Equity in a startup
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Form a corporation, and have very thorough legally binding corporate documents. Also, have detailed formulas for calculating how much each of your contributions would be worth at any given time, in case one of you wants to 'bail out'. Also, have explanations for how one of you would bail out - first right of refusal of remainign partner to buy out, etc. - I mean, without this stuff in writing, you could legally sell all your stake in the company to your brother in law, and your partner would STILL have to find another developer! Decide how or when the ownership of software would transfer to this corporation - once you gained certain incomes or something, otherwise you have contributed a large part of the effort and the corporation has no other inhereent value until sales are made. You could also decide that you own the software and perhaps 'exclusively' license it to the corporation for a specified amount of time. That way, once you are done your partner has a certain period of time to make substatnial sales, otherwise the license expires and you are free to take it and find another marketeer. Get a laboratory notebook and keep track of ALL the time you spent on it and any expenses. You might find that information comes in handy during tax time or during a legal standoff.
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Sorry for maybe asking a dump question, but are you looking for a partnership? If you are talking about a partnership I think the ownership can't be 50/50, because when it comes to the point to make a decision and you can't get a compromise one of you has to decide. So one of you should own 51% of the company. Talking about money isn't that easy. The company has expenses, right? Are you going to split them the same way? Did you get payed for the work you are doing for this company? If you get paid and the owner has to pay for all the expenses, 50/50 won't be fair. If you don't get payed I guess you have to figure out how much your work is worth and how much he spends for all the other things and how much his work is worth. If it is equal, 50/50 is fair. When it comes to buying out one of the partner (let us call partner A the one who wants to buy the other out), I would suggest that partner B gets the right to give partner A the same amount to buy him out and partner A can't refuse. Arrgs, does this make sense? I will explain what I mean. Your company makes good money (let's say an annual revenue of $500,000) and your partner says "I will buy you out. I will give you $10,000" you should be able to say "No, but I will give you the $10,000 and buy you out" and he can't refuse the offer. This way you will make sure you won't get cheated (especially if he is the money guy). Hope this helps. Stephan
"I will buy you out. I will give you $10,000" you should be able to say "No, but I will give you the $10,000 and buy you out" and he can't refuse the offer. I wish I had one of those before ... :sigh:
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Can someone suggest how much equity should I ask for in an IT product company for which I am the only developer and support person. I design, develop the s/w and provide implementation on client side and also provide support for it on an as needed basis. I'll also contribute to the overall vision and strategic placement of the product. There is only one other person involved and that person is the owner of the company. He does the marketing, sales, legal and all other activities. This guy is very passionate about the project and so am I. I just want to make sure when the project hits off and revenues start coming in he does not ditch me and reap of all the benefits himself and lauch a full-blown IT department without including me, etc. Should it even be based on the equity or some sort of profit sharing. Please give me your thoughts/suggestions. Thanks.
>Should it even be based on the equity or some sort of profit sharing. It would be a very strange type of equity that didn't involve profit sharing. The whole point of owning a company is to benefit from the earnings stream. There are only two ways to make money from a company: - Sell your share to someone else for more than it cost you (either in $$ or in time * $value per hour) - Receive an income stream from the company which, over the life of the company, again exceeds the costs you put in. First of all, you need to know your costs. Ok, so it's time, but you need to keep track of how much time you spend, then give yourself a nominal hourly rate to calculate how much effort you've put in. Then you and your partner need to construct exit agreements as others have covered- but you also need to agree on the value-harvest strategy for the company - do you hope to be acquired within three years, or are you both looking for a 20 year stint as leaders of an ever-growing empire? By focusing on what you both want out of the company, it will be easier to construct the constractual documents in a way that suits you both. It's easy to forget that a contract should be a written version of what you agree on, not some type of document which doesn't reflect your wishes and plans for the company. You can also postpone all of this until the project is closer to fruition. If you have an agreement that the code is your IP until you licence it to the company, then legally you're a lot stronger, although code can be written by someone else. Then as someone else said, you can license the software to the company for a set period of time, and have options on the company acquiring the licence agreement for either more equity or a cash payment (or you may find it hard to get acquired if the buying company can't get an exclusive licence)
