Equity Split Between Co-Founders

Mark JohnsonMark Johnson Posts: 2subscriber Member

Quick Rundown

I am running a music production site to help music producers. The site currently contains a free download library of music production tools as well as interviews, tutorials, and music production news. The site made almost no money when I was running it and all the social media accounts for the 3 years of its existence. My plan was to build an audience before I started selling to them, which is why I did not look to make money. I met my co-founder and we transitioned into building a business and did planning for a year. Right now we are getting a web developer to build a marketplace that will be incorporated into what I have already created with the website. Now we are at the point where we are working on a founders agreement and equity split. (yes, this should have been done earlier)

Important Factor to consider

  • We are both financially unstable. However, my co-founder is more financially unstable than me and has a hard time paying his bills. 

My Relationship With Cofounder 

  • When I was networking for my website, I met my co-founder
  • On and off for a year, he helped me with potential ideas on how to grow the website's audience and helped build my Facebook group without asking for anything in return r
  • A year after I met him, I hired him to build the brand identity for $700 as he had prior experience with working on brand identities. 
  • He worked on the brand identity and this eventually led to us collaborating on building a business.
  • In addition to the $700, I started to pay him monthly 1 month after the $700 payment for his help with building the business. I paid him $300 each month for 5 months and have paid him $140 each month for 4 months 
  • We are now at the point where we have the business plan, website mockups and specs and requirements done and are having the marketplace built
  • Through this time, we did not discuss a founders agreement and we are currently trying to work out an agreement and most importantly the equity split. 


Past Contributions

Cofounder

  • Came Up with business idea
  • Created Mockups & Specs & Requirements for website
  • Created logo, tagline, brand story, and brand meaning (Didn’t finish everything he said he would for the brand identity because he said he wanted to wait till the website was being built)
  • Found web developer that we are currently using to build the website. 
  • Has experience in brand identity, graphic design, and a little bit of entrepreneurial experience. 

Me

  • Founded the website and ran it by myself for 3 years 
    • Built website 
    • Grew community (social media following, email list, website monthly visitors)
    • Maintains the community every day
  • Paid my co founder $2,800 over the last year to help me build the business
  • Spent $15,000 on the project not included the money sent to cofounder. Co-founder has contributed $0 to this business and doesn’t plan to contribute out of pocket for the business because of his financial situation. 
  • Created the business plan
  • I have more expertise in the music industry than my co-founder, but no experience with entrepreneurship except for the 3 years running the website and community.


Future Contributions


  • We both plan to be with this business for the long haul. (We might change our minds in the future, but for now, we don’t plan to build the business and then sell it as soon as possible)
  • The job distribution for running the business is pretty evenly split.


Other Notes 

  • In the time that my cofounder has been getting paid by me to help build the business, he has had a lot of issues with his living situation and every day living because of his financial situation. Everything that he created (mockups, logo, brand identity, etc.) for building the business was never on time. His personal financial situation has been an issue that keeps him from spending consistent time on this project. 
  • In the year that we were working on building the business, I just maintained the community and did not look to expand it. 
  • My co-founders strength is his ideas. I still am not sure about the execution of his ideas though. 
  • He is also a graphic designer, but I am skeptical of his ability in this as he did not have many examples of his work and the ones he showed me were not very good. He has not worked professionally as a graphic designer for a decade. 
  • I trust my co-founder, but I am not sure if he will be able to put in the required work for it to be successful.


So the question is, what should our equity split be in the company?

In my opinion, I should get a bigger share of equity. (I know, shocker)

I was thinking 65% for me and 35% for my cofounder. 

I founded the website and community and laid the foundation for 3 years. My cofounder had little involvement in this. (helping with ideas and a little community building in the Facebook group)

My co-founder came up with the business idea, created the mockups and specs & requirements.

He has contributed $0 to the project. I have paid for everything. 

When we launch the marketplace, we will be starting from with a community and foundation that I laid over the last 3 years.

I would like to know your honest opinion on an approximate equity split based off of the information that I have provided. 

Thank you for taking the time to read this post and comment!

I know it was quite long, so I really appreciate it! 

Comments

  • Ryan O'BlenessRyan O'Bleness Birmingham, Mich. Posts: 1,024administrator Site Admin
    edited September 20

    Well, I think most importantly, the deal needs to be fair for both parties. But given your detailed description, and the fact that you've poured your own personal finances into the company while he has not, then you should have a bigger piece of the pie.


    That said, you don't want to make your co-founder feel disrespected or that his work is less valuable. Perhaps you start with the 65 percent/35 percent range, but tell him you're open to negotiations if he is able to create a proposal as to why he deserves to take x percent of the cut. I am definitely no expert in this field, but I think there is a fine line you need to walk here. You should make sure you are being compensated fairly, but you also need to assure your co-founder is as well.

    Ryan O'Bleness
    Community Manager
    StartupNation, LLC
  • Mark JohnsonMark Johnson Posts: 2subscriber Member

    Hey Ryan!

    Thanks for your reply!

    I definitely agree. There is absolutely a fine line that I need to walk here.

    We both need to feel comfortable with the split that we get or there will be problems later down the road.

    It is really tough to find a correct % split here because the analysis that leads to this split is a mixture of both qualitative and qualitative.

    Thanks again for your help!

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