Let me start off by saying that I have done a search on "partnerships" already on sitepoint, but I feel I should still start my own thread since this situation might be unique to me. if not, there is still no harm.
I have been planning a website venture for a little bit over a year now. I have:
- developed and coded the XHTML/CSS of my website,
- done research on the market (assessing the value of the functions of my website),
- done research on website usability, accessibility... and all that good stuff,
- developed the strategy plan (launching, marketing, operations, future goals).
I have found a potential partner, who has been helping me develop my website - handling the server-side stuff (implementing drupal CMS and installing modules, etc). Since I am a layman in PHP, his purpose is valuable to the development of this website, at the moment.
How do I decide how much equity-share he should get on this website?
Since I have done most of the work, I don't think this should be a 50:50 partnership. After all, the service he offers (server-side stuff) is not 'unique' (i can always hire another php guy, but I am willing to give up a share since I want him to feel committed and motivated).
I understand that most web/software ventures are formed on partnerships - Microsoft's Bill Gates and Paul Allen, Google's Larry Page and Sergey Brin, The two Youtube founders, etc. How do they decide on the conditions of their partnership?
Any advice will be MUCH appreciated.
Partnerships in startups that don't involve existing businesses or large amounts of capital are generally formed as, well, partnerships a near even split as you are truly taking on a co-creator more than just someone with a set of skills. Sure you can hire someone directly but it's costly and inflexible. For your 'partner' they assume a great deal of risk in having the project go no where fast and losing the revenue from their valuable time. Thus you are in it together.
50:50 isn't required by any means but it's hard to sell yourself dramatically away from that. After all, without the partner you don't have a site and they don't have a venture to get into.
The trick of course is to really understand what you are both committing to regardless of the number and to be sure it's going to get you what you want. Giving up 10% of your company for a coder who stops 90% through the project is much worse than 40% for a 100% job + constant updates + support + a real partner in the business.
You said that the work that the partner did wasn't 'unique', which could also apply to the things that you did - market research, some front-end work, etc.
The only thing that could really be unique is your idea, and ideas are a dime a dozen as well. If you did formal, excellent research on your market and can evolve your idea into a viable business plan, then perhaps you really have a unique proposition and can drive a better deal. It had better be good, though.
There is a never ending supply of 'good ideas' but that's not enough to get an investor interested. It has to be a plan with a beginning, middle, end, and price tag.
A 50/50 deal has a lot of business advantages, but if you think that you hold all the cards, why not just hire out in cash or offer a profit share instead of an equity share? There are lots of ways to do a deal.
Be careful about valuing your concept more than someone else's time. Your idea may never get off the ground, but someones time is gone forever and has a real, current value.
I would venture to say that you're headed for disaster. This should have ALL been discussed and put in writing BEFORE it got this far.
I would imagine that your partner expects a 50/50 share.
At this point you could just say 'cya later' to him. Do you NEED a partner? You don't seem to think very much of his/her work/labor at this point. If you don't see a need for them in the future then let them go, keep it all for yourself.
In any successful partnership each partner MUST be a valuable asset. Are you going to be working your ass off while he is just called in every once in a while to do some coding? Or is it the opposite? Is he going to be neck deep in code 24/7 while you sit at the desk and do market research?
Either way, at this late point you have yourself in a mess. If you piss him off you're sitting with a bunch of code and a system you can't manage.
That's pretty pessimistic.
Maybe you guys are off to a great start, and you just need to have a frank conversation about how things will unfold so that you can get it all on paper and keep pushing on.
Possibly, but I've been on both ends of the business burn stick and neither side is fun. I've found that if all parties lay all the cards on the table from the beginning, everyone is on the same page through the project and more people leave happy. Watch out for the worst, strive and work for the best.
Just curious, this brings up another issue entirely....
Does the OP own the code that the 'potential partner' coded? Did the potential partner receive a wage for his work?
I didn't get the impression he wants to screw the developer. I just got the feeling that the poster was overvaluing his part of the partnership and undervaluing his developers. But, without knowing any details it's hard to say.
As someone else has already mentioned, you decide equity shares and the such before you start a project.