Bruce Chapman iFinity.com.au - Websites and Software Development Plithy remark available in Beta 2
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Sorry for maybe asking a dump question, but are you looking for a partnership? If you are talking about a partnership I think the ownership can't be 50/50, because when it comes to the point to make a decision and you can't get a compromise one of you has to decide. So one of you should own 51% of the company. Talking about money isn't that easy. The company has expenses, right? Are you going to split them the same way? Did you get payed for the work you are doing for this company? If you get paid and the owner has to pay for all the expenses, 50/50 won't be fair. If you don't get payed I guess you have to figure out how much your work is worth and how much he spends for all the other things and how much his work is worth. If it is equal, 50/50 is fair. When it comes to buying out one of the partner (let us call partner A the one who wants to buy the other out), I would suggest that partner B gets the right to give partner A the same amount to buy him out and partner A can't refuse. Arrgs, does this make sense? I will explain what I mean. Your company makes good money (let's say an annual revenue of $500,000) and your partner says "I will buy you out. I will give you $10,000" you should be able to say "No, but I will give you the $10,000 and buy you out" and he can't refuse the offer. This way you will make sure you won't get cheated (especially if he is the money guy). Hope this helps. Stephan
This is likely to be a bit more complicated than 50/50. Do you get paid? If so is the 'owner' funding this out of his money? Is the 'owner' paying himself? In these circumstances it is relatively common for an 'owner' to borrow money/spend savings to build a business - but take nothing out so that the business has a chance. If that is the case the 'owner' is probably banking on building up his investment and I don't think he will be motivated to give away both equity and cash if there is little rolling in yet. If you demanded 50% in those circumstances he might decide that this was a good time to start taking a wage out himself and can the company survive that? In these circumstances then two thoughts occur to me: 1. A minority equity stake to help 'tie you in' so that you are both incentivised and unlikely to walk - a classic win/win. 2. You offer to buy a larger equity stake to help defray costs and give the company a better shot - but not by means of reduced pay. Make it clear that your pay is separate and that you are looking to invest capital. Value the company at, say, an average of three months company costs (payroll, accountancy, offices, software, hardware etc). As long as the company in incorporated then the transfer of the shares is as legal as you need to get. A 10% equity stake to recognise your worth and likely problems if you walked plus a purchase of another 10% would be a nice chunk in case the company goes YouTube. Of course if you suddenly realise that it costs 20,000 to run the company for three months and you start to add up the revenue and earnings and there is a big gap - it will be easy to see whether the company has a future. Some DotCom2.0 companies (like YouTube!) can be worth a fortune regardless of revenues - but I'm not sure how many ideas will be so valuable. At the end of the process you may feel more comfortable being a paid employee of a company that goes bust than a director. As a Director you may feel obliged to take a pay cut or defer pay entirely - not something that you need to accept as an employee. Also as a Director you have responsibilities in terms of number of years of maintaining records, tax return differences, legal responsibilities etc. Oh and in this sector don't touch any business model that does not feature limited liability (a Ltd company in the UK, for example). Still want a stake? A. Melvin
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Can someone suggest how much equity should I ask for in an IT product company for which I am the only developer and support person. I design, develop the s/w and provide implementation on client side and also provide support for it on an as needed basis. I'll also contribute to the overall vision and strategic placement of the product. There is only one other person involved and that person is the owner of the company. He does the marketing, sales, legal and all other activities. This guy is very passionate about the project and so am I. I just want to make sure when the project hits off and revenues start coming in he does not ditch me and reap of all the benefits himself and lauch a full-blown IT department without including me, etc. Should it even be based on the equity or some sort of profit sharing. Please give me your thoughts/suggestions. Thanks.
