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crspybits
02-17-2015, 03:06 PM
Hi, This is similar to a recent thread started by cneal, but seems different enough to start a new thread.

I've got a software (iPad) app on the market, launched November last year. I'm the sole official member of the business that builds the app (I'm the developer; my wife does the design, but is not an official member of the company). I've recently been approached by a person who wants to partner with me with the business. She brings marketing and business skills. Development of the app has taken me about two years of my time so far. I am not a business person in the sense that those are not my skills-- I have the technical skills for the app.

This is my first business venture, these past couple of years. I've no experience with partnering with someone with a business. I have many questions, but a chief one is: What is an appropriate equity share for this new partner, should we decide to to ahead? I should say that the app is not making appreciable money yet. It really needs marketing. This new person is suggesting she receive a starting equity share of 25%. And building from there. I'm concerned (a) about what is an appropriate share for her, and (b) protecting the business in case she not work out (e.g., not make milestones).

It may also be relevant that neither of us will be working completely full time on this. So far we don't have financial investor backing, so I take consulting jobs to bring in some income. And she'll be doing something similar.

Thanks,
Chris.

vangogh
02-17-2015, 07:27 PM
Welcome to the forum Chris. No worries about starting a new thread.

There are no absolute rules about how much of the company a person owns. In a sense you're negotiating with someone. You want to give out the smallest share of the business you can and the other person wants as large a share as they can get. It's a little more complicated than a negotiation though because you're both going to be working toward the same goal after the negotiation and naturally want to remain on good terms to of that. I think when people enter into partnerships like this, you're looking for something that both parties will think fair. Otherwise I think one party ends up resenting the other.

I understand wanting to be protective of what you've built so far and what might happen if this doesn't work out. In the case this doesn't work out you can cover than in an agreement. Maybe all her ownership reverts back to you unless the partnership lasts a certain amount of time.

Based on your own description it sounds like the business and marketing side of things isn't you and at the moment your apps aren't selling as well as you'd like. You have a short list of options. You can learn to to get better at business and marketing and do the work. You can hire someone to do the work. You can partner with someone who to do the work. I think the last will end up being your best option. Your skills will be better used to develop apps. Let someone else handle the marketing and a partner is going to be more committed to making this a success.

If you're worried about who owns copyright/patents on what you create, you can build that into the partnership agreement. I think if you're taking on a partner the business is going to have to hole the rights to do what it wants with the apps. The point is you can write a lot into the partnership agreement. Anything you're worried about can be mentioned. However, remember you're forming a partnership. You're not negotiating with an adversary.

You should form a partnership with this person because you trust her and think she would be a valuable asset to the company. Assuming you do and assuming you're both going to work equally in the business then an eventual 50/50 split seems fair, which makes me think her suggestion of 25% now working toward more makes sense. You have to decide it the partnership makes sense long term, but assuming it 25% now and working toward 50% or close seems reasonable.

Write up a few things in the agreement that place some simple conditions on the partial ownership staying with her should things not work out within a reasonable time frame. If you stay partners for 20 years she should be able to retain ownership, but if you decide after six months it isn't working you can have her share of the company revert back to you. Maybe there's a buyout where you get back 100% of the company and she walks away with a little money.

Hope something in there helps.

crspybits
02-17-2015, 11:37 PM
That does help a great deal, thanks! I do think she would be a valuable asset to the company. I think you are right. I should focus on what my strengths are. On previous (non-business) projects, I've realized I can't always fit all the needs of a project. Maybe someone can, but I can't learn everything! Plus, I've had the sense, for a long time, that should I get involved in a business project, I should bring someone on board with more smarts on the business side.

She is virtually a stranger to me though, and so we'll have to work on building trust. She's not in the state where I live so that won't necessarily make it easier. Perhaps it would make sense to use this initial period you are talking about (e.g., 6 months) to start to build this trust. Perhaps a statement in the partnership agreement something along the lines of: The first six months will be used, in part, to evaluate if a successful working relationship can be formed. (It just seems too direct to say "To see if we can trust each other"!).

If the first six months don't work out, I might have to give her at least some equity as I don't have much cash to do a buyout.

I didn't post my location yet, but curiously, I'm just outside of Boulder (in Louisville)!

billbenson
02-18-2015, 01:02 AM
Don't partner with someone you can't trust. Your thread is titled in part 'Partner Percentages' . What do you care. It doesn't matter if your partner works more or less than you. It doesn't matter if your partner makes more or less than you do.

What matters is that your business is successful and you make a decent amount of money. A partner is not your competition. Work with your partner. Make sure they are happy and doing a good job.

I apologize if that wasn't the intent of your post.

