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Currently I'm working on a project together with 1 co-founder and soon we are going to incorporate a company. We agreed that I get 70% shares and he gets 30% . The reason is because I started the whole project, initial research and came out with the first product prototype.

My questions:

  1. We need to come out with the initial capital, $10,000. Should co-founders contribute cash based on the share percentage ($7000 & $3000) or split it equally ($5000 & $5000)? What's the common practice?

  2. My co-founder shares are vesting over 3 years. As the co-founder that started this, am I subject to vesting as well?

  3. Since my co-founder first year shares are 10%, how much will he get for the first year profit? 10% or 30%?

Thank you!

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3 Answers

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  1. If you already have been working on the project, then you probably should be contributing (assigning to the corporation) your work product, and intellectual property rights therein, in addition to cash. You can allocate the cash, and the value of the work product, in any way that you both agree makes sense.

  2. While it would be customary for both founders to have similar vesting provisions, no law says that similar vesting provisions are required. (Actually, you probably should have restricted stock with reverse vesting - for an explanation of these terms, see "Rewarding Key Personnel: Restricted Stock or Options?".)

  3. It appears that what you are asking about comes down to the following: If there are profits, you may decide to pay them to the founders as salary and / or dividends. You should discuss this issue with your tax advisor. If you declare a dividend, then the dividend will be paid on a per-share basis.

Please pardon my bluntness, but from your Qs, it is evident that you know little about forming a corporation. I recommend that you retain a lawyer to help you - this is not a do-it-yourself project.

Disclaimer: This information does not constitute legal advice and does not establish an attorney-client relationship.

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Thanks Dana. Yes, I'm newbie in incorporation company. I read a few books and lots of articles until I got lost. But Restricted stock is the best for my case. – Paul12 Apr 21 '11 at 11:16
up vote 1 down vote
  1. We need to come out with the initial capital, $10,000. Should co-founders contribute cash based on the share percentage ($7000 & $3000) or split it equally ($5000 & $5000)? What's the common practice?

Depends. What do you WANT?

  1. My co-founder shares are vesting over 3 years. As the co-founder that started this, am I subject to vesting as well?

Depends, what do you agree upon? What do you want?

  1. Since my co-founder first year shares are 10%, how much will he get for the first year profit? 10% or 30%?

What do you want?

Basically all questions are negotiatle in this area. It is more a qustion of wha you two agree upon and thnen determine as valid than what is law. All questions sound like totally free to determine by free will.

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Thanks for the comment NetTecture. I guess it's because I want to know the common practice. At the end of day, I don't want my co-founder will being shortchanged. If it's common practive, then there is no room for suspicion. – Paul12 Apr 21 '11 at 11:15
The propblem is that there is nothing common there. There are thousands of combinations. Find out what both of you consider fair. – NetTecture Apr 21 '11 at 11:32
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So I have one blanket recommendation based on the 3 questions you outlined.

I would structure the capital investment as a loan instead of an equity investment. It is easy enough to say the equity was earned as "sweat equity".

This clears up any concern over vesting. So you can retain your 70% immediately and your partner can have his vested over 3 years still. The repayment to you both for the loan would be done 50-50 though, as would the split of how much each of you loan.

One downside for you in this situation is if your partner leaves after only 6 months you may not have given up much ownership but you will still owe the partner the loan repayment. For that reason it is a smart idea to structure the loan to be very friendly to the company.

If you choose to go with an equity investment, I think you split 50-50 but you do not vest your partners shares, he/she should get their full 30% the day the investment is made. Because I like the concept of vesting the shares of a new partner I made the previous recommendation.

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Great Idea. Thanks Justin. For an initial capital we will split 50-50. The subsequent money will be treated as a loan. – Paul12 Apr 21 '11 at 11:13

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