Forming Partnership - I need directions and guidance to make the right decision at early stage of a startup


1

I'm a programmer and developer - and that is what i'm good at, although i do have some self-claimed ( :) ) Entrepreneur skills and Managerial traits since i'm already running a Web Development Company (still being a student). Recently, a group of 3 people (and it seems they three are good friends with each other) reached to me with an Idea for an upcoming website. The idea was pitched well to me and i do see future for this Idea.

We've did a few meetings and discussed about this project on various aspects: Technical, Revenue Model, Investment, Future Goals etc.

Now, this is what i'm being offered:

  • 3 people. An aggressive entrepreneur minded guy - seems clever (He'll head the business part of the company), a slightly technical guy and third, a product designer (He's the one who'll be designing the product - which is a game)
  • I'm being offered a 25% (equal) stake in the company (the company is already incorporated with them 3 as the directors). This stake will be non-voting stake. OR
  • A 24% stake where i'll have the voting right, but to me 24% seems like non voting again, because i'll have to get two balls into my court to make any decisions in future - which seems really hard. Considering the fact that they three are good friends and i'm quite new to three of them. I dont even know all three of them to be very honest.
  • I understand that 24% is a lot that is being offered to me, but wether my stake is voting or non-voting or even if i have this stake will be finalized only when i get the product ready - which seems like 9-10 months worth of Job.
  • So, far they are offering me a contract that ensures my stake only when i get the product ready.
  • They are ensuring me that the company will be re-incorporated and shares will be diluted when the product is ready for launch.
  • They claim to have reached out to many Angel Investors and VC's for investments (the first guy has good contacts and that is where he comes in ) and according to them all the VC's liked their Idea but were not willing to invest since they did'nt had any prototype for the game/website - which sounds fair. But, again i'm not sure if that is true. I'm probably gonna ask for evidence of this before i sign any contracts.
  • Since, i'm getting a stake in the company i wont be getting paid for anything - And i'm fine with that - I'll manage my sources of income and time to fit things into my schedule.
  • The first guy, since he seems strategic is heading all thee partnership and agreement talks.
  • They claimed that this is the best they can offer and have mentioned several (may be 2-3 times) that they have all the resources minus a programmer - Also, it was mentioned in one of the email that worst to worst if they needed to secure a loan for thousands of dollars and pay to have this made and still retain 100% of the company, and declaring bankruptcy would dissolve the company but not effect them personally.
Now, my questions are:
  • What should i be deducing out of this partnership?
  • What's the best that can happen and whats the worst?
  • Does this seem like a good offer at this point and what decisions would you make if you were in my shoes?
Please note that i'm not very well versed with legal issues concerning these type of business models since i'm quite young and just doing school at this point of time. If knowing about the region where i'm in helps you provide me any feedback on this, then i'm from Canada.

UPDATE : They are now offering a clause in the contract where it says that 17% of my stake can be bought back by the company after 5 years (these 5 years start from the date company goes through it's first round of venturing...)

I still retain a 9% stake in the company which will be forever and i can just sit in and rake in cash for the rest of my life.. What would you do if you were me?

Risk Decision Partnerships

asked Feb 22 '11 at 16:48
Blank
User7962
6 points

2 Answers


1

Worst case?

You do all the programming work and then get Zuckerburged (ie. the company's not reformed and you get locked in the dark).

Best case?
You talk them into restructuring the company now and do the work and it kicks ass and you become rich.

Now as to whether to do 25% non voting and 24% voting? No brainer. Take the 24% with voting rights. 1% isn't anything in the end, but having SOME say when it comes to voting is huge.

answered Feb 23 '11 at 09:19
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Sean
1,149 points
  • They are offering a contract right now, where it says that the company will be reformed once the final product is ready....?? Any thoughts? Should i really go ahead with this deal? Please read through my update.... – User7962 8 years ago
  • +1 for the word Zuckerburged though! :) – User7962 8 years ago
  • First off, take any time estimate they've made on dev costs and immediately multiply it by... say 10. Any that you've made? 4x. They are not being 100% open with you and stuff is going to change. Game development is NOT a lucrative field in the grand sense. Do the deal if you want it. Don't do the deal. What's your gut feeling? Can you work with these guys for the next 5 years? The buyout clause is kind of standard (I have the option to buy out my partners). – Sean 8 years ago

0

The first thing I think is 25% of nothing is well nothing. So they say Cash is king for a reason and you are taking a tremendous amount of risk. The company idea is so early that they have no prototype, no business plan, and they don't believe enough in it to put there money into it to support you. If they were friends that you knew then you would have something to assess but really this looks like a bad deal to me. This also sounds like the first venture that they have started which also increases the odds of it failing.

Your technical skill is likely to be key that they need and I would suggest that you go after cash and ownership.

Of course I could be completely wrong and this could be the best opportunity ever.

answered Feb 23 '11 at 09:03
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John Bogrand
2,210 points
  • They are infact offering me cash at the moment.. but it would be like half of what i usually get paid for.. In this case if i ask for Cash today, then i'll have to reduce my stake in the company - The idea seems really lucrative to me so i'm quite confused... – User7962 8 years ago
  • Also, they've been running around their idea for the past two years and were unable to find any Investor who would invest in the idea without a prototype + they were unable to find a programmer so far who could do all the work since the game is quite complex and requires time... – User7962 8 years ago
  • They did worked with two programmers (they claim they paid one of them) in the past who just quit the job, because of the sheer complexity of the idea... I assume if someone works @ 15hours/week - the product could be ready within 9-10 months. They have all the business plans and IP rights to the idea - they dont seem to be like kids or immature to me at all... – User7962 8 years ago
  • Perhaps go with prefered participating prefered shares equal to 24%, have a dividend that is cumulative that is close to your nomral pay amount and then also get cash from them. Anyways this gives you all the rights of common shares and preference on payouts if the company is liquidated. http://en.wikipedia.org/wiki/Participating_Preferred_StockJohn Bogrand 8 years ago

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Risk Decision Partnerships