It looks to me like you are trying to figure out how to screw this guy over now that he has done the work with your comment "at the moment".
wow, thank you for all the advice so far.
I am not trying to screw him over, but as mentioned before, I don't want to give him an equity that is overvaluing his future responsibilities. but at the same time, he should be able to receive enough merits for his work.
We are still at the very early stages of development, and I think there is not too much already done to be having problems discussing an equity deal.
I had been discussing this subject with my friend, and he said that I should factor in his value to the website in future (after the website launches). Will he only be responsible for website maintenance? Will he be able to decide the best direction for the website? I have already done most of the future planning.
So in a nutshell, here are what I think of our individual values:
-thought of the website idea
-did all market research to justify the executing of such idea
-designed and coded layout (usability, website architecture research here also).
-covered all the planning stages necessary before launch of website (mostly advertising/marketing strategies)
-planned the operations of the website after launch
-planned the direction that the website is headed in future.
-Implement drupal CMS into the already HTML/CSS coded website layout
-Implement modules required by the website
-responsible for upgrades, and server-side maintenance post-launch
I don't want to be greedy, since I believe he should be rewarded justly. However, I think I should get more equity share since I founded AND planned the idea.
If an 'inventor' is partnered with a 'builder', shouldn't the 'inventor' get more credit? Since he invented something 'of use' and 'in demand', while the builder is only responsible for constructing the invention.
It just doesn't work like that. Just out of curiosity, did you PAY this developer to work with you?
Think of it this way:
1) Imagine you are sitting alone in a room, with your fabulous idea and a great plan. Now fast forward through a year of sitting alone in that room. Are you any closer to having a business, or do you still just have that idea?
2) Imagine you and your developer together in the room. Fast forward a year and you may just have a business put together.
In other words, your idea has very little value on it's own. An idea is pretty useless unless it's in some form that can be executed, such as:
a. If you have an idea AND a lot of money, you can own the whole idea and pay to get it executed.
b. If you have an idea AND you know how to write a business plan (a real one) and get investors, you can sell off large parts of the business (usually more than half if its big) and get it executed.
c. If you have an idea AND you have a developer who believes in your idea and is willing to work for FREE, you can give that developer a big share of the business to execute it with you.
d. If your idea is SO GREAT that developers are beating down your door to help out for free, in return for a small share of the company, then go for it!
I guess the bottom line is, your idea has very little value unless there is some manner of execution. Just because you thought of it doesn't magically make it happen. If you have money to pay a developer, then go for it. If you want a developer to work on spec, you should compensate them.
I'm necessarily saying you need to do a 50/50 deal, but don't undervalue a contributor.
So, you claim to have done all that planning. Is that planning on paper, in a formal document format? Why are you offering the developer any equity at all instead of just paying him? Or, why is he working for 'free' right now?
This is the big problem with partnerships.
How do you value the work? How do you value future work? What happens if one person stops working? How much work does a person need to put in to keep their share of the business? How does one track the value of said work? etc...
Partnerships can be such an awful thing but I understand why people do it that way, because it saves them money in the short run.
I, as an ideas guy. would prefer (if I didn't want to lay out any cash) to do a profit sharing arrangement with a developer with a cap on the amount they could earn. That way, they are sharing in the risk (by developing for free) but also getting a higher premium on their work based on that risk. So for example, if a job would normally cost $1000, I would try to structure the deal so that they get a percentage of the revenues (note revenues, not profits because anyone can fudge numbers to screw around with profits and perhaps even more than 50%) until they get paid out $2000, and a lower percentage until they hit $3000 and then no further payments. That way if the developer needs to create more functionality you can either choose to pay them cash (as the site is now producing revenue) or assign them more profits without being forever stuck in a profit sharing model with no end in sight and murky responsibilities. This type of arrangement also encourages the developer to keep adding functionality as they are only getting paid if the site does well.
With that said, it can still be an ugly arrangement and requires a lot of trust on both sides. A random developer and a random ideas guy meeting on a random street corner couldn't pull it off.
I think you should pay him for the work he does only, or what he normally charges and do not do a partnership. Or give him royalties or something, I wouldn't do 50/50!
As a developer, I had countless idea guys coming to me with the next best thing, something that could change the world, and all I had to do is make it happen.
