Startup Equity question

Thanks for the question!

The way I see it your partner has no equity whatsoever. If your partner isn't willing to continue working on the project then there is absolutely no reason to include him/her in the ownership. It is unreasonable for him/her to ask for ownership when all that has been made is a business plan. Yes, there was undoubtedly a lot of legwork involved, but think of the massive task you have ahead? You've only done a small portion of the work that you have ahead of you. Assuming you're trying to raise money, you still have that, not to mention the execution of the plan itself and running the business. Your partner needs to be there for the execution of the plan for me to be okay with him/her having ownership.

This is the problem with sweat equity. If you choose to have a partnership based on sweat equity you need to keep this in mind: sweat equity is only there if the person with the equity is putting in the sweat.

My questions for you: Have you developed the app? If so, what was your partner's role in the development? What does your partner expect to happen now that he/she's left? Has he/she asked you about retaining ownership?

I'm not an attorney and so seek the advice of one and an accountant prior to making a decision.

It sounds like there aren’t any assets or revenue for this company at this time. Pure research and maybe some work on a project. Assuming that I would discuss with him what is fair but keep in mind that whatever you guys worked on may turn out to result in nothing. I would ask him to sign away the firm to you if that is the case (no current assets, no current revenue and no equity contributions). There will be no value if nobody works it and there still might be no value if you work it by yourself. If he asks for some money that is your call but you would have the option to close down the company and disperse the "assets" (that maybe valueless) equally which would be the artifacts of the project. If there is intellectual property from this you both have equal ownership of it but if it is more outlines of business plans and not patentable products then you can alter it and start over.
Its best to have him exit without ownership having him feeling its fair and that he clearly leaves the firm and the ownership if you have shared the fees of the firm you could agree to reimburse parts of it but I'm guessing that your project is far from completion and it would have no value without someone completing it so keep that in mind. If he did some specialized work that no one else could have done or is normally expensive that would alter what I'm saying because you would have otherwise needed to pay someone. But the firm has no value without someone working it and without him putting in his sweet equity to completion then the sweat is just that hard work without a result.

Your partner is obviously entitled to something for their efforts but how much is always tricky. Since they will not be continuing on, it's logical that they get less than the original deal. The reasoning on this is simple -- they are walking away and you will have to run the company now. That means you should have the ability and control to do that.

Before you have that discussion, you need to figure out how much involvement this person wants to have in the venture. Will they advise, pitch in sometimes or are they just done with it all. Once you really have an idea as to their involvement, then you need to propose an equity split that makes sense. Again, since you are continuing the company on, it makes sense to me that you have more of the equity than your departing partner for the reasons given above.

Another thing to keep in mind is that when you do give out equity, make sure the deal states that this is for the generated Intellectual Property up until the granting. That way, the company owns the product you guys have been developing.