How to split up revenue between partners who contribute different amounts of work

Do not "let it ride". It will cause you more and more stress over time, affect your relationship with your partner/friend, and your pocket book.

I was in a partnership for 17 years. Initially, the inequities were explicit and acceptable (duties were different). We re-structured the way the business operated after 10 years, and our duties were then essentially equal. Our performance was not. Year in and year out, my productivity was 60-80% of the total.

I tried talking. I tried re-negotiating. I tried to get him to start another of our business ideas while I kept the old one running. I tried to get retro-active equalization (even over time). He kept playing the "we're friends and we've been 'married' for over 10 years, and its all working fine" card.

I ended up "writing off" the >$500K that I pumped into his bank account and we both went our separate directions.

I'm not aware of any "ideal" solutions to the issue you raise. Other thorny issues to consider include:

1. Capital contributions.

2. Effort/value contributions.

3. Compensation/distributions.

4. Equity/voting.

One way to analyze/balance these is to consider the extremes. For instance, your partner contributes 100% of the cash, and you contribute 100% of the work. Or another extreme, you draw a salary of $x, and he wants capital gains in the future.

You also need to take into account time and changing circumstances. What if you need to spend the next year taking care of your parents and can't contribute to the business? What if one of you needs regular cash distributions, but you both agreed initially that neither would until the company can organically afford it?

Remember that as soon as one of you has 50%+1 of the shares, the other becomes a "minority interest", and has much less "power" (potentially to never be regained).

The "options and vesting" suggestion from Micah has merit. You could negotiate each year's relative vesting based on the relative contributions each made in that year. As he alludes, you should work with a CPA that has experience in this area, as there can be tax pitfalls in some circumstances.

Perhaps your partner simply can't keep up with the amount of work you do, for various reasons such as family obligations, poor health, his personal productivity being lower than yours, etc.

You have to discuss this honestly with him.

One way to solve this would be to hire developers and other employees and start delegating aggresively, until both of the founders have an equal workload which is also much lower.

That is - take your work load and give it to the employees.

Once you do this, you will find relief to a lot of problems, you won't feel exploited anymore, and you'll discover you can think a lot more about the creative part of your business.

Remember a classic management mantra about work: Eliminate, automate, outsource, delegate.

Read "The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It" by Michael Gerber. It is a book which teaches you how to build a proper business structure through delegation.

I would suggest that you keep to the deal, as, I would expect that once the development is done that he should be doing more of the business side, in terms of marketing and sales.

If that isn't true then discussing it is best, but, regardless, just look at it as a learning experience, since if he push the issue the partnership may dissolve or become unbearable, and there was something that he offered that you felt you needed, else you would never have formed the partnership in the first place.

I believe that Jason Calacanis talked about this (or something similar) to a caller on his "Ask Jason" segment in one of more recent episodes of his "This Week in Startups" show. The key point that I took away was to sit down with the partner, and have a frank, honest, and emotion-disconnected discussion about it.

I am facing something similar to this at the moment in my startup, so I'm definetly interested in the other answers for this question.

This is a delicate situation. But you have pretty much answered your own question - each way of compensating your work has pros and cons for either one of you, so the best thing would be to talk over this and choose something acceptable to everyone. Honesty is the best strategy in the long run - so tell him how you feel.

Steve, Congrats on understanding your lesson learned. As you've mentioned the ideal situation would have been putting everything in writing in the original agreement. Unfortunately, like many partnerships, you did not. This is a great reminder and lesson for most on this board. That being said, I think your options 2 & 3 are good options.

What would pay an employee or an outside consultant to do the work you are currently doing? If you can put a market value on that and show that when you sit down to negotiate it will help your position. It also contributes to implementing either your suggestion to take out some future revenue or a portion of profits (for a limited time) be directed to you.

One consideration, and one reason why maybe option 1 should not be exercised, is to remember why you partnered in the first place. What did your biz partner intially bring to to the table? Was there a reason on the 50/50 split? If that reason was important for the start of the business, it should be important now. The value of service diminishes rapidly once the service has been performed. Could you have done this without him?

During you discussion you may also want to discuss an exit strategy for the business. Along with failure to discuss responsibilities many companies also fail to discuss how the business will be dissovled if things don't work. If you decide down the road to part ways, then your work will already be done.

Your partner seems to understand the situation so if you prepare well enough he may be acceptable to your suggestions.