Get the equity in writing and witnessed by a lawyer. you are in the place I was 10 years ago. I have been well shafted by my "mate" (sales and marketing)who now seems to think that he owns the company we started together. Though this guy was a lot more experienced than me his marketing ideas were rubbish and old fashioned. I have had to design all the products and also fight his out dated marketing methods as well. What matters to these guys is how much money you invest (the risk), they think your time is free and therefore "worthless". I now look after a team of 12, pray my invoices gat paid every month and wait for the axe. I have a tiny house and a 4 year old pickup truck. Before I met this guy I was earning £100,000 a year :(
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Can someone suggest how much equity should I ask for in an IT product company for which I am the only developer and support person. I design, develop the s/w and provide implementation on client side and also provide support for it on an as needed basis. I'll also contribute to the overall vision and strategic placement of the product. There is only one other person involved and that person is the owner of the company. He does the marketing, sales, legal and all other activities. This guy is very passionate about the project and so am I. I just want to make sure when the project hits off and revenues start coming in he does not ditch me and reap of all the benefits himself and lauch a full-blown IT department without including me, etc. Should it even be based on the equity or some sort of profit sharing. Please give me your thoughts/suggestions. Thanks.
Again, like people already said, you're in trouble. You have no legal rights over this sw, so get anything you can as soon as you can.
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Can someone suggest how much equity should I ask for in an IT product company for which I am the only developer and support person. I design, develop the s/w and provide implementation on client side and also provide support for it on an as needed basis. I'll also contribute to the overall vision and strategic placement of the product. There is only one other person involved and that person is the owner of the company. He does the marketing, sales, legal and all other activities. This guy is very passionate about the project and so am I. I just want to make sure when the project hits off and revenues start coming in he does not ditch me and reap of all the benefits himself and lauch a full-blown IT department without including me, etc. Should it even be based on the equity or some sort of profit sharing. Please give me your thoughts/suggestions. Thanks.
I was in your same situation, and all I can say is you should take a look at your contract. If you're hired as a programmer and you're paid to program this application, the program belongs to your contractor. Unless it's something different in your contract.
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Can someone suggest how much equity should I ask for in an IT product company for which I am the only developer and support person. I design, develop the s/w and provide implementation on client side and also provide support for it on an as needed basis. I'll also contribute to the overall vision and strategic placement of the product. There is only one other person involved and that person is the owner of the company. He does the marketing, sales, legal and all other activities. This guy is very passionate about the project and so am I. I just want to make sure when the project hits off and revenues start coming in he does not ditch me and reap of all the benefits himself and lauch a full-blown IT department without including me, etc. Should it even be based on the equity or some sort of profit sharing. Please give me your thoughts/suggestions. Thanks.
ssmith721, If your in this for the long haul you'd better get everything in writting. Anyone that refuses to do a binding contract in a partnership isn't worth trusting anyway. You may want to get Key man insurance for this partnership and write the contract so that it covers who gets the dying partners assets in the business. Even if a spouse is to get it you may want a clause in the contract so that while they have a share in the business they will not make day to day decisions. Nothing like having someone that doesn't have a clue telling you what you should do with your business.... that's the governments job. While we are at it you had better get any current (and when it happens future) spouses to also sign off on the deal or you may find yourself in court after the death of partner. I know what I'm talking about here. Freinds in partnership soon arent when the wives get greedy.
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ssmith721, If your in this for the long haul you'd better get everything in writting. Anyone that refuses to do a binding contract in a partnership isn't worth trusting anyway. You may want to get Key man insurance for this partnership and write the contract so that it covers who gets the dying partners assets in the business. Even if a spouse is to get it you may want a clause in the contract so that while they have a share in the business they will not make day to day decisions. Nothing like having someone that doesn't have a clue telling you what you should do with your business.... that's the governments job. While we are at it you had better get any current (and when it happens future) spouses to also sign off on the deal or you may find yourself in court after the death of partner. I know what I'm talking about here. Freinds in partnership soon arent when the wives get greedy.
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Any pointers to lawyers without shelling out a ton of money? What are your experiences/suggestions?
Well I hate lawyers, but I havn't figured out a good way around them. Sit down with your partner and work out the details covering what ifs like. If either of us dies or are incapable of performing our function. Who gets what in the event of a bust up. How a buy out will work, and how shares are distributed. The personal experience I had was when one of partners I worked for died suddenly. They had a contract with each other so that the serviving partner would get the business and the spouse of the dying partner would get the Key man insurance. but had not made the contract binding enough on the spouses, even though they signed it as well. So after she got the insurance, she got a lawyer and sued the partner for another $300,000.00 and won. This ultimately put the business under. The lesson here is that the contract should have been written so that the partner gets the shares in the business no matter who is left behind and the corporation takes out insurance and pays the premium, with the spouse as the benifactor. And that shouldn't take a spouses signature. Less complex and clean.
