Outside work while in a startup


4

I am currently in a startup with a partner, and we have 50/50 ownership. Things are going fine, but like all startups it is taking some time to get everything going. We don't have any revenue now, but my spouse is working. It isn't enough to completely support us (living off savings right now)

I have the opportunity to do some outside work at about 25% level of effort. This particular job is pretty strongly tied to our core business, and a significant percentage of that work will help in our business. Additionally, there is a really good chance this outside work will lead to a significant contract for our business. Now, there are some conflict-of-interest issues here, but I think I have things handled.

My question is how to handle the money I am making from the outside work. The simple version we came up with is that my pay from the outside work is effectively an "advance" on pay from the company. So, let's assume the outside work pays $20K and we end up being able to pay ourselves $100K each this year. Then, my partner would get $120K and I would get $80K.

Does this seem like it would work? I want to avoid anything that changes our relative ownership.

Partnerships

asked Mar 2 '10 at 14:22
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Alex K
21 points
  • Just a note, your math is off. If you earned $20K advance, then you should get $80K and your partner should get $100K, not $120K. – Elie 9 years ago
  • Doh. Thanks Elie. Good thing I am not the accountant. – Alex K 9 years ago

2 Answers


2

I can tell you a few things not to do:

  1. Don't make any deals with money you haven't made yet. It's the easy way out, but it's basically a pseudo-liability on the company's books and it's likely that investors will not look too favorably on it, since they could see it as their investment being used to pay previous debts rather than growing the company.
  2. Avoid deals based on hours worked or perceived effort. What if you work 125%, i.e. 25% for the side gig and still do everything you used to do - would you still be happy with your partner making $40k more of company money? Or what if you worked half the time but still accomplished as much as your partner?

I've always felt that equity should be based on your value to the company. Investors are paying for intellectual property, signed customers, cash on hand; not the fact that you punched the clock faithfully for 2 years. If you're valuable to the company but you need a side gig to be able to keeping doing it, then the side gig is helping the company. So I guess I agree with Jarie, but you have to work it out with your partner sooner rather than later or it could cause hard feelings.

I would consider vesting some of your founder's stock (which is a good idea anyway in case one of you leaves) and then maybe tying additional shares to tangible goals - that way your incentive is to do what needs to be done with or without the side gig and your partner shouldn't care about time spent as long as the goals are met. It's not always possible to do that cleanly though so good luck.

answered Mar 2 '10 at 15:35
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Brian Deterling
984 points

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What you do on your own time, should benefit you directly. If you have to get a second job to feed yourself and your family, that should be entirely yours. If you get some upside for your startup, great but don't give up the money to your company. You earned it, not the company.

The only caveat would be if you farmed yourself out via your company. There are plenty of companies that have done that. Then, it makes sense for your startup (or partner) to take a cut. Think of it as your startup also being a consulting company. That would be the only fair way to do it. Otherwise, just take the money from the outside jig as your own.

answered Mar 2 '10 at 15:07
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Jarie Bolander
11,421 points
  • The challenge is that I am dedicated 100% to the company. Any outside work dilutes that. I know I would be miffed if my partner took some outside work and was only able to work 75% of the time, because I am expecting him to be fully dedicated to the company. – Alex K 9 years ago
  • That is true but you also have to eat and pay the bills. It's a question of can your present business sustain you. If it can't, you have to do something about that. Ultimately, it's up to you and your partner to work it out and come up with a fair deal. – Jarie Bolander 9 years ago

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