I work on a side-project with a friend and we spend uneven working hours. How to make sure we both get fair pay?

Question

Long story short, my friend and I have started a side-project and we have different responsibilities in this project.

I am the developer, doing technical stuff. My friend is a sales person and manages sales. Our goal is to split the proceeds 50/50.

However, since we don't work full-time on this and have normal jobs, it is likely that we don't spend equal time on this project. I'm especially in charge in the beginning, while my friend will have a lot of work later on. Of course there are also tasks both of us can do.

After a year or so, it might turn out that one of us spent double the amount of time than the other.

Should we split the proceeds according to working hours? Or should we define a fixed hourly rate, which will be subtracted from the revenue before the proceeds are estimated?

How do we make sure that both of us get a fair pay?

With the first approach I fear that one of us might earn too less, even though we are both vital for the project's success.

Please note, we both have founded separate businesses, so we are more of a work group than a single entity. We might found a company together if the project is successful, but for now my company "owns" the project.

Answer 1

Should we split the proceeds according to working hours? Or should we define a fixed hourly rate, which will be subtracted from the revenue before the proceeds are estimated?

How do we make sure that both of us get a fair pay?

This is something only you and your friend can really answer.

I suggest you two get together (a call or virtual meeting would be best, given the recent events...) and talk about what is "fair" for both of you, and reach a proper way of splitting revenue that both of you are happy with.

Yes, you could consider "checking" work hours and use that as a guideline or parameter to calculate the split. You could also include to that consideration the difficulty or complexity of the task: more complex tasks require more effort thus more revenue. Or you could well just agree on an even 50/50 split regardless... again, talk with your friend to see what works best for you two.

Answer 2

Just to add another perspective on Stephan's good answer. As someone who has started several online ventures (I'm a developer too), I think you're looking at things in slightly the wrong way by only considering time/effort put in as a measure of equal partnership.

For example, it's likely that you will spend hundreds of hours building the software, but what if your salesperson, through his network of contacts and sales skills, lands you a big client that generates significant revenue for the business? It might only take him a few hours, but is his contribution any less valuable than yours? A business with no customers is just a concept.

In other words, I don't think you can really say that one hour of your time is necessarily of equal value to his.

Most of my ventures failed, not because they lacked technical quality, but because we couldn't sell them effectively, so I know how valuable sales is to a new business idea. Don't undervalue it.

With all that said, you should formulate an agreement based not on effort put in, but on tangible outcomes. For example, his role as the salesperson is to get you customers, so his equity should be tied to delivering them. Your role is to make the product meet those customers' needs.

Sit down and discuss what you both feel would be fair justification for an equal partnership, and include timescales and clauses so that if one person abandons the project they forfeit their equity. Ideally use a lawyer or legal professional if you want the agreement to have some weight.

Answer 3

Read The Partnership Charter by David Gage (there is an audio version too)

You need to ask yourselves many questions.

For instance, what happens if your friend gets sick or gets hit by a bus. Who's going to own his shares after that? Or what happens if he gets promoted at his current job and never wants to leave his main employer? Or what happens if he just doesn't perform well as a salesman in this new environment?

This is why an incoming CEO joining a tech startup (with no personal funds to buy his way in) does not get 50%, not even close.

And don't get me wrong. That friend of yours needs to ask himself similar questions about you. What happens if you get hit by a bus? What happens if you turn out to be a shitty technical partner? These kinds of questions need to be addressed too before any kind of partnership gets started.

Answer 4

You both need equal motivation, but unequal number of shares.

In entrepreneurship, one of the most common recipes for failure is to have equally split equity, e.g. 50/50. One of you must have 50% + 1.

Once this is done, try to look at the roadmap of your startup: at the beginning you need to develop an MVP, and the sales person is going to be super busy while you code. He/she has to work on scoping the market, understanding the competition and keeping communications open with customers and partners, pitching your idea and coming back to you with feedback.

In the same way as you are working on a product that has to work, your sales colleague will be accountable for the conversations he can open, the contacts he provides and the demand he generates, plus all the strategic work. Actually, I can't even imagine a sales person working LESS than a developer, especially at an early stage.

If this process goes well, it's very likely that after one year you will be working on "plan B", a new offering validated by the MANY customer conversations your sales co-founder had in the previous 12 months. These conversations will also open the door to investor conversations, bringing in new funding opportunities and partnerships, as needed.