What would be a fair split of ownership for a new service I and another company created [closed]

Question

I am currently working at an online marketing company as a software developer. A few months ago I started my own software company (sole proprietorship, eenmanszaak in Dutch). I am still studying and I am 18 years old, so I am not very experienced when it comes to entrepreneurship. Soon after I started my company, my bosses came with the idea to work together for a new project, with me as a company instead of an employee.

We want to create an online service with tools for webshops. I can't really go into any of the details, but it involves a lot of programming and some infrastructure design. The company I work for is run by my two employers and is quite small (~10 employees, mostly students like me). My employers don't really have any deep technical knowledge, they know how to run webshops and use their computer, but they can't code or configure servers. The way they want the partnership between my company and theirs is as follows:

• I will create the project during my working hours and get paid for them
• They will cover all costs
• They already have a few customers who are interested in using it once it is done
• When the project reaches a certain turnover (the exact amount is still open for discussion), they create a new company (a general partnership, or VoF in Dutch) in which I can join in as a co-owner any time I want.

The thing that bothers me is that when that new company is created, I would only get 33% ownership, just like my two employers. In my opinion this doesn't feel right for the following reasons:

• Although they also had some input in what the service should be capable of, I am the one who thought of how it should be executed and the only one of us three with the knowledge to actually build it.
• Since it is a partnership between our companies, I don't see why the ownership is suddenly split between persons instead of our companies. I would reason that if we split it evenly, that would mean that my company gets 50% and their company gets 50% as well. Also, all the brainstorming that has been done untill now was only with one of my employers, the other one has had close to zero input till now.

Although I realise it is nice that I get the opportunity to build a big project without having to take any risks or having any costs, it really bothers me that if it turns out to be a success I only end up with 33% ownership, even though I created the entire service.

If I had the choice, I would get 50% ownership, if not more. Is this reasonable to ask, or are my employers right when they say it is fair to give everyone 33%?

Answer 1

33% of a successful venture is worth a lot more than 100% of failed one. And essentially, they are offering to de-risk your venture (you still collect a salary, you don't need to pay for equipment or office space, etc.) - you get the chance at significant upside without any exposure to the downside. Don't overestimate the value of ideas, and don't underestimate the value of capital. An idea without capital is worthless.

However, there is nothing wrong with negotiating your ownership stake. Prepare some clear arguments, plan ahead for some of their likely questions and reactions, and practice your pitch. That said, you must always go into a negotiation with a clear plan as to what will happen if they say no - will you leave and go build this on your own? did they contribute enough of the idea that they "own" it, or at least make it difficult to establish your ownership of it?

Separately, there are a lot of concerns with what you proposed (independent of ownership stakes). Which company will own the IP of this effort (their company, your company, the new company)? How can you guarantee that IP gets transferred to the new company when the time comes? Which company will sell this to the first few customers, before that new company is created? How will the contracts transfer from one company to another?

I think a much cleaner model would be to establish the new company now, and have all IP and all sales belong to the new company. In exchange for their ownership stake, your partners will need to fund the company - let's say enough to pay your salary for 3 years, pay for your company's rent (even if you pay it right back to the original company), marketing, etc. It must also be very clear that they will need to recapitalized the company a few times, once you bring on more developers, expenses, etc., without increasing their ownership stake.

Answer 2

I would say the 33% is generous and you should take the offer. They are risking a lot of money with no hope of recouping until the business actually gets to the billing and AR phase. You are getting paid while this happens, so you risk nothing. You are, essentially, acting as an employee. But they are willing to motivate you by offering a partnership.

I was in a slightly similar situation early in my career. Due to several years of experience working in a medical clinic and a company which had created software for medical clinics, I knew enough about what software a medical clinic needs to create an application which did it all; billing, patient scheduling, ICD-CPT codes, insurance billing, etc. All this was done on my own time. The software was written and tested. It just needed to be sold. The software company I was working at offered to market it for me, for 70% of the profit. I turned them down, as I was indignant at the idea of them taking so much profit for "nothing".

But if I had understood what a huge part of making a profit was dependent on marketing, I would have taken the offer. As programmers, we see only what we put into the product. But without someone to do the selling, we make nothing. And when you add in the fact that what is being sold was paid for by them...I'd say you were getting a pretty sweet deal.

Answer 3

Decision is up to you how you would feel fair

But, IMHO, when new company created, it should be 50-50 split between your company and theirs.

I would check your employment contract thou, and see if there are no pitfalls regarding your work product while on company time.

Because if there IS, Anything you make while being paid salary is your employer property.

In that case i will suggest signing a contract for this product development upfront where your working and them paying is structured as you respected contributions to that products with 50-50 ownership to it

Good luck and please keep us posted

Answer 4

To my mind, the question is about how much equity each partner has put into this venture and how much that equity is worth?

They've put up the financial equity and you've put up the "sweat" equity. How much is their equity worth? How much is your "sweat" equity worth? Is it worth more than 33%? None of us can answer that for you.

Your best bet would be to seek out an attorney who specializes in this area and engage them to help guide you and advise you in this matter.

Answer 5

The offer is generous. Maybe too generous.

Remember you don't have anything on the table as of today. Their word that "at some point" you will share stakes is literally nothing. You are negotiating a piece of dream, taking their word for a guarantee.

I suspect your employers are taking advantage of lack of experience to completely control the negotiation the way they like. There are many hints for that:

• You haven't cleared intellectual property considerations
• You haven't a legal structure from the beginning
• Their offer is delayed, and oddly generous and off financial considerations

And even then, they took care of offering a cut where they would be majoritarian. There are countless tricks they could run from there to get you out of the equation. Remember, with the majority they can freely decide of salaries and dividends. I know a similar case where someone owned 10% of the business, but earned absolutely nothing because the "CEO" had fixed his salary to absorb all profit.

In my opinion there are strong reason to think they want you to work for them, not to partner them.

It's important to realize though, it's likely you can't succeed on your own as you would have no funding and no client, but they can, because they can hire someone to implement your idea.

It might not be your dream venture, but I would consider switching plans completely. If they are really interested in your idea, and that your idea is successful, there is a way you could make a profit: agree on a price, conditions for shipping delay and further support, then sell your software to them (i.e. freelancing). Going their way and agreeing on that "deal", consider you are an employee and nothing more.

Answer 6

Not enough info tbh, but if you commit to A VOF there are risks going your way as well.... I'd be VERY cautious to move down this path. Seems to me they just don't want to let you go as an employee and effectively hire you as a ZZP-er (dutch, means you're self employed without personnel, effectively an employee that pays their own taxes) and on top of that get 70% of your company. Way too steep a price!