How to decide on a fair partnership model between two partners for a startup?


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I and a friend are looking at a start up for a web product. He has come up with an idea and was looking at assembling a team in India for developing a prototype for the product. He is based in Europe and is doing a full time job. Currently we are at the concept stage & I am helping him design the product and putting up a team in India.

We want to decide on a partnership model between both of us before going ahead with registering the company. He has offered me a partnership in the ratio proportionate to the amount of seed investment put in by each of us, and proposed that he will invest a higher amount. However with all other qualifications being more or less similar, I think that I am better positioned to manage the operations for two reasons - I am based in India and I am currently not in a full time job. So I have asked for an additional equity of at least 10% so that we both end up having 50:50 stakes.

I feel that an equal partnership will keep both people equally motivated to get it on to a stage wherein it can be converted into a full time engagement for both of us.

Alternately I am ok for a 50-50 partnership with
I. additional equity of 5% if I take up a full time job
II. additional equity of 15% if I do not take up a full time job

Please advise if my argument is reasonable. Does it work better for the business if one partner has majority stakes than both partners having equal stakes?

Partnership

asked Oct 16 '11 at 23:57
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Esha
1 point

4 Answers


1

I think 50-50 split sounds fair. If your company is not successful, the split won't matter. If the company is successful, then well done... aren't you glad you didn't jeopardise it by having uneven equity splits that can cause drama.

If you really can't come to terms about this, maybe you need to consider if you really want to partner with this person. Not being able to get this agreed upon would be a bad sign to your ability to compromise and work together.

answered Oct 18 '11 at 11:06
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Joel Friedlaender
5,007 points
  • Thanks Joel. I am reconsidering my decision if it doesn't come to 50-50. Whatever effort has been spent so far by me is a sunk cost. Don't want to add on to it. – Esha 9 years ago

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Theres a guy named Frank Demmler from Carnegie Mellon who wrote a really awesome peice on how to split up equity amongst founders in a fair / logical manner. I'm having trouble finding it again, but I think it was called The Founders Pie Calculator. It's a great tool to check out.

Goodluck with your business!

Here's an excerpt of it that I found: http://stephenfanjoy.posterous.com/dividing-the-founders-equity-pie

answered Oct 17 '11 at 00:50
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Jake S
1 point
  • thanks Jake. I guess this is the one you have mentioned. http://foundrs.com/calculator/index.php. It gives a very good & logical method for equity distribution amongst founders. – Esha 9 years ago

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50:50 is best, as anything more complex is likely to lead to tension and eventually resentment.

If you believe in the product and the team, then 50% of something good is better than 63.7% of something that doesn't quite work.

answered Oct 18 '11 at 17:27
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Steve Jones
3,239 points
  • Agreed better to avoid a situation that leads to resentment. – Esha 9 years ago

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The artificial 50:50 split is a recipe for disaster.

  1. Founder's equity should be split based on expected future contributions to the firm. Start by figuring out the split on this. This will vest over time. If you work full-time over 4 years. If you work 20 hours/week, over 10 years. And so on. Use a calculator like that at foundrs.com to give you a starting point for your discussion. Then additional equity can be issued for cash at a fair value of the company. I've got more on this in a recent blog post.
  2. If you are still holding out for 50:50 as a 'fair' split, because there are two of you and anything other than perfect equality is unfair (can you tell I think this 50:50 though superficially attractive is actually ridiculous), then do yourself a favor and at least agree on 51:49 split. Your conversations will go a lot more easily if there is a majority for one person. You will then know you can never 'deadlock' your votes ... and you will also realise you need to compromise on everything. If it ever gets to the point where you are calling a shareholder vote to decide an issue, your partnership is in trouble! Making a 51:49 split makes it clear that a shareholder vote is never going to be the way to take a decision!!
answered Aug 18 '13 at 03:27
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Kamal Hassan
1,285 points

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