This is a case with a friend of mine who is a first-gen entrepreneur and close to cutting a deal with Angels for a funding of $400K.
But before I ask you his question, here is the situation, step-by-step as it unfolded.
a. My friend (Say A), had this idea in Nov '10 while on a $100k per annum job
b. He decided to quit his job because he saw the 'bone' in the idea and wanted to give it a shot
c. At that time, he had already submitted a raw version of the idea to a couple of business-plan competitions and got reasonable reviews as well
d. So A consulted his mentor, who is quite an expert in the field and this mentor has helped him out a lot with ideas, validations, contacts etc since then. Now, convinced with the idea, A quit his job by Dec end and started working on multiple hypothesis of the idea to pilot the one with the highest success rate
e. So, between Jan and Mar'11, he travelled around, met a lot of people, did a lot of research and finetuned his hypothesis further to 'set sight' on an executionable pilot strategy for the next 9-12 months)
f. This being a very niche idea, he saw the importance of 'proving the concept' to investors with a model and hence set forth on the pilot starting Mar'11 with his $45k savings
g. By Apr '11, he had just started on the pilot and met this person B (who had just quit a $45k per annum job to try something of his own) through a random connection
h. Person B was super-enthusiastic about the idea and expressed interest in seeking an opportunity with the start-up
i. All along, while A was planning his pilot strategy, he never felt the need for a Full-time employee, since he felt finding someone who appreciates the idea was difficult and besides his $45k wouldn't permit A to hire a full-time employee for the pilot
j. But A and B vibed well and could sense a lot of positivity around. So A explained his situation and asserted that he can't pay B anything at least till Dec '11 and in fact, that the idea in itself might bomb and could come to nothing.
k. Besides, A said that B's contribution would never go unrewarded in terms of stake (no promises of any money)
l. Now, 7 months into the pilot, they both have done some outstanding work and are pretty close to roping in angels with a ticket of $400K for an exchange of 25% stake (please assume ordinary shares all along) which pegs the start-up's valuation at $1.6M. But throughout, they had 2 big fights leading to B offering to resign (and in both occasions, B admitted he over-reacted and was thinking too ahead of himself and A felt a soft corner for B and decided to forgive and forget in both instances)
m. Now realizing the biggest mistake commited, A and B both want to settle stakes and compensation issues once and for all
n. Consider the following:
Agreed pools for shareholders outside the founding team: Angels - 25%; VCs (at a later stage) - 10%; Employees (outside the founding team) - 15%; A's mentor and friends (who supported him throughout lending money and shoulders) - 5.5%;
So, that is, there is a decided pool of 55.5% of the stock going to shareholders outside the founding team.
How should the remaining 44.5% be divided among A and B given the following,
Idea - Entirely A's till even strategizing pilot; Money invested - 94% A's and 6% B's; Time invested - A (effectively 13 months) and B (effectively 8 months and B did an awesome job and complemented A more than A could have imagined); Contribution to pilot - A (45%) and B (55%)
Both A and B are real honest people and don't want to screw each other over (even unintentionally).. In such a case, how would you suggest, A and B split the 44.5% between the two of them (considering vesting to be the same for both)? And also the fact that A nevertheless would have completed the pilot (albeit 2-3 months later than the case now) even if B never joined the startup? And it is incorporated as a private limited company!