Questions

What share split should I ask for in a new venture with a partner?

I've been talking to a reputable outsourcing company about doing a software project with them where I would lead a team and would implement an PaaS project that I have in the early-stage. The idea and expertise are mine: I have a very good understanding of the product and market, and I have proven experience in training and leading a team. They would help me with formulating a business plan, office space, and salary for me and 2 others (full-time), help with recruitment etc. for the foreseeable future (6-12 months). We will be using fairly new tech, and they'll require us to spread the knowledge to the larger team (70-100 people) by doing trainings, workshops, etc. In addition, it's likely they'll need me for some client-facing work for their blooming outsourcing business in the EU: 2-3 days at a time to act as tech consultant for prospects. All in all, it looks like a great partnership, and they seem genuinely nice people, with a proven record, with whom I'd like to work. They're offering a competitive salary for a senior-level programmer, not quite there for a technical team lead. In addition, they asked me to name a percentage of shares that I'd like to have. How do I evaluate? What split seems fair? Thank you very much for any insights!

4answers

I've been a co-founder of three ventures and have had to negotiate ownership stakes with my partners for each one. I've also conducted intellectual property diligence, as a consultant to IP/M&A attorneys, for multiple multi-million dollar software M&A deals.

As Stoney said, it's a bit hard to come up with a firm number, given the number of unknown variables involved here. Also, it almost sounds like you and your product are being acquired by this larger company, while essentially selling or licensing a product you've built to this company in the process. If that's the case, you may want to speak with an attorney who's experienced in software licensing agreements and M&A. They may be able to steer you in the right direction of a valuation, as well as make sure you're very clear in what you're giving away, from an intellectual property rights perspective.

Another thought that comes to mind is that if the company is providing you with a lot of support, including a salary, be prepared for them to possibly low-ball you on the ownership stake. Once you decide on an ownership stake to suggest, I wouldn't be afraid to start at the high end of your estimate, taking into account the fact that they may try and negotiate the share down quite a bit, given the financial contributions they'll be making. In my experience, investors putting money on the table typically and unfortunately don't value sweat equity too highly or fairly, when compared to cold, hard cash.

Always happy to discuss further on a call and good luck!


Answered 7 years ago

Hi, I have many years experience in structuring various partnerships, JV's and business entities.

Depending on the structure, it should be based on the level of each parters' paid in capital. You put in 20%, you get 20%. That's the easy way. However, when you are going to a JV/partner that is supplying more than just capital, you would need to come to an agreement with the company as to the intangible value of what they are providing in addition to cash. So, if the cash is worth $XX and their services, time and other assets are worth $YY, then they may be entitled to a larger share than you.

I hope this helps on the process to value. If you would like assistance in the valuation of the share split and negotiation of a fair structure, feel free to contact me directly at: interwealth@email.com.

Best of luck,
Craig


Answered 7 years ago

Are you getting a percentage of the outsourcing company or are they starting a new company with your product? It's very hard to answer this if the former, due to not knowing the value of the existing company and what the value is of what you're adding to it. If the latter, then I would suggest you ask for 50%, or an equal share of whoever has the highest share.


Answered 7 years ago

Thank you for your input, as always the Clarity community is outstanding.

To clarify, the product is not built yet, but I've proven it's viable and they think it's valuable. So they are ready to help build and scale it as a new company, in which I would get shares.

I understand that ultimately it is a negociation and cash is valued more, so I'll take it from there. Seeing as they're willing to pay my salary, I don't expect to get more than 20-25%

Thanks again!


Answered 7 years ago

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