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| 19:45.16 | skinner | Good afternoon all! A friend and I are working on a startup together. I have some concerns about the splitting of ownership. Anyone here have experience/knowledge with business ownership? |
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| 20:41.39 | SunSparc | skinner: Do you have a working product? |
| 20:46.13 | shalkie | skinner: I know this: Get it in writing, and that definitely includes the exit planS. <-- Note the S. There are many ways we exit businesses. Some good and some bad. Have them all documented. |
| 20:47.23 | eggyknap | The major reason to make a contract between business partners is that one day, one of them will need to end his relationship with the company, if only because he croaked, and that sort of ownership transfer stuff needs to be established clearly. |
| 20:47.38 | skinner | SunSparc: Mostly. It's just a simple dev shop. |
| 20:48.26 | skinner | My concerns are that my friend has an idea on how to split ownership, but it doesn't feel right to me. |
| 20:48.48 | skinner | But I don't know enough about business to know what other options there are. |
| 20:48.50 | SunSparc | skinner: Get a lawyer |
| 20:49.11 | shalkie | +1 |
| 20:49.47 | skinner | We have started working with one. |
| 20:50.11 | skinner | The issue is that my friend is older, has money. He's a php developer as well. |
| 20:50.37 | skinner | I don't have money, but I also have more experience when it comes to server administration. |
| 20:50.41 | skinner | and a few other areas |
| 20:50.47 | SunSparc | skinner: If you cannot both agree, either together or through mediation, bail. |
| 20:51.38 | SunSparc | Disagreements kill any relationship if one or both of the parties are not able or willing to compromise. |
| 20:59.44 | SunSparc | OR, if you are both at least willing to hold off and being official, just finish building the product and get users and when there is some money, then work out the business side of it. |
| 21:00.43 | SunSparc | Any way you go though, your "team" will ultimately make or break the business. Choose your partners well. And as the others have mentioned, know at least your own exit strategies. |
| 21:02.21 | ninnypants | SunSparc: not sure I'd go all the way through to the making money stage |
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| 21:02.50 | ninnypants | if they can't decide on a split that makes them feel good with no money on the table it'll be even worse when they have revenue on the table |
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| 21:05.18 | shalkie | Don't forget that part of what is covered in this conversation is what kind of legal entity is being done up and how the debt is going to be covered. |
| 21:17.55 | skinner | We've been building a small platform to manage our client and contractors with. I've done a lot of the back end work. |
| 21:18.06 | skinner | My friend has also done some of the work. |
| 21:18.24 | skinner | So far, our expenses have been funded from his pocket. |
| 21:18.51 | skinner | Which he says is his "investment". |
| 21:19.47 | skinner | When we go legal he wants to put in a couple $10k's to a bank account and come up with an arbitrary price for shares. At which point he'd be 100% owner. |
| 21:20.04 | skinner | and I'd have the option to buy shares at a locked price up to 49% ownership. |
| 21:21.08 | skinner | So in order for me to get a share of the profit, i have to have paid into the bucket. |
| 21:21.38 | skinner | Now I can be employed by this startup at a small hourly rate and then turn and put that money into the bucket. |
| 21:21.44 | skinner | Just seems....odd. |
| 21:22.18 | shalkie | skinner: This is why you need legal advice. Money is well understood to provide a measure of ownership, but your labor and efforts can be considered as part of a claim to ownership too. A lawyer can help you figure this out. |
| 21:22.57 | skinner | shalkie: You said what I'm thinking. "...labor and efforts as part of a claim to ownership..." |
| 21:23.07 | skinner | I guess I feel like I'm not getting that |
| 21:27.52 | josephscott | honestly, this doesn't sound like much of a friend |
| 21:30.19 | skinner | josephscott: We've been friends for a few years now. When he first explained it to me it kinda made sense, but we hadn't started and I was more excited to get going. That was last August. |
| 21:30.35 | skinner | We are almost ready to start taking on clients. |
| 21:30.50 | josephscott | tough time to start negotiating |
| 21:30.53 | skinner | He said it was a fair system. So I've trusted him. But now I'm not so sure. |
| 21:31.16 | skinner | He said it was fair because he has the money and I have the know-how. |
| 21:31.27 | josephscott | changing founding terms after the fact can be painful |
| 21:31.34 | skinner | yeah I know |
| 21:31.46 | josephscott | if you owned 50% of the company as part of your know-how then that would seem more fair :-) |
| 21:32.15 | skinner | Part of me thinks it's ok to bring it up since we haven't actually done any legal stuff yet. Nor earned any $. |
| 21:32.18 | josephscott | as others have said, you'll need a lawyer at this point :-( |
| 21:32.23 | shalkie | Making you put in the "know-how" and then buy ownership seems odd. |
| 21:32.24 | skinner | The only legal part is a business license. |
