This is a long exposition.
Please bear with me, I think that I need to provide as much specifics as possible, while keeping it as short as possible. Thanks for reading, any feedback is much appreciated.
(I'm using a throwaway account for obvious reasons).
(Why a hack? The system is written in a full JEE stack: Struts2, Spring, Hibernate... Very painful and slow to pivot - one of my initial disagreements)
So... the owner and I finally come and sit to talk about what happens next in our relationship.
We have talked and we agree in the following:
Our first talk about a potential partnership as co-owners, has come out with some starting points:
a) 20% for me as co-owner and CTO. 80% for him.Rationale for a) is that he has been working in this for a year, and my contribution has been for three months and a half. He also spent all his savings when he was trying to starting it (the last months of last year), although with no success.
b) He tells me that he doesn't want to be in a Craiglist-like situation (!?). So he wants to include a restriction to prevent me from selling my shares to any third party.
In b) I think that this is like getting equity without really getting it.
1.- With all these facts, do you think a 20% is appropriate? (Taking into account his initial investment and he working on this for a year now). I am under-valuating my contribution? Initially this felt right but while thinking and writing all this I am having second thoughts.These last days I've been getting the feeling that this is a bad deal for me* (maybe a very bad one), but I need some feedback in what would you consider fair and appropriate. I don't want to feel like I'm taking advantage either.
2.- There is some kind of practice that allows you to block completely a "co-owner" to sell her equity, and can you call the person being blocked a "real co-owner"?
*We are still talking, nothing has been settled yet.
20% is not unreasonable. Let's put it this way: it's significant. You have to decide if the business has serious potential. You should be able to tell, based on the early clients. Do you believe that more customers may be signed up soon, bringing significant revenue and growth?
Regarding the second clause, at least in the US, I would refuse. You could compromise with something called the right of first refusal, which would protect him and still give you the freedom to sell your shares if you want to.
I can't speak to the 20% being fair or not.
The prohibition on you selling your shares is not that uncommon. It is however worded more carefully and with a more limited scope in most case. The owner should also be subject tot he same restrictions you are in this together.
Here are some ways to modify that clause that might make the owner happy:
Here are good articles on the benefits of vesting founder shares:
The percentage sounds good, but don't get hung up on it. If he controls all of the other terms of the agreement, your 20% can be completely diluted.
You need to negotiate future salary payment, bonus, and/or some kind of payment he can pay. If you aren't going to get paid, maybe you should get paid in additional stock? Nothing will make him find the money to pay you more than you getting additional equity.
Finally, you seem to be holding the entire system together. He has walked after you once before, so he understands how important you are. You have the MOST power now, before you say yes. Once you agree, you lose all of your power. You need to get a good lawyer and think very long about what you want. Time is on your side. The longer you sit it out and think about the offer, the stronger your position gets (within reason).
In the UK there is something about having a minimum of 26% of equity that gives you further rights and security (you'll have to check this as I only know from watching Dragon's Den and they always try to get this amount or more).
Beyond that, ultimately you need to be happy with any deal if it's going to work. And your partner needs to understand that as well. It sounds like you may well being doing a lot more work for little financial reward so I would suggest you seek something higher. Bear in mind though that your partner has put a lot into the business and will of course be reluctant to give away any more of his 'baby'.
Go for 26-29%
Let's say that I'm this owner.
For your second question, I would check with a smart experienced business lawyer.
Quick unprofessional idea: I would refuse that except if there was an agreement on how to give dividends. He would then have an incentive to buy back your actions at a (previously) fixed price and could not let them cold.
From the facts you present in my opinion it's high time you leave. The fact that there are clients and some cashflow and you haven't seen it is sure indicator that you never will see much, your boss is trying to entice you with a carrot. The business wont move a step forward without you, if not leave I would ask for an equal partnership but even that is a risk of loosing even more time, with no clear capital gains.
Your boss or future partner might not have ill intentions but these are the signs of a classic dreamer a person who is not connected to reality and feels his needs are more important than others.
Here is a framework for figuring out what is fair for your situation.
As far as ownership percentage, if the company were to start today, and you are going to design & build the app, and he is going to bring in customers and investors, then a 50/50 split would be the right way to go.
Since there is already a business going, the value of what has already been built can be compared to the future value. The business has an application concept, some early customers engaged to use / purchase the product, and some other programmers involved. So what has been built thus far might be worth 50% (going to him) and the remaining "future value" would split 50/50. That would be him 75% and you 25%.
Or maybe the future value is 30% him, 30% you, and 40% for future employees. That would look like 65% for him (50% + 30% of 50%), 15% for you (30% of 50%), and 20% for future employees = 100%. Before the future employees are added, your part is 15/(65+15) = 18.75%.
So on the whole, 20% looks reasonable.
You can then ask yourself these questions:
Forget the owner's happy talk about how great the future will be and also ignore the question of percentages. The core question is whether this company is ever going to be worth anything.
You can spend months arguing 20%, 30%, 50% etc but unless you see the company getting product sales quickly and succeeding then you are wasting your time and you will never get paid for past or future work.