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I am about to take on a partner to develop a software prototype I built almost a year ago and I need some guidance on deciding equity/profit split.

I know out of past experience that I cannot develop, maintain, ship and market the idea all on my own - I simply don't have the time resources or capital to stop all the other work I'm doing and work exclusively on this project.

So, I would rather take on a partner and own 50% of a useful project which shipped than 100% of vaporware. The partner in question is willing to be involved full-time for a period of 3-6 months to develop the idea and part-time after that. We need to decide on a fair equity/profit split for his involvement.

I am partial to an equal 50/50 split whenever possible, but the project is my idea, I built the prototype and I have the necessary domain knowledge and experience to develop it alongside another developer.

Having read all the other questions related to equity split, none seem to adequately address my case. I did spot the term "vesting", which seemed relevant, but I have no experience with that.

What is a fair agreement to compensate all parties and to ensure that if my partner leaves after helping the idea succeed, I'm not left with half the equity and all the work?

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In addition to vesting you might want to add a clause that if he stops making contributions below some level (milestones, time, etc) that he is obligated to sell back his share, or some portion of it). I would talk to him as well and see what he thinks is fair. You might want to consider making it 51/49% – TimJ♦ Oct 4 '10 at 18:35
@Tim: why not add that to your answer? – pate Oct 4 '10 at 21:53

3 Answers

up vote 1 down vote accepted

Your answer is here -> http://www.paulgraham.com/equity.html

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I thought I had read all of Paul Graham's startup essays, but this one had eluded me. @Tim: I found it insightful, if not specific to my question. – pate Oct 4 '10 at 21:52
After second (full) reading, I changed to +1 – TimJ♦ Oct 5 '10 at 0:22
up vote 1 down vote

Does this person want to have ownership in a software company or is equity a substitute for salary? Are they looking to get experience, so they can land a full-time job?

Many people ask this type of question who know little about technology and would struggle to hire & manage a developer, so they require a lot than you do. Tim has some great points on vesting, having some expectations on this person's contributions. They've already to commited to becoming part time after three months. I just don't see how they can be considered an equal partner.

Iron out some more of the details and get their expecations and offer between 25-49%. If thing takes off and you need a full-time developer, what are you going to do?

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up vote 0 down vote

You might want to figure out a way to share profits so he has up side in the business but not ownership. There is no reason to give him equity when all he might want is profit/upside.

It is easier to unwind a profit sharing scenario than an equity partnership.

That is not to say that you should not look for or get a partner - but they have to be as dedicated as you. When/if they choose to stop/bail/exit, then it has to be clean and revert ownership. They can be paid off with bonus or whatever, but you are thinking about the right things.

It is not that hard to do. Talk to your potential candidates and see what they want out of it.

Good luck. Please post back with updates so we can learn as well.

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How would I craft a profit sharing scenario that is easily unwound? – pate Oct 4 '10 at 21:53
That's a good question - I do not know. But essentially profit sharing is only given to employees - once you are no longer an employee (or whatever status you deem worthy) you can end the profit sharing. If the departing partners contributions were so great that they warranted other treatment then you can discuss that. – TimJ♦ Oct 5 '10 at 0:18
I think it deserves a separate question: answers.onstartups.com/questions/14758/… – pate Oct 5 '10 at 9:16

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