Partner Asking For Investment Back

I recently just started an IT business. I built the product and got the product out there and brought in clients already.

I asked a friend to partner with me to build the company. I gave him 30% of the business and he invested some money into the business. I how ever invested twice of the amount he put in plus a year working on the product. He did not know about it till 2 months ago when it was already out there.

He is not a professional marketer but can handle that aspect in a way. I wanted to concentrate on building the product so I gave him 30% of the company to keep him motivated.

So far, nothing much has come up from his end and there is more work to do and I have gotten 2 developers on board to help me out with the technical side while I still handle the business side. They do not have equity nor do I pay them salary. The are working for the long haul and I haven't promised them anything yet.

Right now, I feel these guys are going all out spending time with me tirelessly to get things done, but my partner did not work to gain the equity. At the moment, I felt I rushed into that agreement with him.

I told him, I wanted to see his dedication, ambition and commitment before I give out any form of equity to him. As at now, those developers are working harder than him it wouldn't hurt me giving out equity to them because they have worked for it. It's like their initial contribution.

My partner however, doesn't seem to understand the value of the business and asked me to give him back his money for zero equity so that he can prove himself. But I doubt he will really work towards that and might just leave.

His other alternative was I give him 20% of the money he invested plus 5% of the company.

I did not agree to that because I wouldn't want to have a share holder who is not interested in working for the company and has a grudge with me.

I wanted to propose a 7% equity upfront plus an 8% equity vested over 2 years after the first year, considering certain conditions are met.

What should I do because it seems he has made up his mind about getting his investment back? And at the moment, the company cannot afford to pay him back.

Is it a good sign he's asking for his money back? Is it a rational and professional decision?

I think the 20% money back for 5% equity is quite fair in this situation. Basically, you buy back 85% of his equity for 20% of his initial investment. If you're unable to give him back the 100% of hist investment for 100% of his equity - that's the next best thing, and it is a very generous and fair offer on his behalf.

It doesn't sound like you expect him to actually do any work, so having him at 5% without any strings attached will leave both of you in a better place than 7% (already more - you're worse) with vesting schedule (strings attached - he's worse).

It is not a problem nor is it rare to have a "cash-only" minority investor with little or no actual work done. Money is as good an investment as work, and sometimes better.