I would get a cut of the revenue/profits for my work, and make millions!
O ya, and they had no money... that's why the deal had to be on shares, and no upfront cost.
Out of all those people, not one made some real money.
Some made a few thousands here and there, but when you add up the hours needed for that work, and multiply by the salary made at McDonald, you would end up with more money.
So, before you can ask for free work from a partner, you have to think of two things:
#1 Did you do some real money in the past, proving that you can take care of your half of the deal, and that your decisions can make money for you and your partners.
By real money, I mean something that can pay for your and your partner's living expenses with leftover for expanding.
#2 If you don't have such an experience, and your tech partner agrees to a 50/50 split of profits/income (or whatever you give him), then you have to think if that partner is worth it, since chances are he doesn't know his head from his ****, and if that is the case, and your really able to generate an income, your stuck giving part of your income to someone that can't drag his weight, or that will bring down your whole operation.
Without getting nosy... what is your current financial situation? Could you essentially buy him out of the project for the work he's done? If so, consider it. If you can't then there's some great advice here given how to value this person's input in regards to shares. My personal advice would be to do everything you can to buy this other person out.
I have an umbrella company that I use to start each of my "ideas" under. Some of them take off and others flop, it's sort of the nature of the business. However, my investors are investing in the umbrella so that they can take advantage of the successes and be partially insulated from the failures. You may want to consider this approach as you're probably going to have more ideas.
Even if you can't buy this other person out at 100%, try bringing up a number. If nothing else, it starts to value his/her input in real monetary terms which tends to make things real. If you can negotiate to retain more than 50% of the company you may feel more comfortable from a management standpoint and still allow your working relationship to thrive.
I would assume you are not currently working with revenue now, so to promise something in the future is only worth so much. You might want to focus instead on how you both can make more money. While you are doing that you can build a good relationship, so that as you cross obstacles you can work through them together.
Someone needs to be in charge of the budget, and you need to earn your partner's trust. If you promised 50/50 there could be issues in the future. For example, one of you may be inclined to take profits rather than reinvest in growth. That could be disastrous. Should you be successful, you can still count on there being times when one or both of you need to make a sacrifice. There have been lots of times where I had employees making more than me, but they trusted me with the budget, and when I got some extra money, it was not a big deal.
So again I would focus on building the relationship and becoming responsible with the budget.
Good to hear some developer perspectives. I know that my company still gets inquiries from people with that 'great' idea - always looking for us to build their idea for free in exchange for equity.
In only one case have I ever excepted and that was because the idea person had a well written business plan with real market research (in the traditional sense)
Yet in your signature you're asking for business ideas. :rofl:
Yep. But I'm looking to be the investor rather than trying to get someone to work for free. The whole equation changes when you don't need outside funding. Then you simply sift through all the 'incredible ideas' that are floating around and find one that can actually be executed for a huge profit. Different story altogether
use rentacoder and get your work done its better then offering a partnership
I've certainly enjoyed this conversation to date, I think it illustrates perfectly the challenges faced with partnerships.
There's been a few people here who've mentioned the magic 50/50 split. IMO that's an agreement headed for trouble. In the early stages it will work however as you're project grows, you're putting yourself in a position where there can be a decision making stalemate. You really need someone with a majority stake that can make a final call when it comes to disagreement. It's a card better never played, but it means you can deal with issues and move forward. Even if it's 51/49 - it's going to avoid dead locks.
I think Sagewing nailed it with his first response -- there are many ways to do this deal. If you don't want to enter a partnership, offer options (different from shares) that will ensure he is rewarded if the site takes off, but he doesn't have influencing share of the business. Offer a profit share (with an expiry date), or pay him like a contractor / employee. You might also consider asking him to buy in if he wants a controlling share, or his initial profit can be used to buy a stake in the business.
Whilst is sounds like there is still a lot of groundwork to be covered, you need to think about the situation if your site takes off -- because that's what I'm assuming your hoping for.
My last point is that all the best partnerships I've had - work much better when there is mutual benefit for both parties. You've mentioned this already, but always be mindful not to devalue your partners contribution -- even if the idea was not theirs
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