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Can someone suggest how much equity should I ask for in an IT product company for which I am the only developer and support person. I design, develop the s/w and provide implementation on client side and also provide support for it on an as needed basis. I'll also contribute to the overall vision and strategic placement of the product. There is only one other person involved and that person is the owner of the company. He does the marketing, sales, legal and all other activities. This guy is very passionate about the project and so am I. I just want to make sure when the project hits off and revenues start coming in he does not ditch me and reap of all the benefits himself and lauch a full-blown IT department without including me, etc. Should it even be based on the equity or some sort of profit sharing. Please give me your thoughts/suggestions. Thanks.
I'm in a similar situation except I'm the owner. I did two things with the first person I took on: we signed an NDA (non disclosure agreement) since the patent application was not complete, and we signed a letter of agreement that covered our responsibilities and share in the business. We had witnesses present at the signing of both documents. You should check your local laws as to the proper way to enter into a binding written agreement. Hope that helps... By the way you can see my startup at: www.intriever.com, and feel free to leave me some feedback as to how I can make it better for you. Cheers!
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Can someone suggest how much equity should I ask for in an IT product company for which I am the only developer and support person. I design, develop the s/w and provide implementation on client side and also provide support for it on an as needed basis. I'll also contribute to the overall vision and strategic placement of the product. There is only one other person involved and that person is the owner of the company. He does the marketing, sales, legal and all other activities. This guy is very passionate about the project and so am I. I just want to make sure when the project hits off and revenues start coming in he does not ditch me and reap of all the benefits himself and lauch a full-blown IT department without including me, etc. Should it even be based on the equity or some sort of profit sharing. Please give me your thoughts/suggestions. Thanks.
I've read all the other responses, and I'm a bit confused. Are you currently a co-owner of the company, or are you simply the hired help? If the owner had a software idea, but can't code, that doesn't mean you can simply ask for 50% of his company. That's extortion. The software is his vision and his company is at stake. If you were hired to write it, you are an employee or contractor working for him. If you get cocky and try to tell him he can't live without you, you will soon find out that he most certainly can. You can offer to take limited pay in return for a stake in the profits, but if I was him, I'd never hand over 49% of my company to the programmer simply because he can code and I can't. I would get rid of him and find a capable programmer to work as a contractor, and when my product is launched, he would either have the option to come on board as an employee at that point, or leave and I'll find his replacement. If he stood with me through thick and thin, I may consider giving him a portion of the company, but probably not more than 20%. If I did make him an owner, his salary would drop quite a bit and he would be paid by a percentage of the revenue on a quarterly basis. Even if he's open to the idea of you becoming a part owner, asking for 49% is very risky in my opinion. If you're willing to give up your pay completely and work as an owner (unless you have VC money), he may be open to that as well. That's when you're going to get a larger percentage of the company because you are increasing your personal financial risk quite a bit. If he's operating off his own equity, he's not getting a paycheck, so why should you if you're co-owner? Just my opinion. Dan
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I'm in a similar situation except I'm the owner. I did two things with the first person I took on: we signed an NDA (non disclosure agreement) since the patent application was not complete, and we signed a letter of agreement that covered our responsibilities and share in the business. We had witnesses present at the signing of both documents. You should check your local laws as to the proper way to enter into a binding written agreement. Hope that helps... By the way you can see my startup at: www.intriever.com, and feel free to leave me some feedback as to how I can make it better for you. Cheers!
