Share ownership in software spinoff


2

I have been employed at a research consulting company for several years. During the course of running research projects, I have developed software that I use internally to run some of my projects. The costs of the software have been "bootstrapped" by the projects I lead. The software is owned by my company, although I have managed all aspects of its development.

I see potential for a new piece of software that could be sold externally, and would be based largely on the current software. Because we are a consulting company and not a software company, I think the new software should be created through a new company, with ownership and incentives structured appropriately for a software company rather than a consulting practice. The new company will not happen unless I propose it and lead it.

My own company may be interested in investing in the new company, and I am willing to invest in it, too. My question is, how should the ownership shares in the new company be determined? Should I get some equity simply for having invented the original software and having the vision for the new company? And how do we balance that against cash investments, plus my original company's ownership of the original software?

Equity Investment Shares

asked Feb 16 '13 at 06:47
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Randigoo
61 points

1 Answer


2

If the consulting firm 100% owns the software, you could do something like this (this is just one possibility)

  • You start the new company as a founder (now you own 100% of the common stock of the new company)
  • You sign a standard 4- or 5-year vesting agreement with the new company (so you have to stick around to keep your stock)
  • The new company takes a cash investment from you in exchange for newly issued preferred shares. The preference gives you the right to get your cash back first if the company is liquidated. These preferred shares do not need to vest. At this point you own 100% of the common and 100% of the preferred, the new company has some money, but no code.
  • The consulting company also buys some preferred shares. They pay for their preferred shares with a combination of cash and by contributing the source code in question.

Now you're done:

  • you own 100% of the common shares (but this will get diluted if you hire people and give them options)
  • the consulting company owns some of the preferred shares and you own some of the preferred shares; the ratio depends on the relative value of your cash investment vs. the consulting companies cash+source code investment; you will need to agree on a value for the source code that was contributed
  • the new company has code, a founder, and cash in the bank
  • if you leave before you have fully vested you'll lose some or all of your common shares but keep your preferred shares.

To answer your question, "should I get some equity simply for having invented the original software," the answer is no -- although you invented the original software, since this was done as a work for hire for the consulting company, it is 100% owned by the consulting company.

This is the kind of thing that startup-oriented lawyers do all the time, so you should consult with one.

answered Feb 16 '13 at 12:36
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Joel Spolsky
13,482 points
  • Joel, thank you so much for your thoughtful answer. Do you have any guidelines on how equity ought to be distributed based on 1) my role in starting the new company; 2) my programmer's role (the other employee); and 3) the cash and software contribution of my consulting company? I really appreciate your input. – Randigoo 7 years ago
  • unfortunately that's kind of like the question "How long is a string..." the only possible answer is, it depends. – Joel Spolsky 7 years ago

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Equity Investment Shares