| 21:32.41 | shalkie | http://www.sba.gov/tools/sba-learning-center |
| 21:33.00 | shalkie | Might check out the Local Assistance portion. Maybe someone there could give you some help. |
| 21:33.18 | skinner | I guess part of me wanted to reach out to you guys to make sure my thoughts weren't crazy. :) |
| 21:34.54 | macnewbold | definitely not crazy to get it settled now |
| 21:35.00 | macnewbold | worst case, it ends the partnership |
| 21:35.11 | macnewbold | or other worst case, you go forward, and then are really upset later |
| 21:36.12 | shalkie | Might be worth a note that if this is all done on a handshake, it can be prove later if he retracts the offer to let you buy ownership. |
| 21:37.06 | tierra | of course it should have never come to this to begin with, but if you really feel like the business was worthless without your know-how, it's probably worth the threat of leaving without the partnership share you think you actually deserve since his investment really is lost if you leave (it's in his best interest to make 50% instead of 0% when it flops, heh) |
| 21:39.52 | tierra | the nice part about owning 0% of the share at this point is that you have all the leverage of not losing a dime over ending a piss-poor business relationship in which you're going to always regret having agreed to 0% partnership over something you've poured your heart and soul into |
| 21:44.42 | clintberry | skinner: he basically setup an options pool and gave you the options to purchase at a certain price |
| 21:44.45 | clintberry | that is really common |
| 21:44.59 | clintberry | (from your description, it sounds like this anyway) |
| 21:45.45 | clintberry | So if the company sells, it should be setup that your options exercise immediately and you get your money. It is close to being a founder but not quite. |
| 21:46.58 | skinner | Does it make sense for me to have been around since day 0, and start with no options? |
| 21:47.22 | skinner | Even building say....80 - 85% of the platform |
| 21:47.49 | clintberry | no, if you started from day 0, you should get your stock up front in my mind. As a full co-founder |
| 21:47.58 | clintberry | But you do have "options" |
| 21:48.04 | clintberry | you have options to buy 49% of the company |
| 21:48.09 | skinner | right |
| 21:48.10 | clintberry | you don't have direct equity |
| 21:48.24 | clintberry | which screws you come tax time in the event of an exit |
| 21:48.29 | skinner | at a set price no matter the value |
| 21:49.05 | clintberry | if you haven't exercised your options when your company sells, you get your money, but it is taxed as income |
| 21:49.13 | clintberry | while the other guy will be taxed as capital gains |
| 21:49.43 | skinner | So that means I need to buy in as soon as possible? |
| 21:50.04 | josephscott | clintberry: I think the bigger issue is that this guy is basically a co-founder ( day 0 ) and got no equity in the company for his work, only options |
| 21:50.33 | clintberry | if you sold for millions, that would put you in the highest tax bracket and you would get taxed at something like 40%, so that isn't cool |
| 21:50.36 | clintberry | josephscott: agreed |
| 21:50.43 | clintberry | skinner: you should be a co-founder |
| 21:50.46 | clintberry | not an options holder |
| 21:51.35 | clintberry | A good read: http://blog.samaltman.com/employee-equity |
| 21:55.05 | tierra | 49% of company stock does not sound like a traditional employee option pool, that sounds like a founder offering a co-founder a traditional employee option pool instead of an actual co-founder share of the company |
| 21:55.36 | tierra | skinner: are you deferring any salary? |
| 21:56.24 | tierra | deferred salary is not quite as great as putting down seed capital, but it definitely counts |
| 21:56.27 | skinner | The plan is to compensate me for my work at an hourly rate, but due to me having options, the rate is like $10/hr. |
| 21:56.37 | clintberry | that isn't fair |
| 21:56.49 | clintberry | if you aren't getting paid market wages, then you should get the difference in stock |
| 21:57.05 | tierra | yeah, this sounds super shady |
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| 21:58.06 | shalkie | Yeah, you should totally talk to someone that he isn't directly paying. |
| 21:58.45 | josephscott | ouch, at $10/hr I'd suspect he is trying to set the value of the stock super high as well, which has another set of problems |
| 21:59.20 | josephscott | I think we all agree that this doesn't not appear to be on the up and up |
| 22:00.51 | skinner | ya, we haven't talked final details, but he was thinking of starting at like $4 an stock |
| 22:01.33 | skinner | he was going to throw in around 30 - 40k to start |
| 22:01.54 | tierra | I'd be curious to know what buying 49% at $4/share comes out to, especially if it's actually much more than the founder's initial seed captital, heh |
| 22:03.10 | clintberry | that would be so jacked |
| 22:03.15 | clintberry | artificial company valuations are so stupid |
| 22:03.26 | tierra | agreed |
| 22:03.34 | skinner | Last we talked he was saying something like there'd be 10k shares |
| 22:03.43 | skinner | so his buy-in makes him 100% owner |
| 22:03.51 | skinner | (I could be way off here btw( |
| 22:03.52 | skinner | ) |
| 22:03.57 | clintberry | with a 49% option pool :-) |
| 22:03.58 | josephscott | off the top of my head $4/share sounds really, really, REALLY!, high for a company with very little of value except $40k in the bank |
