I have an idea for a website that myself and a partner have started to get going. One of our first steps was speaking with a web developer. The site may run over our budget. The developer (who is a friend of my partner's and has a well established web/marketing company) likes our idea and believes it will be successful. He is meeting with his programmer this week to determine what the extent of the project will be and get an estimate for us. He mentioned that if the cost is over our budget he would like to discuss "profit sharing" with us. We are having a phone conference on Thursday so I'm trying to do some research on how this works and how much would be a fair cut for him. My partner and I are 50/50. Since he will not be providing any actual monetary capital it wouldn't be an equal split, right? Any feedback is appreciated, I want to have an idea of a number when we speak. Thanks in advance!
Profit sharing is different from giving him equity.
If you give him shares, he has equity in the company. If you are profit sharing, he would get a share of the profit you make each year for a determined amount of time.
Be very clear when you are negotiating with him that you are talking about the same thing.
You need to decide how much value he is going to bring. If he is going to be an essential part of the team going forward, go ahead and give him equity. If he is going to be just a supplier for you work out a deal where you give him a royalty for a limited amount of time or a deal where you pay him double his normal fee at a certain point (obviously at a date where you think you will have the income.)
I think it's up to you. Since he is not a founding partner and did not invest any capital you could say that he deserves a smaller slice. On the other hand, without him, you don't have a product.
Think about how expendable this marketing guy (the term web developer seems misused here) is for you and your partner and think of alternative ways you and your partner could get your product going without this person.
Look, for your product, he is not just a web developer, but someone who is designing your product for you. And as Tom said, your product is nothing without him.
Now, say you 2 partners are investing 100000 each in the business, and the website cost the developer is designing for you is 50000, he can rightfully ask for 20% capital of company as he is investing his money in work form. Ask him to be a full time part of the company to get profit sharing,(A website company will surely get advantage of one technical co-founder), then he will be paid for his effort he will put in the company after developing the website.
Another approach, ask him that you will pay him after the company starts earning with a good interest rate. This way you will be giving him his money in form of installments with a good interest rate and you wont have to share you profit for long time.
Tip: You guys should pay yourself too, on the basis of effort you guys are putting. Instead of sharing all the profit on the basis of what percentage of share each have. Later is a wrong approach.