I am starting a new company with a long friend. He had the original idea but we both developed the idea and spent approx equal amount of funds to get it to the state of developing and launching with a customer. We now need to hire full time staff etc. so we need an equity plan. However, my friend is leaving the company to take a full time job (because he needs security and money) and will only be able to be an advisor now. I am staying on and still have zero income and planning to work full time on the project. He has suggested that the company is 50/50 his and mine and I would get options for my continued efforts.
Does this make sense? Or am I getting bamboozled?
How can it be 50/50 when he isnt even working here and taking the same risk? Does his ideas of options correct for that? I am just learning about equity models.
You mention that you have both created the company so his contribution did have some value; you even say you've contributed about half the effort each so 50% seems fair, at the moment.
However, you're limiting your thinking by assuming there will always be a fixed amount of shares and that 50/50 now is 50/50 forever.
Let's say you incorporate and each get 100,000 shares (I'll continue using this figure for this example), with no outside partners: you both effectively own 50% of the company. Let's say that you draft a stock option plan for employees and allocate 50,000 shares: now you each own 40% of the company. And so ownership changes as the business grows because the number of outstanding shares evolve.
Now, how can you solve your issue? By both agreeing that you should receive stock options that vest over time. For instance, you could issue a warrant for 48,000 shares that vests over 4 years: each month you work there, you earn an additional 1,000 shares. And then he could also have such plan so that if/when he comes back, he also earns 1,000 per month. Or something like that.
What's important with partners is that each has a share of the company that makes sense relative to the share of the other. So when an investor comes in and funds you with 1Mio, he might also get 100,000 shares. Now the cap table will be 100K for you, 100K for your partner, 100K for the investor, 50K for the employees; 350K shares total (plus your vesting warrants) and even thought neither of you owns 50% of the company, both of you are happy because you own a similar stake. And since you're working there, you keep accumulating shares with the vesting of the warrant.
Here's an easy model.
Let's say you both spent a year till now. You each get 1000 shares and own 50% of the business.
The fact that it was his idea is mostly irrelevant, or you can be generous and give him 100 shares for his idea.
Now you work another year with no salary for the company, so you get another 1000 shares. You now own 2/3 and he owns 1/3. Keep doing this for as long as you work there and he doesn't.
One small adjustment to the above model is that you should get your extra shares on a monthly rather than yearly basis so you have the majority of share after a month, not a year, and can have the decision making power.
50/50 doesn't make sense. At first, I was thinking 95/5. That would be a typical (generous) offer for an advisor. Someone who is leaving for a job doesn't deserve much. At most 10%, so split 90/10. Sorry, it's harsh, but that's reality: it's called sweat equity for a reason.
Here's how you convince him that 50/50 doesn't make sense. Say it's a great deal. Take it too! So you both stop working on the company, and each insist on keeping 50%. What do you think will happen? Nothing obviously.