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I've read all the other responses, and I'm a bit confused. Are you currently a co-owner of the company, or are you simply the hired help? If the owner had a software idea, but can't code, that doesn't mean you can simply ask for 50% of his company. That's extortion. The software is his vision and his company is at stake. If you were hired to write it, you are an employee or contractor working for him. If you get cocky and try to tell him he can't live without you, you will soon find out that he most certainly can. You can offer to take limited pay in return for a stake in the profits, but if I was him, I'd never hand over 49% of my company to the programmer simply because he can code and I can't. I would get rid of him and find a capable programmer to work as a contractor, and when my product is launched, he would either have the option to come on board as an employee at that point, or leave and I'll find his replacement. If he stood with me through thick and thin, I may consider giving him a portion of the company, but probably not more than 20%. If I did make him an owner, his salary would drop quite a bit and he would be paid by a percentage of the revenue on a quarterly basis. Even if he's open to the idea of you becoming a part owner, asking for 49% is very risky in my opinion. If you're willing to give up your pay completely and work as an owner (unless you have VC money), he may be open to that as well. That's when you're going to get a larger percentage of the company because you are increasing your personal financial risk quite a bit. If he's operating off his own equity, he's not getting a paycheck, so why should you if you're co-owner? Just my opinion. Dan
I am not a co-owner. He asked me to help and I am helping. Software was his idea but I have contributed significantly to its maturity, practicality and refined (and of course, impletemed all of) it. I have helped him through troubled times from my personal and family time with no compensation. I certainly undersand that I am replaceable. But he should honor my commitment to the project and the fact that I single-handedly coded the whole project and currently there are 5 major clients for us. I helped launch systems for all 5 of them. We have others in pipeline. He operated throuh his money and now he IS getting a paycheck.
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I am not a co-owner. He asked me to help and I am helping. Software was his idea but I have contributed significantly to its maturity, practicality and refined (and of course, impletemed all of) it. I have helped him through troubled times from my personal and family time with no compensation. I certainly undersand that I am replaceable. But he should honor my commitment to the project and the fact that I single-handedly coded the whole project and currently there are 5 major clients for us. I helped launch systems for all 5 of them. We have others in pipeline. He operated throuh his money and now he IS getting a paycheck.
Well, now that the product is launched, you are in a bit of a spot. I must have missed that from your initial post. Since you didn't get anything in writing beforehand, you don't want to get greedy and try for 49% of his company. If he appreciates your efforts through the entire process, I would think he would have rewarded you by now. You have no legal ground to stand on. You can only hope that he sees your passion for the product and is willing to give up a portion of the profits to you. You are so far on the tail end of what should have been done, it's hard to say what will happen now. While he will certainly appreciate you coding the whole thing and doing the implementation, you are still an employee at this point. He has no financial incentive to make you part owner now. All the heavy lifting is over. You took a product from nothing to market, and now it's being sold by him and implemented by you. You might sit down with him and discuss how important the company is to you, and try to get from being at straight salary to salary plus profit sharing. Usually that requires a financial investment on you part whether by an influx of cash into the company, or my reducing your salary in return for a percentage of the company. The more you're willing to reduce your salary, the more ownership you'll be given in my opinion. Nothing comes for free. I am speaking from a company owner standpoint as well as a coder. I am very passionate about my products, and I don't want to give up percentages of ownership. Every product I have was my idea, I wrote the specs, did all the design work and so far have written all the code. If another programmer came along and offered to help, I would give them a percentage of that particular products' profits. The more products they were involved in, the more money they would make as a whole. That still wouldn't make them owners. It would simply be a commission on every sale. Call me a control freak, but I have seen partnerships cause the death of companies when they go bad. I'm not willing to risk that.
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AKAJamie wrote:
we signed a letter of agreement that covered our responsibilities and share in the business
Did you give up half of your company to that first person?
No. That first person was only going to have one responsibility while I shouldered the rest. Again, I believe all parties in this situation should first sit down and fully understand what they are going to contribute and what is expected of them, that way they can have a feel for what percentage of the whole effort they are contributing and then can better determine what they deserve based on what they're going to put into it; whether it's money and/or work. It takes a certain personality to make it in the start up environment. There are a lot of eager people that want to get involved. A lot of them don't last though because once they get in they find out it is a lot of work with few and far between rewards. In the case of my first person, they got out before even starting once they realized they couldn't meet the commitments they made. I wound up getting even better people to help out, who took on more responsibilities, and are getting a commesurate share. Hope that helps...
