Equity in a startup
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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.
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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
Stephan Hoppe wrote:
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.
Interesting idea. Note that it can still have a downside. Say the company is worth 10 million on paper. Partner A offers a million to B (and partner A does have a million in cash.) To meet the reverse buy B must be able to actually come up with a million dollars - so where does B get it? Note that 10 million on paper doesn't immediately translate into a million in cash. Still an interesting idea. At a minimum I would insist that although the company has first refusal they must match any real offer made for the equity. That prevents contractual deals where the company has first refusal but based solely on the price they set.
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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.
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AlaskaDan wrote:
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.
I would suspect that he could go for code ownership as well.
If he didn't have any sort of agreement up front on who owned the code, it belongs to the employer, no matter what he got paid. You can't just claim ownership after the fact because you didn't have the foresight to get your legal ducks in a row before you started. The employer would claim that the relationship was employer/employee. I think he was paid for his time though, he just wants more now that the project is successful. If it was a turd and was sucking the money out of the company, you can bet he wouldn't be trying for any ownership rights. As a company owner, I would look on this guy as someone trying to latch onto the success of my product. If he pushed too far, I would call my lawyer, then show him the door. It's one thing to ask for a commission on sales for your development efforts. It's an entirely different thing to ask for 49% of the company.
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If he didn't have any sort of agreement up front on who owned the code, it belongs to the employer, no matter what he got paid. You can't just claim ownership after the fact because you didn't have the foresight to get your legal ducks in a row before you started. The employer would claim that the relationship was employer/employee. I think he was paid for his time though, he just wants more now that the project is successful. If it was a turd and was sucking the money out of the company, you can bet he wouldn't be trying for any ownership rights. As a company owner, I would look on this guy as someone trying to latch onto the success of my product. If he pushed too far, I would call my lawyer, then show him the door. It's one thing to ask for a commission on sales for your development efforts. It's an entirely different thing to ask for 49% of the company.
AlaskaDan wrote:
If he didn't have any sort of agreement up front on who owned the code, it belongs to the employer, no matter what he got paid.
Not so in the US. As a paid employee an employer has a method to prove an employee/employer relationship. The paycheck proves that. An employee/employer relationship gives ownership to the employer implicitly. (Noting of course a paycheck is not necessarily sufficient proof but is certainly useful.) All other relationships are dependent upon contractual relationships. In consultant/contractor relationships a company must explicitly contract for ownership otherwise the consultant/contractor retains ownership. Thus "work for hire" clauses in such contracts. See the following link.... http://www.bowie-jensen.com/?file=softwarenew.inc[^] The above link also discusses relationships that are less clear such as when someone claims a partnership or co-owner. With no payment, no documentation, 100% code by the developer and an expressed understanding by the developer as to ownership I doubt that any court would have a problem in awarding full ownership to the developer. Precluding evidence to the contrary of course.
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If he didn't have any sort of agreement up front on who owned the code, it belongs to the employer, no matter what he got paid. You can't just claim ownership after the fact because you didn't have the foresight to get your legal ducks in a row before you started. The employer would claim that the relationship was employer/employee. I think he was paid for his time though, he just wants more now that the project is successful. If it was a turd and was sucking the money out of the company, you can bet he wouldn't be trying for any ownership rights. As a company owner, I would look on this guy as someone trying to latch onto the success of my product. If he pushed too far, I would call my lawyer, then show him the door. It's one thing to ask for a commission on sales for your development efforts. It's an entirely different thing to ask for 49% of the company.
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Well! That's something entirely different. According to the previous poster, you legally own the source code to that application, which puts you in a better position than he is. You now have a lot of clout in asking for part or even half ownership in the company. I still think you'll be met with a bit of hostility if you try for half, and if you pull the "the code is legally mine" argument, don't be surprised if that ends your relationship. Don't show this card to him unless you have to. You really need to talk to a lawyer about how to best approach this with the owner. You did all the work for free, so you must believe in him, his vision and the product. That's the angle you want to use. Make sure he knows how personally invested in this company you are, and that such an investment should warrant part ownership in the company. If he agrees, get a lawyer to draw up all the particulars so you don't get into this position in the future.
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ssmith721 wrote:
I was not paid for anything.
And there are no written agreements... In terms of code ownership it is a matter of what the relationship was. So you have to evaluate your understanding of it and your actions per your involvement. For example if you sent a hours worked per week to the other guy then that could be used as evidence of employee/employer relationship. If there is letterhead that lists the owners and your names shows up then it suggests a non-employee relationship. etc, etc.... If there is absolutely no written documentation, including email, then as long as you presented yourself as owner then I doubt that a court would cede ownership to the other person.
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ssmith721 wrote:
I was not paid for anything.
I want to emphasize the last part of what I said. Just because you were not paid does not automatically insure that there is no employee/employer relationship. A paycheck is evidence that an employer can use. It isn't the only thing that they can use though. With no written contracts though these days someone claiming an employee/employer relationship can use email. If the developer thinks that this might be a problem in the future but isn't one now then the developer should take proactive steps now to document the relationship. For instance save email that seems to suggest an equitable discussion in which the developer is involved with decisions about the company (it doesn't hurt to proactively get involved in such decisions either.) A diary, one that is actually kept over time, can be used to document business communications which would otherwise not be documented. Meetings, telephone conversations would fall into this. Keeping instant message conversations would be a good idea as well. Keep in mind that depending on state laws (US) you can NOT record conversations without permission. So either verify the state laws, get permission or do not record.