How to split up revenue between partners who contribute different amounts of work

My co-founder and I will soon launch a micro ISV. Our current agreement states that we split ownership 50-50. However, since we reached the ownership agreement the amount of work we have put into the venture has been very unequal. I've done approximately 80% of the development (and idea creation) so far and I feel I should be compensated for my efforts.

My question is, what is the best way to handle this problem? Here are the options I've come up with so far:

1. Renegotiate the ownership split
2. Declare the difference in work as a specific dollar amount, and take that out of future revenue off the top
3. Declare that profits that would otherwise go to him go to me for some period of time

That's what I've come up with so far. Is there some standard way to handle this? Ideally provisions for this would have gone into the original agreement, but we did not put those provisions in the (very loose) contract. A learning experience!

I would like to get this out of the way to preserve harmony between the two of us; I fear that I might become resentful over time. My co-founder has demonstrated no ill-will about the work; unforeseen family obligations have taken up much of his time. We also did not clearly define work expectations at the outset, which is another learning experience as well.

I've been through (and still am in) this situation. The first time I went through it, I just decided to swallow my pride and let it go. I think it was the right decision, as there's no way I could have done the project without my partner, even though I put in the lion's share of the work.

I don't think it's possible to set it up so that there's a perfect representation of skill, effort, determination, and everything else in the ownership split. Someone will get less than they deserve, and someone else will get more. But, as long as everyone is shooting for the same goal, hopefully things will turn out alright.

However, one way to protect yourself going forward (and perhaps you still have time) is to set up a vesting schedule for stock options. That way you both start out owning 50/50 of the company, but over time the initial ownership is dwarfed by the amount of equity that is gained during the vesting period, like say you start out with 100 shares each, but after your first year you each vest 10,000 options.

This can protect in (at least) 2 ways:

1. What if he (or you) walks out? If one partner decides to quit, which is a major possibility in a startup, they don't walk away with 50% of the company in perpetuity. They get the equity they've vested up to that point. So, they get what they've earned, and the other partner has the option to continue the company and earn more.
2. Authorize additional shares Once you've got the basics of the stock and options set up (see an accountant!), it's much easier to do things like authorizing additional shares and options, which can be used as a reward. So, if at the end of the year you feel that you've done 80% of the work, you can ask that additional options be granted to you as a reward for your extra work. Although the outcome is pretty much the same, I find this an easier thing to propose than asking someone to straight-out give up some of their equity in the company, which is what it means to renegotiate the ownership split.

Now, I should say that I'm definitely not an expert and this could all be horribly wrong and misguided. So, if there are any real experts out there, please jump in and correct any of my mistakes.

Lance Weatherby also has a good writeup on how to settle equity splits.

Do not "let it ride". It will cause you more and more stress over time, affect your relationship with your partner/friend, and your pocket book.

I was in a partnership for 17 years. Initially, the inequities were explicit and acceptable (duties were different). We re-structured the way the business operated after 10 years, and our duties were then essentially equal. Our performance was not. Year in and year out, my productivity was 60-80% of the total.

I tried talking. I tried re-negotiating. I tried to get him to start another of our business ideas while I kept the old one running. I tried to get retro-active equalization (even over time). He kept playing the "we're friends and we've been 'married' for over 10 years, and its all working fine" card.

I ended up "writing off" the >$500K that I pumped into his bank account and we both went our separate directions.

I'm not aware of any "ideal" solutions to the issue you raise. Other thorny issues to consider include:

1. Capital contributions.
2. Effort/value contributions.
3. Compensation/distributions.
4. Equity/voting.

One way to analyze/balance these is to consider the extremes. For instance, your partner contributes 100% of the cash, and you contribute 100% of the work. Or another extreme, you draw a salary of $x, and he wants capital gains in the future.

You also need to take into account time and changing circumstances. What if you need to spend the next year taking care of your parents and can't contribute to the business? What if one of you needs regular cash distributions, but you both agreed initially that neither would until the company can organically afford it?

Remember that as soon as one of you has 50%+1 of the shares, the other becomes a "minority interest", and has much less "power" (potentially to never be regained).

The "options and vesting" suggestion from Micah has merit. You could negotiate each year's relative vesting based on the relative contributions each made in that year. As he alludes, you should work with a CPA that has experience in this area, as there can be tax pitfalls in some circumstances.

Perhaps your partner simply can't keep up with the amount of work you do, for various reasons such as family obligations, poor health, his personal productivity being lower than yours, etc.

You have to discuss this honestly with him.

One way to solve this would be to hire developers and other employees and start delegating aggresively, until both of the founders have an equal workload which is also much lower.

That is - take your work load and give it to the employees.

Once you do this, you will find relief to a lot of problems, you won't feel exploited anymore, and you'll discover you can think a lot more about the creative part of your business.

Remember a classic management mantra about work: Eliminate, automate, outsource, delegate.

Read "The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It" by Michael Gerber. It is a book which teaches you how to build a proper business structure through delegation.

I would suggest that you keep to the deal, as, I would expect that once the development is done that he should be doing more of the business side, in terms of marketing and sales.

If that isn't true then discussing it is best, but, regardless, just look at it as a learning experience, since if he push the issue the partnership may dissolve or become unbearable, and there was something that he offered that you felt you needed, else you would never have formed the partnership in the first place.

I believe that Jason Calacanis talked about this (or something similar) to a caller on his "Ask Jason" segment in one of more recent episodes of his "This Week in Startups" show. The key point that I took away was to sit down with the partner, and have a frank, honest, and emotion-disconnected discussion about it.

I am facing something similar to this at the moment in my startup, so I'm definetly interested in the other answers for this question.

This is a delicate situation. But you have pretty much answered your own question - each way of compensating your work has pros and cons for either one of you, so the best thing would be to talk over this and choose something acceptable to everyone. Honesty is the best strategy in the long run - so tell him how you feel.

Steve,
Congrats on understanding your lesson learned. As you've mentioned the ideal situation would have been putting everything in writing in the original agreement. Unfortunately, like many partnerships, you did not. This is a great reminder and lesson for most on this board. That being said, I think your options 2 & 3 are good options.

What would pay an employee or an outside consultant to do the work you are currently doing? If you can put a market value on that and show that when you sit down to negotiate it will help your position. It also contributes to implementing either your suggestion to take out some future revenue or a portion of profits (for a limited time) be directed to you.

One consideration, and one reason why maybe option 1 should not be exercised, is to remember why you partnered in the first place. What did your biz partner intially bring to to the table? Was there a reason on the 50/50 split? If that reason was important for the start of the business, it should be important now. The value of service diminishes rapidly once the service has been performed. Could you have done this without him?

During you discussion you may also want to discuss an exit strategy for the business. Along with failure to discuss responsibilities many companies also fail to discuss how the business will be dissovled if things don't work. If you decide down the road to part ways, then your work will already be done.

Your partner seems to understand the situation so if you prepare well enough he may be acceptable to your suggestions.