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I've read all the other responses, and I'm a bit confused. Are you currently a co-owner of the company, or are you simply the hired help? If the owner had a software idea, but can't code, that doesn't mean you can simply ask for 50% of his company. That's extortion. The software is his vision and his company is at stake. If you were hired to write it, you are an employee or contractor working for him. If you get cocky and try to tell him he can't live without you, you will soon find out that he most certainly can. You can offer to take limited pay in return for a stake in the profits, but if I was him, I'd never hand over 49% of my company to the programmer simply because he can code and I can't. I would get rid of him and find a capable programmer to work as a contractor, and when my product is launched, he would either have the option to come on board as an employee at that point, or leave and I'll find his replacement. If he stood with me through thick and thin, I may consider giving him a portion of the company, but probably not more than 20%. If I did make him an owner, his salary would drop quite a bit and he would be paid by a percentage of the revenue on a quarterly basis. Even if he's open to the idea of you becoming a part owner, asking for 49% is very risky in my opinion. If you're willing to give up your pay completely and work as an owner (unless you have VC money), he may be open to that as well. That's when you're going to get a larger percentage of the company because you are increasing your personal financial risk quite a bit. If he's operating off his own equity, he's not getting a paycheck, so why should you if you're co-owner? Just my opinion. Dan
He wasn't hired if he hasn't been paid and wages weren't discussed. It sounds more like a partnership in that he's working pro bono. He should go for 50%. Doesn't matter that the other guy has the vision. He's requested help without paying. That's partnership. If he has money to pay him now, then it could be a hired situation. But I'd wager, that he can't afford to pay now, and that the dev won't get any til revenue comes in.
This statement was never false.
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Well, now that the product is launched, you are in a bit of a spot. I must have missed that from your initial post. Since you didn't get anything in writing beforehand, you don't want to get greedy and try for 49% of his company. If he appreciates your efforts through the entire process, I would think he would have rewarded you by now. You have no legal ground to stand on. You can only hope that he sees your passion for the product and is willing to give up a portion of the profits to you. You are so far on the tail end of what should have been done, it's hard to say what will happen now. While he will certainly appreciate you coding the whole thing and doing the implementation, you are still an employee at this point. He has no financial incentive to make you part owner now. All the heavy lifting is over. You took a product from nothing to market, and now it's being sold by him and implemented by you. You might sit down with him and discuss how important the company is to you, and try to get from being at straight salary to salary plus profit sharing. Usually that requires a financial investment on you part whether by an influx of cash into the company, or my reducing your salary in return for a percentage of the company. The more you're willing to reduce your salary, the more ownership you'll be given in my opinion. Nothing comes for free. I am speaking from a company owner standpoint as well as a coder. I am very passionate about my products, and I don't want to give up percentages of ownership. Every product I have was my idea, I wrote the specs, did all the design work and so far have written all the code. If another programmer came along and offered to help, I would give them a percentage of that particular products' profits. The more products they were involved in, the more money they would make as a whole. That still wouldn't make them owners. It would simply be a commission on every sale. Call me a control freak, but I have seen partnerships cause the death of companies when they go bad. I'm not willing to risk that.
If he was never paid up front for his participation, then he has contributed sweat equity, and already has equity in the company and the other guy is liable for the taxes on that equity contribution.
This statement was never false.
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He wasn't hired if he hasn't been paid and wages weren't discussed. It sounds more like a partnership in that he's working pro bono. He should go for 50%. Doesn't matter that the other guy has the vision. He's requested help without paying. That's partnership. If he has money to pay him now, then it could be a hired situation. But I'd wager, that he can't afford to pay now, and that the dev won't get any til revenue comes in.
This statement was never false.
I haven't seen anywhere that states he wasn't getting paid for his development time. The owner was using his own equity to fund the company, so he was probably paying the programmer. If the programmer worked for free for the last X months, then yes, he needs to be compensated in some way, but now that the project is over and no agreement verbal or written was made regarding his own ownership in the company, I don't see what recourse he has other than getting paid for his time. If he worked for free and decided to take the owner to court over wanting partial ownership, he would most likely come out of it being paid for his time but nothing else.