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Me (software developer) and my co-founder (UI designer) are looking forward to build a SaaS startup. I would usually lean towards a 50/50 distribution, but in this particular scenario, the application we are building requires much more software development work than user interface design - at least, that's my perception. Furthermore, I was the one who came up with the initial idea and have a clear vision of where we are going. However, there is the possibility that my partner could bring some capital through a personal connection.

Do you think it would be fair for me to get a bigger share of the company assuming my partner doesn't bring the said capital?

If he is able to invest capital in the company, what would be a fair way to determine how much equity we each get ? Maybe estimate how the work load will be distributed among us and convert the capital into "work load" (capital / hourly rate) ? This is delicate step that I'd rather skip, but it is important to put all our cards on the table beforehand in order to avoid future conflicts and frustration.

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8 Answers

up vote 11 down vote accepted

It all depends on what you mean by "fair." Here's a few mental experiments to help you think about it:

  1. It's crunch time. You're down to your last four months of burn, you both have to make significant sacrifices or the company dies. Will the equity distribution you've come up with help the company survive?

  2. You're succeeding beyond your wildest expectations. Money is pouring in in buckets. Will the equity distribution you've come up with help the company continue to succeed, or will someone start getting bitter because the other hasn't really "earned" their share?

  3. You've hit a serious snag. Getting around it is going to take creativity, ingenuity, and and not a little attention to details. You know you and you know your partner. Does the equity distribution fairly compensate the people who are going to get the company around that bend?

  4. In all of the scenarios above, imagine that your partner walks. Do you really care? That is, is one of you more critical to the success than the other? Said another way, whose company is it? Is it your company, and your partner is along for the ride? Or is it really both of yours?

To the specifics you raise above:

  • ideas are easy. Execution is hard. Having the idea is valuable, but it's not the idea that makes money, it's the product. You should design the equity to incent and ultimately reward people in the company to do the right thing, for the company, during the long and very hard ride it takes to make a product succeed.

  • Sweat is not the only consideration; equity should also reward talent. There is always more software work than design work, but you can hire more developers. Excellent design is invaluable. Is your partner a unique design talent? Are you a unique software talent? Does one of you bring to the table business experience or significant understanding of your market that should be considered? Is your partner the "right" person to start this company with -- could you find somebody else who is compatible, with whom you can work through the tense times, and would bring overall more to the table?

  • Who is taking more risk? Putting in money increases your partner's risk, so perhaps it would be fair to increase their reward. OTOH, if (for example) they're only going to be working part time on the company and will be able to take part time work on the side to bring in money on their own, perhaps that washes away.

  • Does the equity distribution empower one of you in a healthy (or unhealthy) way? You might design the stock so an imbalanced distribution of equity doesn't correlate to additional control over the company, of course, but perhaps having a clear decision maker is useful -- or perhaps it's very much not.

There is no right answer. But I'd encourage you to think long term and design an equity distribution that: helps all involved to make good decisions for the company; fairly compensates for effort, risk, and talent; and doesn't introduce extra tension either in failure or success. Finally, I think you're asking the wrong people. Ask your partner. If you can't agree on what's fair, it's probably not the right partnership.

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Thanks for bringing up the "talent" and "critical to success" vs "replaceable" variables which I had left out. I will obviously discuss this matter with my partner but I wanted to get an external opinion beforehand :) – Olivier Lalonde Jan 16 '10 at 22:03
Great answer dondo. Very well thought out. – Usman Sheikh Jan 18 '10 at 7:20
One thing to add here is that while your're busy chugging away at writing the app your partner can help handle business aspects and client interactions - including, eventually support. In the long term, there will be plenty for him to do until you start hiring more people while you work on new features and bug fixes. – Max Sep 28 '11 at 22:35
up vote 4 down vote

Is the only thing he brings to the table his skills at being a designer?

If yes, he shouldn't be a co-founder at all. Establish a fair rate, and then if you want to pay him in options/warrants/whatever then agree on a price.

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I think it also depends on if he is willing to learn and take on other responsibilities. For example, the OP only brings the idea and coding skills. At the beginning of most startups there is not much each brings to the table, except for the willingness to do what it takes to make things happen. – TimJ♦ Jan 17 '10 at 3:01
I am sorry but what kind of reason is that? The designer could might as well be the one getting the ideas knowing how to make it user friendly etc. – ThomPete Jan 17 '10 at 8:24
+1. Another way to say this: In equity negotiations a important question is "how easily/hard would it be to replace this founder with an external supplier/consultant?". UI design is fairly low on the list, because in most cases it's not a full-time position. – Jesper Mortensen♦ Jan 18 '10 at 4:09
@ThomPete -- That's why I said "if." If more, probably he's a cofounder. – Jason Jan 19 '10 at 0:56
up vote 2 down vote

You mentioned there may be a capital contribution from your friend.

If you could address additional factors such as:

  1. Experience: How many years has your friend being done UI design for? The higher the experience level, the greater will be the sacrifice he will be making working on this project.

  2. Time: How much time is he dedicating to the startup? Is he working weekends or will he be coming full time?

  3. Role: As jason mentioned will he only be doing UI design or will he be taking an active role in marketing and sales.

A better understanding of what each of you are really putting into this venture will help you reach a better answer as to what will be the best equity split.

I have a post on a equity calculations you could use when you have got all the variables in place.

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up vote 1 down vote

You are not distributing equity based on how much work each of you do but on how important you are to the project so 50%/50%.

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up vote 1 down vote

If you have the idea and vision, I'd say you keep more than 50%. You can always confer with him and respect his ideas, but you need to be able to make quick calls and not always have a voting session for every single thing down to which coffee machine to get for the office; keep more than 50% if it's your idea, you plan on putting in more hours, and do most of the work. Otherwise executing your vision could get cumbersome and slow.

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up vote 1 down vote

I agree with newyuppie to keep more than 50% if you have the idea and vision. I have a friend who was working for a partnership that was doing well. Then the 50:50 partners could not agree and the company, growth and business came to a standstill. He quit as the working climate was not good and he told me if he had a business he would not go into a partnership. I do believe partnerships work but the partners must be able to work things out.

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up vote 1 down vote

You have an idea and a vision for how it is going to be carried out. You anticipate doing more work due to the programming needs verses the design needs. It doesn't sound like you want to give 50% of the power to this other person nor have you given any evidence that he actually wants half. If he is able to bring in this money, who is going to decide what to do with it? Wanting to be fair is a great trait to have in a partner, but fair is not the same as equal.

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up vote 0 down vote

You should be talking with him, not us.

I'd advocate 50/50 unless it is really obvious that there is a big discrepancy.

EDIT

Jason brings up a good point. Is he going to take on other tasks and act like a founder, or is he just going to do UI/design and that is all?

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