On January 15 a buddy of mine (who is not technical with a full time job in the social gaming/payment space) came to me (an independent Web Strategist SEO/Social Media looking for my next big thing) and asked me how to make a very rough concept he had, a reality. In short, even though he had thought about it for over a year, and talked to other web savvy people about it, he still did not have a single realistic path forward… and yet didn't want to just give up on it because he thought it would work.
In 24hours, I came up with a solution by just re-framing the entire question and swapping out payment mechanisms. It was indeed a hell of a solution, and it now made the idea not only 'doable', but doable to the point that I actually wanted in, and offered to just grab the ball and run with it, since he had no real idea what to do, and I was completely in my zone, and could literally do everything myself or outsource to the right people.
Since I'm trying to be deliberately vague about the actual subject of the startup, let me try to clarify by using an inferior/fake, but kinda similar idea; imagine the idea was my buddy wanted to make it possible for friends to give each other real flowers on Facebook, using various national flower stores' gift cards to process the payment. That was about the entire extent of the concept. No real idea how to do it technically, just a rough idea you can tell someone in a sentence, but basically nothing more.
At first glance, I could see it was possible to do that (I have a few years in the e-cert/gift card space) …but as a marketer and a businessman, I wasn't yet 'blown away' by anything here. (Yeah it might go big, but there is a tremendous amount of hidden friction just under the surface here.)
In all honesty, I could/can say 1.) I don't think my friend had a very good chance of getting this off the ground by himself because this isn't his area, he doesn't have time/money/experience/knowhow/marketing/tech skills, and 2.) if he wasn't my friend, I would not consider compensating him for a half baked concept which was not patentable.
So on Feb 5 we agreed:
– he and I are 50/50 partners (meaning we both own half and we share decision making equally)
– I got a $10k loan from my father @ 6% that comes off the top of any money we generate first… then we pay expenses… then future operating costs… then we take salaries… then we split profit….
– his 'job' was coming up with the big idea, and my 'job' was to make that into an app. What happened from there we still needed to talk about. A company would need to be formed, it would need to be managed, it needed a marketing strategy, etc., so if he just wanted to be a founder, fine, but there needs to be a way to compensate me for my efforts, the same way we could hire someone else to run this for us. And since it was stupid to get loans to pay my salary, and I was really the one essentially doing everything and that was responsible for essentially everything, I should be compensated in non-voting stock, which would allow for unequal total ownership, but equal voting rights.
My concern is I never wanted to lose more than 50% of voting shares… and I want to be fairly compensated for doing a ridiculously good job at doing the job of 5 different people, in less than half the time, and 1/4 of the money…. and he agrees. He is just happy to see it moving ahead and that he had a stake in it, and I solved the problems, with a superior solution, and even came up with the money to make it happen.
So I came up with an operating agreement for an LLC with 2 kinds of shares, that reflected what we were trying to accomplish in our verbal agreement… X number of Class A shares (with voting rights) would be awarded to both of us equally, as founders, once the app was finished (based on my time spent building just that component out.) Once we are awarded our shares, we would be awarded Class B shares, like the rest of the employees, to compensate them for additional work, at a mutually agreed upon rate. This would ensure that no matter the ratio of total stock between the two changes, we would always have an equal voice in decision making, based on the Class A ratio which was split 50/50.
The problem is that if we want to get funding we really need to be a C corp… so now we are dealing in 'preferred vs common' stock, not Class A/B shares… and there isn't really a correlation to what we had in mind before.
But yesterday, March 15th, I incorporated us because I need to establish bank accounts. And I can say that C corp and NV were good choices, I do NOT know if I should have divided up the 1M shares into 500,000 'Preferred' and 500,000 'common' shares, but that is exactly what I did.
I was thinking even though the stock has a par of $.01, I was thinking about valuing them initially at $1… that would leave $490k worth of preferred non-voting stock ($10k goes to my dad?) and $500k worth common voting stock which we would have to give to the employees, including us as both workers and founders. Hypothetically we should be around $65k (in combined labor costs) by the end of May, and we hopefully will be making money after that to switch to cash salaries, depending if we get into Techcrunch Disrupt, AND it goes well.
On March 5th we agreed by the end of may the numbers would look something like this by the end of May, which was when we knew if the bird was going to fly:
Founder 1 (Class A): 23,875 Me (Class A): 23,875 Founder 1 (Class B): 9000 Me (Class B): 28625 Founder 1 (Total Shares): 32,875 (39.22%) Me (Total Shares): 52,500 (60.78%) Total Shares Issued: 86,375
…so, at this point, I need to convert this over into C corp speak. My translation is: - 10,000 preferred stocks go to my dad (or me)…. leaving 490k available for investment - Founder 1 gets ~40% of the common stock, I get ~60% common stock and anything we give out dilutes us. And so at the end of May, we have to come up with a new way for me to get compensated.
…what are your thoughts? Anything jumping out at you? Sound fair?