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new business partner
rick421




msg:4121340
 4:36 pm on Apr 24, 2010 (gmt 0)

I am taking on a partner for a new project I have been working the concept for about 8 months. A ll start up funds are mine as well as the concept. The new partner will be working about 25% as many hours as I do until we are profitable and then will come on board full time. Neither of us will be taking any salary.

What is a fair percentage of the company to offer him? He is very talented.

 

httpwebwitch




msg:4121553
 2:38 am on Apr 25, 2010 (gmt 0)

Hi rick421, welcome to WebmasterWorld!

The value of "sweat equity" varies, but here is a formula you can use.

Assign an hourly rate for his work. Assign an hourly rate for your work (These needn't be the same number). Figure out how much you've invested so far, and tally up how much work you both will be doing in the next 2 years. Add any other assets that you've provided to the company. Sum up the net worth of everything so far, and anything you anticipate investing in the next 2 years.

Then run those numbers and figure out what % of the investment he'll really be contributing to the first two years of operation. If that number feels right to you, offer it as a % of ownership or partnership.

nEquity




msg:4122126
 1:05 pm on Apr 26, 2010 (gmt 0)

Hi rick,

Agree prett much with the above post, very good advice.

Hardest part is to work out rates etc, best is to use comparables. My consulting business has done a bit of this work before in various merger type transactions (although a bit different of course).

[edited by: httpwebwitch at 1:47 pm (utc) on Apr 26, 2010]
[edit reason] removed self-endorsement [/edit]

rick421




msg:4123856
 6:44 pm on Apr 28, 2010 (gmt 0)

Thank you very much for your input.

digitalv




msg:4148376
 8:29 pm on Jun 7, 2010 (gmt 0)

Curious, what's the reason you want to offer a percentage of the company in exchange for free labor now instead of just paying per hour? It would be cheaper to pay someone and maintain control of the company.

No offense (and I know it's going to sound like that, but I truly mean no offense) - anyone who would take that offer would have to be pretty dumb. That's the exact same deal every half-baked internet startup offered to those of us who were writing code back in the 90's. If I had taken all of those offers, know how much money I would have made? Zip... because they're all gone.

Now don't get me wrong, I'm not saying this will be your fate - maybe you know what you're doing. But you're making the same pitch as all of the people who DON'T know what they're doing and don't have the money to hire someone to get the job done, and that's going to make anyone with real ability and common sense want to stay far away from your offer.

Remember, you're going to be PARTNERED with this person if the idea takes off. Do you really want to be partnered with someone who would go for that deal in the first place? I would constantly have to question every decision they made.

incrediBILL




msg:4148385
 8:41 pm on Jun 7, 2010 (gmt 0)

No offense (and I know it's going to sound like that, but I truly mean no offense) - anyone who would take that offer would have to be pretty dumb.


It's called bootstrapping, something people do to start a company with little cash.

I know someone personally that did exactly that and it turned into an 8 year job with a big fat salary and ended with selling over $500K in stock options.

Obviously they were totally insane, completely dumb.

I know a pair currently doing exactly what the OP is suggesting in the iPhone app space and now they have an app that Apple actually promotes, money is rolling in the door, a couple of additional dummies.

It's more a matter of trust.

If either the OP and his partner have a track record of actually delivering to the market then I would say go for it.

If it was all my money and my idea, depending on who the partner was, maybe 10%-20% unless they bring funding to the table as well but I would go on the low side if they're working 25% less.

If it was someone I had done other projects with perhaps more.

You should incorporate and leave additional space for other potential partners in the future and build a vesting schedule for this partner so that the percentage is vesting as stock and if he doesn't complete or walks away before 12 months he doesn't get the stock.

digitalv




msg:4148394
 8:50 pm on Jun 7, 2010 (gmt 0)

Even dumb people get lucky once in a while. :)

It's the same odds you get in the venture capital business I suppose... out of every 10 investments, 9 of them will be bombs and the 10th will be a home run.

But that's just writing a check... TIME is a different animal. Maybe if I was in my 20's this sort of arrangement would be appealing, but the reality is that 90% of startups fail and most people aren't lucky enough to jump on board into an arrangement like this that ends up being one of the 10% that doesn't. Unless you're on to something really special those who know the odds going in will stay away.

incrediBILL




msg:4148413
 9:17 pm on Jun 7, 2010 (gmt 0)

But that's just writing a check... TIME is a different animal.


Personally I don't see the difference because TIME is MONEY.

You can either write a check to buy someone else's TIME or use your TIME in lieu of money.

FWIW, I've been in bootstrapped businesses and bootstrapped myself and I'd do it again in a heartbeat just because it's way more fun when you don't have institutional investors breathing down your neck and asking lots of questions.

caribguy




msg:4148681
 7:33 am on Jun 8, 2010 (gmt 0)

Consider the following quote, it's often used in the context of SCRUM development :)

A pig and a chicken are walking down a road. The chicken looks at the pig and says, "Hey, why don't we open a restaurant?" The pig looks back at the chicken and says, "Good idea, what do you want to call it?" The chicken thinks about it and says, "Why don't we call it 'Ham and Eggs'?" "I don't think so," says the pig, "I'd be committed, but you'd only be involved."

If you only put in money, you're the chicken...

digitalv




msg:4148836
 2:11 pm on Jun 8, 2010 (gmt 0)

Personally I don't see the difference because TIME is MONEY.

You can either write a check to buy someone else's TIME or use your TIME in lieu of money.


Time is only money when you have time and don't have money. When I was younger I would do everything myself for that reason. Deals like this came along all the time, I had my pick of them. Now that things are reversed (more money than time) my perspective is a little different and it makes a lot more sense to pay someone to do what needs to be done than take time away from other (already profitable) projects to do it myself. I can always make more money. I can't make more time.

FWIW, I've been in bootstrapped businesses and bootstrapped myself and I'd do it again in a heartbeat just because it's way more fun when you don't have institutional investors breathing down your neck and asking lots of questions.


I can agree with that, I've done the same thing - but only when it's MY OWN business I'm starting. I wouldn't allocate unpaid time to someone else's business that maybe, if it's successful, I'll get a small piece of.

That's kind of the reason I brought this point up. So many startups try this same method and most of them fail, and it's more than a little frustrating for the guy who put in all of that time with the promise of future riches and never got it back. All I'm saying is that this proposal should be reconsidered. If you are successful in this venture, you're likely giving away a huge piece of the company to someone who only contributed a few grand in labor. It can be problematic in the future... say two years from now business is booming and you need to raise a few hundred grand or a few million in outside capital to expand. You make your pitch to a company like mine and I see that you only own 70% of the business because you gave 30% to someone else, we can't do a deal because you would have to give up your majority share to get the money you needed. Then you're in the situation of having to ask your 'partner' to relinquish some of their ownership to get the capital you need, and it just gets messy.

Maybe you'll never be in that situation, but most people I've worked with who are in that situation didn't ever think they would be. They all thought their business would grow naturally, and that money for expansion would always be there from steadily increasing revenue. It doesn't always work that way, so really think it through before making this kind of proposal. If you really believe in this business and don't have to startup cash, I'd rather see you max out a credit card to pay someone to do the required development than turn over a piece of the company. In the long run, free labor is WAY more expensive than paid labor.

gpilling




msg:4151653
 2:12 pm on Jun 12, 2010 (gmt 0)

In the long run, free labor is WAY more expensive than paid labor.


Which agrees with what @incrediBill said. His friend got $500K just that way.

I would make sure the OP has a vesting period of a year or two at least.

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