Need input regarding ownership in a startup company

Hey everybody,

I guess I'll cut to the chase and explain the situation.

Basically I had this idea for an app for android/apple smartphones (obviously I can't go into detail about what the app is). In general I'm not a very optimistic person or easily excitable, but when I had this idea (it actually came to me in a dream) I couldn't go back to sleep and I actually searched around on the internet to see if anyone else was already doing it. From what I could tell no one was.

So I have this friend who owns and runs a tech-related business. I sent him an e-mail with this idea and how I envisioned the app working and why it would be useful and I asked him if he thought it was a good idea or just a waste of time. He sent me back an e-mail saying he liked the idea and wanted to meet as soon as possible. Well when we met, it was obvious he really really liked the idea. We talked about the idea further over lunch and he gradually got around to asking me if I had anyone in mind to team up with to make it happen. I said if he wanted to team up with me I'd be fine with it. Immediately he brings up the question of ownership if we were to start some sort of LLC or S corporation. He asks what I was envisioning in terms of an ownership split. I say probably something like 60-40, with me having the majority stake. He says something like "Well don't get mad at me for saying this, but I think I would be looking more for a 70-30 ownership, since I could bring a lot of technical knowledge and experience to the company and I already have developers that I could shift over from other projects." Additionally he said he would want to split the costs 50-50. I told him I would think about it, but I also said that I have an issue with the costs being split evenly between both of us yet him getting such a large chunk of the company. He said we can meet again this week, and if I choose not to partner up with him he promises not to take my idea (of which I am a bit suspicious, even though in general I do trust him).

So that is the main issue right now, how the company would be owned.

Of course in negotiations each person must evaluate their 'leverage' and to be honest my position is quite weak. I trade stocks and options for myself and I don't know anything about programming, getting patents, operating servers etc. All I have is the idea.

His position is quite strong. He essentially already has all the 'tools' to create the app. He has developers, knowledge about how to run a retail website, how to get patents, and overall a much deeper technical knowledge about the subject matter (which is why I e-mailed him in the first place, his opinion was valuable). So this is his reasoning as to why he should get 70%.

What do you guys think? I guess my current options are:

A)Continue to negotiate with him. (I would be alright with letting him have a majority stake such as 60-40, but to me 70-30 with the costs being split evenly is unacceptable. So I would probably come back with an offer of him getting 55 and me getting 45 and then us meeting somewhere around 60-40)
B)Try to find someone else to partner with (although I have no idea how I would do this without giving away my idea to random strangers). How does someone go about doing this?

Any advice would be greatly appreciated since I'm a complete noob at this. Thanks.

 

I have no input on the ownership division, but to protect your idea a NDA or similar would be wise.

http://inventors.about.com/cs/nondisclosure/ht/NonDisclosure.htm

 

Thanks for that. I've heard of NDA's being used when companies want to buy other companies, but didn't know they were useful in a situation like this, thanks.

 

Get the NDA signed as soon as possible.

Otherwise, it sounds like you know what you're willing to do. Negotiate it. I hope it turns into a winner for you, especially if it's going to let you make money while he does the work!

 

I would say the cost ownership must match the stake ownership. Any other way just doesn't make sense to me. If you and your friend were splitting a pizza, why would you pay for half the pie then only take 3 of 8 pieces?

 

I'm sure his development team is top notch. But so are others. You have an unique idea. His 'tools' are not. Not to take anything away from developers, but any of several hundred tech companies can do the same as what he is proposing. I think you should get a NDA signed ASAP then shop around. Talk to a few more companies (after each signs a NDA) that do the same.

 

Thanks for the responses guys. Yeah the whole 'who needs who more' thing is interesting to think about. And yes of course 30% is better than 0%

A larger issue has come up, and it was something I knew might arise before this situation started.

I sort of knew this friend of mine was already somewhat busy running his current company and other nebulous "projects" he mentions. When me and my other friends would have social gatherings/parties, this guy would say he's coming and then either show up very late or not at all. Essentially, whether his reasons are sound or not, he is unreliable.

When I first sent him the e-mail about the idea it took him 4 days to respond. After we had our lunch meeting last Friday we agreed we would e-mail each other over the weekend to arrange out next meeting. I e-mailed him on Sunday saying I could do any day except Monday or Friday, I could even do the next weekend. So I sent that on Sunday, and I didn't even get a response until yesterday, Wednesday. Basically he wants to meet next week.

So essentially if and when we do eventually meet and make some sort of deal, I am very sure it would be me and the developer(s) doing all the work with my 'partner' being pretty much absent and extremely hard to contact.

So yes, I am thinking very hard about all of your ideas about shopping around. I think I will give him one more week but after that, who knows.

 

Here's my two cents:

1. As others pointed out, your idea is more valuable than what he has to offer.

2. Get an NDA signed and make sure the terms and conditions are tight. Maybe hire an attorney to write something good up for you? There's other TFPers here who know much more on that in the US legal system than I do. Try Jazz or KirStang for some advice.

3. His tools are not a strong position to base a 70-30 share on. If he insists on 50-50 cost sharing, your idea has at the very least the same worth as his tools. I would advise for 60-40 in your favour, and the minimum to be 50-50.

4. If you opt to create a new company, go for LLC. Limited liability will ensure you won't be left with all the losses that could be the result of this venture.

5. Not to belittle your skills of perception, but when a guy runs a business there are tons of reasons why he suddenly has to change his plans. Business is very fluid and it's all a matter of priority. If a good customer of his wants an urgent meeting about an existing or new project; or someone fucked up in one of the projects and it needs to be rectified ASAP, I certainly wouldn't blame him for not attending a gathering/dinner with friends. Unless you know his full situation in life and at work, it would be unwise to make assumptions about his reliability.

 

Bloody time limit expired when I came back on this.

6. Alternatively, you could agree with him to give up some of your profit share in exchange for him to accept full responsibility and liability of the venture. It's a risky thing to agree to and many people wouldn't, but if he believes this venture to be a really good opportunity, he might go for it. Who knows? It may be something for you to consider to offer him. I wouldn't insist on it if he doesn't seem enthusiastic about it, though, as that may alienate him from the entire thing.

 

I agree, the 70-30 ownership split given a 50-50 cost split is silly. I don't believe he actually expected me to accept that. As everyone knows you always throw out a low bid in the first number of a negotiation.

As for making assumptions regarding his reliability, as a human being I have to make decisions based on patterns of past events. Yes, my previous experiences with him were based on more of a social level but I now see those patterns persisting into this possible business venture.

I think I'm starting to turn this more into a soap opera rather than constructive avenue for receiving advice

 

1. What are thoughts? What profit share do you want to settle on and what arguments do you wish to present to him to make your case in the upcoming negotiation(s)?

2. Have you looked at his competitors yet? Did you find anyone who is qualitatively better than him? Or more professional?

3. How do you see yourself setting up the venture? What role do you wish to play in it?

4. What is your risk threshold?

5. Do you have a rough cost estimate for the first year of the venture? Do you have the capital to undertake a 50-50 distribution of costs?

 

You may have already heard this... but get the NDA NOW!!!

Secondly, if it's a single app that you have in mind (as opposed to a family of related ones), have you considered just leasing the concept to him exclusively for a simple royalty on each download while you maintain the IP rights? That protects your idea, gives you a certain profit on every sale without any downside risk on your part. It's the reverse of many a venture-capitalist's terms for investing in small company's with innovative products. If you want to go that route, however, you should also find a good IP rights lawyer now and get the idea protected as soon as possible. If it's a family of apps, then this is even more important.