I need some advice on how to handle the current situation with my co-founder. I am not happy working with him, we haven't signed any contracts or agreements, and he has put in a lot of hours over the past year without any compensation. I would like to compensate him, but not in a way where he gets any revenue sharing or decision-making power, and need to figure out the best way to do that. Here is our background:
Having attended college together and being friends for a while afterwards, we first became business partners an a design/development agency we started about 5-6 years ago. When that company started, he worked part time while I worked full time. Although for years he always said he would quit his day job to go full time on our company, his involvement steadily declined and he kept bouncing around to other full time jobs until at a certain point it became clear that what he had promised me was never going to happen. To his defense, he is a married home-owner with a mortgage. I am a single renter, so I am probably able to take more risk than he is. I am still running the agency alone (luckily we changed from a partnership to an S Corp with me as sole owner a couple years ago), but have been wanting to switch from agency work to developing a product. I've had an awesome idea for a product for several years now, in an area that I have a lot of personal interest in, and have just not had any money to pay anyone to work on it with me.
About a year ago, aforementioned partner told me he'd like to work on the product idea I've had. The idea was that we wouldn't borrow any money to start out, we'd both just make time to build it, and then if it fails then all we've lost is time spent. He suggests that he'd just like to start out as the designer, and then see how things go, and perhaps take on more responsibilities later on.
I secure us our first client, we agree to provide them our product in exchange for sponsorship status at one of their large events, my partner and I build it out, putting in a lot of hours in return for our logo being on a bunch of collateral, and we get interest from a potential second client as a result. I ask partner to come with me to meet this potential client, and he says "I'll come with you this time, but you need to learn how to do this on your own." Red flag #1. Red flag #2: I invite him to a gala event hosted by the client we sponsored, so that we could represent our brand as sponsors of the event. When we get there, he randomly runs into some friends and stands around with them in the corner the entire night. At one point he says he's leaving, and suggests I go find our client, so I can mingle, then turns to his friends and tell them that attending this event was a business trip, for ME (i.e. not him). I'm not sure why he thought he was there. The next day we meet with the potential second client, and she is incredibly enthusiastic about our product, gives us exciting inside info about our only competition (she is currently one of their clients, but would happily switch to us), just a really positive meeting all around. Immediately after, "partner" is super excited and enthusiastic, because now it seems like it could be profitable. Extreme attitude change from the night before.
Fast forward about 6 months, we've secured the second client, and said partner has done nothing except designs (90% of the time super last minute, and sometimes not to spec, but since they're done so last minute we don't have time to fix). All of the last minute-ness is always explained by the fact that he's really busy at the other startup he's working for. Nonetheless, he has done a lot of work, and hasn't been paid for any of it (our product requires a lot of design work, as we offer different site "themes" for our clients to choose from; he's designed 5 themes, plus our main site, and a couple of print ads). I am regularly doing industry research, competition research, pricing research, flown across the country to give the 2nd client a demo alone, cold-emailed a couple new potential clients, hired a lawyer to write our contracts, researched merchant account rates and basically done everything I can think of on my own initiative. This is on top of doing all the front- and back-end coding for a medium-sized app.
2 weeks ago he messages me to "let me know that he's in it for the long haul" and would like to start helping with code maintenance and bug fixes once I "get the code to a stable place". I brush him off and tell him that I'll believe that when I see it, considering his constant promises of becoming more involved with our first company, which never happened. After he says this, I suddenly start realizing that I don't think I even want him to start helping me with the code. I don't want to work with him anymore. He has been a bad partner, not putting in any of the sweat and tears and risk it takes to get a company off the ground, letting me do all that leg work, but wanting to walk in when it seems like it'll be profitable. Last week he messages me and says he'd really like to discuss percent ownership and revenue sharing, that he realizes that "while we've all been working hard, obviously you've been working hardest, so let's come up with a percentage that's fair". I don't want to give him any percentage ownership or revenue sharing at this point. I stalled him and said yes, let's talk about it soon. Currently I've been waiting around for over 2 weeks for progress on a mobile design from him. 2 days ago I checked in with him about it and he replied a day later saying he's going on a road trip tomorrow, and he should have some time to work on it in the car, if he can get his wife to do more of the driving. This just seems incredibly lame to me. Two weeks to work on it and the only time he can find is during a car ride?
What should I do? Thankfully, currently we have the startup established as a sub-project of our first company (of which I am still sole owner). He has stated recently that he'd like to establish a separate legal entity for the new startup "to keep the money separate". Knowing that I'd be the one stuck with doing all the accounting and taxes if that were to happen, I told him that I don't want to manage another entity, that we can just open a separate bank account instead, to which he hesitantly agreed. I feel like I need to just cut him off at this point. He's unsupportive, unreliable, and seems only self-interested. Having said that, he has put in a lot of hours without compensation, and he's done that under the impression that he was going to be a co-founder of this new startup. What would be a fair offering to him to compensate him for what he's put in so far, without giving him indefinite ownership or revenue-sharing privileges in the startup?
Sorry this is so long, I think part of the reason for this post was for me to vent!
Co-Founder Equity Partnership Compensation
That wasn't the question I was expecting at the end.
It sounds like this guy isn't truly devoted to the company. That may not be all that bad either, most employees aren't. You just don't put him in a position of leadership of any kind.
Something I've done with people in the past (when they are helping me with a startup) is I give them specific tasks with rough deadlines, and they log their hours, with all the terms written in a 1 year contract. After that year, we can choose to renegotiate the contract. If we choose to part ways, I convert all those hours they put into the work, and pay them an agreed hourly wage with a percent of gross profit, until they are all paid for.
This may seem complicated, but it's a way to protect both parties, and still get the development you need.