| 22:04.08 | clintberry | unless there are 10 shares :-) |
| 22:04.13 | skinner | then I could buy like 4999 shares |
| 22:05.27 | skinner | or 4900 |
| 22:05.37 | josephscott | yeah, but if that is the 409A value, then you also end up having to pay taxes on that $4/share as income when you exercise them |
| 22:05.43 | skinner | so $19,600 |
| 22:06.21 | clintberry | if he was there day zero, he should get his shares at a $0 value |
| 22:06.22 | clintberry | so jacked |
| 22:06.29 | josephscott | yep, totally agree |
| 22:06.44 | josephscott | was just pointing out that with details this deal keeps looking worse and worse :-( |
| 22:08.06 | skinner | yup he and I brainstormed over lunch one day, then started putting it together. I researched and picked the hosting package, got the domain. Setup the server(s). Started building the php application we'll use with some of the php work done by him (about 15%). He paid for the server hosting and domain. |
| 22:11.06 | skinner | On a side note... |
| 22:11.28 | skinner | He has this money he wants to invest in something. So he wants to put it into this business and have it start paying out. |
| 22:12.14 | skinner | I don't have money. I want to start a business and grow it to have it pay out so I might retire someday. Where I don't have money, I have skills. |
| 22:12.31 | skinner | I just don't see the balance of our setup. lol |
| 22:13.21 | skinner | He's also single. Almost 50. No debts. |
| 22:13.47 | skinner | I have a family, student loans, and nervous about the future. :\ |
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| 22:16.53 | SunSparc | skinner: money is an asset, skillz are an asset. The business would not work without both. You have leverage. Let him consider doing the project without you. He may say, "fine, I will just hire someone to do it". You say fine. Call his bluff. Worst case scenario, you part ways and you find something else to work on. |
| 22:18.07 | SunSparc | Do no let money outweigh skill. Money comes and goes, but true skill is hard to come by. |
| 22:19.31 | SunSparc | He could blow all his money and then have nothing. You could build project after project and only have more and more skill and experience. |
| 22:19.32 | SunSparc | By far, you have the more valuable asset. |
| 22:20.03 | skinner | So with it said that we haven't formed the options pool yet or any legal stuff, assuming that is what we are doing, I wouldn't be out of place to ask for starting options then would I? |
| 22:20.07 | SunSparc | Need another project? I have plenty. I am sure everyone in here has at least a couple project you could work on. ;) |
| 22:20.48 | SunSparc | skinner: In my opinion, you would not be out of place to ask, nay, demand ownership. |
| 22:20.59 | skinner | I doubt he would do this, but it seems like since I'd start with 0% options, once we go "live" he'd be at 100% ownership, i'd be a hire at $10/hr. He could fire me and run with the platform benefiting from my work. |
| 22:21.03 | SunSparc | At least 50/50. |
| 22:22.09 | SunSparc | skinner: From what you have said so far, it may just be a losing cause. Are you married to this project? If not, I say take your intellectual property and leave. |
| 22:23.35 | josephscott | give him a chance to make it right, but given the situation I'd agree that you need to be prepared to walk away |
| 22:23.50 | SunSparc | ^ |
| 22:24.08 | skinner | Not really married to it. And a lot of what I built, learned, libraries I've used, I've gotten better at outside this project. If I were to start over, I could probably get the same thing built in a third of the time. |
| 22:24.35 | SunSparc | skinner: You are holding ALL the cards. |
| 22:24.46 | SunSparc | He has no ground to stand on. |
| 22:25.08 | SunSparc | You are an owner. If he does not agree, he is not worth partnering with. |
| 22:26.46 | SunSparc | Oh, and whatever you do, do not make it personal. You can still be friends (meaning it is possible), even if you do not partner in this venture. But once you make an agreement, you are bound to it. Like marriage. A business relationship is like any other binding relationship. It takes work and commitment. |
| 22:27.38 | SunSparc | If you were looking at this as a marriage, you probably would have ditched him as a "partner" long ago. Unless you are desperate and lonely. ;) |
| 22:27.56 | skinner | lol good analogy |
| 22:28.00 | SunSparc | :) |
| 22:28.09 | herlo | only in the traditional marriage standpoint. :D |
| 22:28.21 | SunSparc | ~traditional herlo |
| 22:28.26 | herlo | SunSparc: lol |
| 22:28.31 | skinner | SunSparc: shalkie eggyknap ninnypants josephscott macnewbold clintberry tierra Thank you all very much. You all win the Internet today. You all made my day today. |
| 22:28.47 | SunSparc | Woot! |
| 22:30.07 | herlo | SunSparc: most of it will be with the lights off, in a dark and dreary room... |
| 22:30.33 | SunSparc | So true. |
| 23:04.46 | ponderability | Is the PHP meeting on for this Thursday? If so, has a topic been selected? |
| 23:05.19 | josephscott | ponderability: it may have be canceled for this month since we just had the OpenWest conference, need to ask carmony to be sure |
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| 23:38.23 | beandog | ~rickroll mindjuju |
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