I had a problem that required a database solution. I designed the concept of the database and over a 2 year period developed a crude system that worked.
In trying to find help with the programming side of things I talked through the concept with someone who had experience in setting up software systems to see if they could help create the solution. (At this point the solution was just for me not for commercial sale.)
They then went away and started development on a system of there own to do just what I wanted but with the plan to create a web based solution for commercial sale.
They have been tapping me for my thoughts on how this should work and have used my original design as the bases for theirs. It looks completely different of course.
We are now in a position of them having created a Beta version that they are trying to get investors to back and have managed to get some serious interest. I suggested we join forces as they want my input to make the idea a success.
So I have offered a financial and time investment from myself with access to all my workings and networks within the industry. I really believe in this solution and think it could be a great success.
They really want me to be apart of it but now we are at the discussion stage of what my investment is worth they have come back with a 4%.
This is based on a $10,000 investment and my time.
My biggest issue with this is they are basing there calculations on the value of my investment on what they perceive the company will be worth once they reach the point of seed funding. (They are suggesting I only pay the $10,000 at this point.) Surely all the work I have put into this already should be accounted for. It's not like I am just coming into the project at the seed funding round.
There is an obvious naivety on my part here and I know they are the ones who have actually put all the work into creating the beta solution investing there own time and money to do it so I'm not looking to be greedy. I just want what is fair.
Any help on this would be very much appreciated.
Paul, if you feel you are worth 20% negotiate towards that. I don't know about you but if I felt I was going to add that much value and felt like the compensation wasn't fair, I would start to resent it after a while - which isn't good for your relationship or the business. So you have to be happy with whatever you negotiate or it's not going to work.
I would say 4% might be a fair compensation for what you have do so far. Do they need you to get to the next stage? If so, then you are worth more than that.
Do you trust these guys and do you want to work with them for the next 3 - 5 years?
If the answer is yes, make a list of what you think you have contributed so far and what you can contribute in the future and how that will move the business forward. Then go back and negotiate.
(You may find the articles on the Founder's Pie useful in assessing what your contribution is worth.)
As I see it you have 3 connected problems:
How I would suggest you present the concept to them (and yourself) is to break down the issues
In Principal agreement. Before going any further you need to get the overall boxes ticked and make sure you want to jump in with them..
It should cover the basics
These are the key things to get peoples agreement and signature to before starting then soon afterwards I follow up with a lawyer written contract to cover the bases properly.
Share Split Guidelines I have written this section a few times in other answers.
We typically have a few standard metrics we use to run through how much a share is worth:
You took the initial risk and seed IP investment over 2 years while doing all the work so you take your contribution above and apply a multipler to it say 3X or 4X.
EG. Moving forward your continuing investment would look like
As the company starts to make a profit (assuming it does which is your risk), everyone starts to draw earning from the company.
The other way to look at this that the $54,000 owed to you by the company buys you a greater amount of shares in the company.
DISCLAIMER: I'm not a lawyer, just a venture developer who has done this a bit. The formal answer is pay a lawyer to draw it all up or there are websites that sell "packs" of legal documents for starting up a business.
One approach you might try would be "milestone equity".
Start with a rock solid fully vested 4% right now.
As you continue to contribute and meet specific milestones going forward, you should be able to earn additional equity grants.
This is good for you and good for the other investors. It recognizes the contributions you've made so far and encourages you to continue to contribute and also feel good about your contributions.
If I were in your shoes:
It's not worth the headache to work with them IMO if you can't get what you think is fair. Their offer may be realistic - but what is important is that you fell you are treated fairly. if you do not feel that way you won't be able to be productive and it is better to walk away.
Boil down your value to a few bullet points and tell them it's worth 25%, but settle for 20%. Your bullet points need to be truthful and convincing. However, these guys don't sound like partnership material to me; I think you will be taken advantage of, I'm sorry to say. Most partnerships fail, and this one feels like it's starting on bad footing.
I would suggest that 4% might be what your inputs are worth at this point.
You had an idea, and they did some programming for you. Depending on where you are and what contracts you signed, ownership of that code might be in doubt.
Then they went and turned the idea into a resellable product. Presumably this was with your blessing, at the very least it has your implicit consent.
It sounds like the idea was never patented and I'm sure they could make a case that you authorized them to go on their own with it regardless. This leads me to suggest that the idea in and of itself has very little value for these purposes
The next question is how much are your future contributions worth? You mention having industry contacts etc, but can they get a foothold without you? (We can't answer that, however the answer is usually yes.) In other words, with a properly funded sales team, can they concievably be calling those contacts, without you, and close deals? Granted if it's a personal contact then this might at least get them in the door; but, honestly, if it's a compelling product then they shouldn't have a problem with this anyway.
So with those things out of the way, the only thing left is a financial investment from you. At which point 4% for a $10,000 investment might be a great deal for you.
At the end of the day the question for them is: How much impact in the companies growth/survivability will you make? And, what value is this impact versus investments made by others. Sometimes our inputs just aren't worth what we think they are once weighted against a big picture.