Partner wants more equity? How to handle?

Discussion in 'Growing and Managing a Business' started by ask4justin, Apr 4, 2012.

  1. ask4justin

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    Apr 4, 2012
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    New to the forum, first post, and would appreciate any advice I can receive.

    Twelve months ago I started a company having carefully planned and organized the preliminary business plan and how we would differentiate ourselves from competitors. Now, I'm skipping over a lot here to abbreviate this post, but let's say I sufficiently researched this venture prior to putting my idea into motion. The company is a SaaS company with fairly substantial market potential. While I am educated in many business concepts and feel very confident in my knowledge and business plan I want to put this question to public opinion to judge whether my thoughts are consistent with others that have been there and done that. One thing I am very aware of is that I do not know everything, and without relying on others that are smarter than myself I wouldn't be who or where I am today.

    So here is the issue. During the early stages of starting the company I knew I had a good idea, but knew that the design/coding/site functionality was something I was not capable of completing. Actually, while I am above average with computers, designers/programers make me look like an idiot and I needed the best. So I interviewed nearly 10 individuals for the position. I narrowed the list of applicants to four individuals that I deemed worthy to meet in person. I made each individual I met with sign a NDA and only then did I reveal part of my business plan and strategy. Truth be told I didn't need to release all the details.

    One of the individuals I met with stood out above the rest. I ended up hiring that person and after four or five meetings he accepted and decided he wanted to be a partner. Our agreement is that I would not pay him, but rather I would give him 40% equity in the company for his work. I knew going into it that I would be paying six other people that he would hire, but I would not be paying him. The other six individuals he knew from other partnerships and they owed him so we got a great discount on their services. The other individuals did not receive equity. So at this point myself and my partner were the only two owners (I the majority at 60% and he owned 40%). I funded all business cost.

    Now currently we are about 75% completed with the site. It has advanced beyond either of our dreams. My partner, as I could tell from the beginning is extremely talented. He has since moved to Silicon Valley to work for one of the premier companies as a manager of a team. Both of us are continuing to work because there are no profits coming in, only expenses. I have personally bootstrapped the project up to this point. We knew the development/design side would take a while because we wanted to keep the company lean without relying on VC Money (we were offered meetings) or Angel Investors (also offered). Honestly, to this point we haven't needed to raise capital, while we might in the future that time is not right now. While we were eager to get the company in Beta and launched we know what we want and are quickly approaching the launch day (1.5 months out).

    Just last week my partner (which is truly respectful, hardworking, and extremely intelligent) approached me with concerns. The concerns were more questions he needed reassurance on; rather than true concerns. While he is an extremely gifted programmer and communicates very well, he does not know the industry as well as I do that we are entering (he has learned a lot, but I would be viewed in this partnership as the expert). I quickly overcame all his concerns but the last one offended me because I didn't know it was coming. He wanted to become equal partners 50/50 equity each. My current position is CEO/President and his is CIO/CTO. I will admit that he has had some great ideas. I have started with one concept and he has added to the concept and vice versa. That is why our service website is pretty impressive. To this point I couldn't have done it without him, but at the same time he wouldn't have had the idea to start this either. It was fairly well known that his efforts would be more on the front end and mine would be more on operations, sales, growth on the backend.

    Couple thoughts, I don't want to loose him. I told him "do not be confused with equity and compensation." His response is that he is not as worried about the compensation difference that might exist, but rather the 60-40 split gives me all the power and I could screw him over. He referenced examples such as Apple and Facebook. While I won't deny those stories, trust and a well written Business Partnership Agreement should address these concerns, right? While I started this paragraph with I don't want to loose him, I am not afraid of finding someone else either (won't be easy to find someone like him, but I'm confident I can find someone). My goal is to make a mutual agreement that is long standing, no more changes, but truth be told I value his contribution more than our earlier 60-40 split and I want him to remain in place but content.

    Here are my thoughts, I am willing to make some adjustments to our agreement, but I do not know what "some" changes means to me right now. Do I adjust the equity? Do I make the business partnership agreement better? Do I go 50/50 on compensation? Some combination of all of them? Other options that I am not thinking of? I am going to present a couple options to him to consider. I have already told him I did not like the idea of 50/50 and I was not prepared to be equal partners, besides the fact that equal partnerships tend to have a lot of issues and fail more times than not. I would welcome your thoughts and sorry for the length of post.

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