Equity splits for new company are threatening to tear it apart before it gets off the ground

hope to get a few outside opinions here.

The cast of the saga:
"M" - the "idea person", has experience, has (or will have) money from property in near future, unemployed at present
"B" - A creative, self employed film/scriptwriter
"G" - A company director of a different tech/media company
"C" - Me, self employed web builder

M & B know each other well from previous company and have engaged G on paid projects in the past. I know G fairly well and have been used as a subcontractor in the past.

Late summer last year, M & B approached G, who invited me to participate, with an idea for a website/service that integrated media with website and further services. M funded the company early on with approx £14K to pay actors/film the video segment of the venture.

G's company then took over and with B's help, edited and produced a finished, slick version of the video. In the meantime I, with the help of B, produced a large lump of the initial website to a demo stage. I was paid a small amount (was supposed to be £4K by M, but ended up being £2K from her and £2K from G's company as M was temporarily financially short) so M has funded £16K directly, G has funded £2K directly to date.

During late Summer last year to Christmas, M was largely uninvolved due to a family illness that tragically culminated in a death. By February this year, B and me had moved the website on to a level where it was being trialled by a potential user. Apart from the £4K I received initially, I've been paid nothing else since. B has been paid nothing and G's company is owed £6K (£4K on same deal as me and £2K for the amount he paid me on behalf of M.)

To date, using our standard hourly and daily rates, B, G and I have all contributed approximately £40K's worth of time to the project. M came to a meeting in March at which she insisted on having 51% of the company on formation, with the rest of us splitting 49%. We asked her to justify her calculations and she was unable to, just repeated that she wanted 51%. By our calculations, the company has effectively had £120K in "time" from B, G & I and £16K from M in cash (but little or nothing in time) as yet and therefore the worth is notionally £136K. M insisted that it was important to have one person as the lead driver for future investment purposes.

We agreed to postpone the business decision and after further delayed meetings, met again recently. Once again shareholding came up, at which point M announced that she now had no desire to do the mundane day-to-day running of the company and wanted to be free to concentrate on sales and overall strategy/direction. She said we would have to, when the time came, employ a general manager to do these things.

G pointed out that this was just extra cost for the company and she was dropping a large part of her initial responsibility and therefore asked if she would be dropping the 51% she was asking for. When she answered "no", he asked if she was therefore not going to be taking a salary when the company could afford it, sticking with dividends only? This caused M major stress and led to a break up of the meeting with the question unresolved.

G has now told M that he is planning on being a non-exec director and staying away from meetings due to the personality clash and differences of opinion. There has been no response from M.

From this point, we have a lot more website work to do. I will be required to put in probably another £20K's worth of time to our September launch for which I will receive some payment from M of approx £5K, taking her cash input to £21K and my "time" input to £60K. B will also be required to put in more work, approx £10K of time for which he may get £3K or so, so M is up to £24K and B is at £50K in time. G and his company will also probably generate £5K in timed work.

If we use those figures, we're now at 60k + 50k + 45k (in time) and £24K in cash making it £179K in total. M will be putting in approx £10K of "timed work" in the next month or two, taking her to £34K and the company as a whole to £189K.

On pure percentage splits at proposed launch that then makes me 60/189 = 32%, B 50/189 = 26%, G = 45/189 = 24% and M 34/189 = 18%. Allowing for a 15% "original idea" premium for M, that makes it 27% for me, 21% for B, 19% for G and 33% for M. I'm happy to make the split even between B, G and me so 22% each to M's 33% and that seems to be a fair split.

However, should there be a consideration for those (mainly M) who have put in cash instead of time? (we have, incidentally, used a reduced "project" rate and not full commercial rate for calculating our time cost).

As things stand, M is insisting on 51% still. There is absolutely no sign or willingness for compromise even when faced with figures such as the those above. We are told (by B) that she is a fantastic salesperson and will be important in securing business for the company, without which it's worth nothing anyway. Even allowing for that, 51% seems phenomenally high.

There are beginning to be mutterings of mutiny in taking the idea on without M, but this would require time from one of us in sales effort which we don't really have the time or expertise in, so it's a tricky one. Plus there would likely be legal battles over the ownership of the idea so it's not a great direction to take.

Basically is there anyone with any suggestions of how we can approach an extremely sensitive person about what we feel is an excessive equity demand and try and make it what would appear to be a more equitable split?

I would just close the files and walk away, writing off the work as business loss. THen see what happens - maybe it sorts out, likely not. If not, discussions are worthless because it will not be a viable alternative.

Alternatively: let her have 51% PLUS your share, then insist on being paid 3 times market contractor rate for the work done, from incoming revenue, no more work until cash paid. She wants 51% - good, let her put up the full responsibility of running a business. And come up with the money.

To date, using our standard hourly and daily rates, B, G and I have
all contributed approximately £40K's worth of time to the project

So, given this situation, I would think a better equity swap would be for you to receive 0 equity, but be credited with your rate so far (ie you get treated as an external consultant if you're charging your rate in this way) minus the amount you've already been paid. I expect you just did the work and didn't get any contract signed, so effectively you did the work for free (as a director) to get the business started up. I would also say you've forgotten to include the time M spent getting it all started up and sorted, plus whatever sales she's done, so are under-estimating her contribution anyway.

I think, and IANAL, the equity split is 90% M, 10% G as they put in the hard cash.

BTW, you can't take your website code away, not when you've been paid for it (which you have, regardless of how little you think that may be). You've been paid, it belongs to the company, in which you have no financial stake.

So. 51% to M if she refuses to budge (which is never a good sign, but is common for startup entrepreneurs who don't to lose control of their babies), and the rest to you. I'd say that was a damn good deal for you, as 49% of something is far better than 70% of nothing.
You could try to persuade her to take 51% of the company, but to have some of those shares as non-voting so that she wouldn't be able to override all of you in board meetings, but still own a majority share of the company.