Freelancier
02-18-2015, 07:28 AM
I've recently been approached by a person who wants to partner with me with the business. She brings marketing and business skills. Development of the app has taken me about two years of my time so far. I am not a business person in the sense that those are not my skills-- I have the technical skills for the app.
First rule of business: learn the business skills -- especially bookkeeping! -- just as a self-defense mechanism. Being a techie is fun, but ignoring the business side will kill your business in the end.

As for this offer, other than some marketing skills, what is she bringing to the table and can it be replaced by someone else if all you had was money? That's how I define whether I want a partner in my business: if I get money instead, can I get more of the same thing easily? Marketing people are easy to find if you look around. Money is harder to find, because the people with money don't share it so easily. The people with marketing skills are happy to share it with anyone who can pay them.

You want a business partner, not a marketing partner. The business partner will want some piece of ownership and will give the business money (and lots of advice) so you can then hire marketing, sales, documentation, accounting, legal... all the people needed to scale your idea. Go find an angel investor group in your area and talk to some of them to see what they'd want to become your business partner(s).

0maha
02-18-2015, 05:28 PM
I am not a business person in the sense that those are not my skills-- I have the technical skills for the app.

The world is filled with people who can build apps. But you want to build a business, so you need someone who can sell apps.

Look at this from the perspective of a would-be partner: I'm guessing you have next to nothing in sales so far, or you wouldn't be asking this question. You are asking someone to come in and build a revenue stream for you in exchange for a whole bunch of their time, blood, sweat and tears. Why would someone do that? What are you bringing to the table?

At this point, the percentage doesn't mean much of anything. 75/25? 50/50? Doesn't make any difference, since you're talking 75% of nothing. To the extent this company builds value, that will depend entirely on constructing a reliable revenue model that actually works. Frankly, I'd be suspicious of someone willing to come in for only 25%. The person you need is a shark, and they'll want more than a quarter.

Do you have a concrete business plan? The real discussion you need to have is over how you are going to finance your proposed growth. How much revenue does your plan project in 24 months? How much money does your plan say you have to invest in marketing to get to that point? What is your projected cost of customer acquisition? What about the cost of all the other stuff (accounting, legal, tech support, etc, etc, etc) you will need? Who is bringing that money to the table?

Until you have answers to those questions, talk of percentages is premature.

crspybits
02-19-2015, 10:44 AM
Thanks for all the feedback! This is exactly what I wanted. The issues I need to be thinking about.

Alex - Arvixe
02-22-2015, 09:10 PM
Have you met this person? Have you seen previous work where she has succeeded? Bare in mind you're giving up quite a large stake of your company here. You need to make sure it is worth the loss of equity.

I would set some strong milestones to earn the equity as the company grows. I'd also be sure to meet this person face to face.

At the end of the day, there is no right or wrong answer as to how much of a stake you can/should give. I would start low and allow her to "earn" her ownership over the coming months/years. After all, you have.

Good luck, hopefully everything works out smoothly for you :).

Adel Landman Steyn
02-26-2015, 08:07 AM
It normally takes longer than six months to successfully launch a product / business, so I'd rather build in "step" time frames.

For instance, the first six months will be used to evaluate whether the parties are compatible enough to form a successful partnership. If, within this time, the partnership should dissolve, X will receive a 25% interest in the net profits as fair compensation for her interest.
If the partnership should, for any reason (including death) dissolve within a year, but after six months, X will receive a 35% interest in the net profits as fair compensation for her interest.
Should the partnership dissolve for any reason (including death) before five years have elapsed, but after one year, X will receive a 50% interest in the net profits as fair compensation for her interest.
Should the partnership dissolve for any reason (including death) after five years, X will receive 50% interest in the net profits as fair compensation for her interests and she will retain 50% of any intellectual property rights.
Both partners will have first option to purchase the other's interest in the partnership, should one partner wish to sell for any reason.

Naturally, I am working on the assumption here that you intend to produce more apps together, as I realize apps have limited life cycles.

I agree that, if you have no natural interest in business, it is better to outsource this. Time is our most limited resource, you need to spend it as effectively as you can - and that means creating things that can generate future income.

Adel Landman Steyn
02-26-2015, 08:12 AM
Although I do agree with some of your sentiments, contracts are very difficult to adjust later on.
If there is no specific agreement, courts either tend to assume a 50/50 split (including of the assets such as intellectual property). If she doesn't work out because she is not a shark, that is giving away half of the potential business for free - and then you may need to give away more to someone else!
An alternative method they sometimes use, is to determine the value each partner brought to the table, but in this instance it would be difficult as many of the efforts cannot be quantified in money.
So, I do advise making sure to reach a definite agreement where the expectations of both parties are clear - and put it in writing.