Equity split for IP contributor vs part-time founder
I am founding a startup and trying to determine the correct equity split to expect. The situation is that at my former company (Company A), I developed some software, which is currently owned by Company A. I have since left Company A to go on my own. Now Company A and I are talking about a joint venture based on my idea, in which they would contribute the intellectual property of the software, and I would work to develop the venture part time, as well as contribute cash.
I haven't come across any discussions of how to divide equity when there are two founders, and one is only contributing IP, and the other is only working on the venture part-time. Does it make sense to simply try to value the recreation value of the IP and that represents their equity, and then value my lost wages equivalent for sweat equity, as well as my cash contribution, and that represents my equity?
Co-Founder Equity Intellectual Property
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How about a simple 50:50 split? Trying to value past and future contributions is fraught with difficulties, so a simple split will let you just get on with it, rather than wasting time on negotiations which could easily lead to a breakdown in relations. – Steve Jones 11 years ago
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Steve, I appreciate your input -- but I think 50-50 would not be the right outcome. I know there is some debate about this, but the problem is it would arbitrarily value each of our contributions. If I put in $5,000 in cash or $50,000 or if I worked quarter time or full time I would end up with the same equity. To me, 50-50 works if both parties feel that they are contributing the same -- but unless there are two equal co-founders contributing the exact same money, time, and experience, that seems unlikely. Thanks for your thoughts, though! – Randigoo 11 years ago
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In that case, there is no way to answer your question, as you don't provide enough information to give a meaningful response. – Steve Jones 11 years ago
1 Answer
I went through something similar to this, only I was a full-time founder. I ended up severely under-compensating myself, as I created more and more value, and the value of the original IP dropped and dropped ... but the original IP holder kept a lot of shares because that was the original split.
I would actually recommend that you consider a licensing agreement, where you start a company and you license the IP from Company A on an exclusive basis, paying a standard license fee (as a percent of revenues or of profits, depending on the type of industry). If the business doesn't take off, they pull their IP ... if it does, you end up paying them their 10-15% or whatever it is ... and you control your company.
If you do it via shares, what I would recommend is that you grant yourself a big chunk of the shares (e.g., 80-85%) with a long-term vesting arrangement. For instance, you should vest over e.g., 4 years if you are working full-time, and vest over e.g., 10 years if you are working part-time. This way, as you create value over time you will earn more and more of the company.
Their initial equity grant should pretty well vest right away in return for the IP, since they are giving the IP to the company. So they have no vesting schedule, and get, e.g., 15-20% of the shares.
After one year part time, you will own one third of the company, they will own two thirds; after two years part time, you will both be 50:50; if you flip to full time and work another 2 years, you will be three quarters, they will be one quarter ... and you see how it goes.
This will be tough to sell initially, because they will be focused on the headline number: 'you own 80%, and we own 20%'?? Explain the vesting carefully, that they vest 100% right away, and you can take up to 10 years to vest ... so they start out controlling the company, and lose that control as you build value.
