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Bootstrapping Partnerships


#1

Does anyone have advice on how partnerships should work when bootstrapping? In the early stages of a company, when people still have jobs or contract work, everyone brings different levels of time, skills, and cash to the project. Anyone have advice on how to handle this?

In my specific situation we will be forming a C-Corp very soon, so we need to figure out how to divide up the shares.


#2

The Lifestyle Business podcast #163 has some insights into the potential partnership issues.


#3

Here’s a comprehensive answer on this from Joel Spolsky:

http://answers.onstartups.com/questions/6949/forming-a-new-software-startup-how-do-i-allocate-ownership-fairly

I’m with Joel on this one, splitting the ownership equally among the founders will likely prevent a lot of issues later on.


#4

What I learned from a failed partnership:

  • Speak openly & multiple times (gives you time in-between to think
    about what has been said in the previous talk) about what everyone
    brings to the table - be as detailed as possible
  • write it into a contract, have everyone sign it
  • Speak up early & openly when you feel that someone is not pulling his weight

Also, I favor a model where you split equity into two equal parts. Then you take part 1 and split it equally among the founders. After that you split part 2 based on the cash everyone is putting into it.
You can have more parts and split those other parts along which ever axis you like.


#5

Here’s an interesting spreadsheet you can use to figure this out http://www.andrew.cmu.edu/user/fd0n/35%20Founders’%20Pie%20Calculator.htm


#6

I continually refer to Joel Spolsky’s advice when it comes to sharing equity.

I think it’s important to make a distinction between founders and not founders. Founders are in it for the long haul and will be expected to share in the pain (leave their jobs or invest in cash) BEFORE they get funding. If everyone is getting the same amount in equity, but not the same level of pain, then it’s not a fair deal and members will drop off.

Make sure you include a vesting schedule with ANY share or stock you’ll be offering. Also since you’re early make sure you file an 83(b) election with the IRS while the value of your company is really low. It will save you tons in tax liability. You must do this within 30 days of being awarded the stock.


#7

I’ve not had to deal with this, but if you’ve not come across startuplawyer.com, it seems to be a pretty good resource… you can find the most relevant entries from this page (items 7, 8 and 9).

The Founders Dilemma also had an interesting discussion of this.

But the to Joel’s answer from @dennis and @patpohler seems pretty bomber, so maybe just start there!


#8

Joel assumes that the founders quit their day jobs and start working on the startup full-time. Bootstrappers are not always like that. Some fund their business from the revenue of full-time jobs.

The valid question then is how to split shares when both founders have FTE.

The answer though, probably, still 50-50.

If one of the founders later starts to slack off, the conflicts are unavoidable anyway no matter what is the split.


#9

@rfctr said:
Joel assumes that the founders quit their day jobs and start working on the startup full-time. Bootstrappers are not always like that. Some fund their business from the revenue of full-time jobs.

This is exactly the issue I am wondering about.

Everyone’s income / life situation is so different. For example, I’m married and have a new born baby. Imagine I was teaming up with an eager young hacker that already has two years of salary in the bank. Obviously he/she is going to be able to bring much more to the table in the first year of the company.


#10

I think the biggest take away from Joel’s post is that there has to be some assurance of commitment. So a starting investment in cash, or a solid written agreement of “hey I’m saving x amount from my FTE to go full-time on the startup with you in x months”

I partnered with someone a long time ago for a consulting biz. I looked at the opportunity as a chance to quit my day job at some point and work full-time for myself, my partner I think liked the freelancing as just a secondary source of income.

The partnership didn’t last too long because of this fundamental disagreement, each of us assumed the other was in it for the same reason and after 2-3 years at the end it felt (at least for me) like a big waste of time. Careful who you take on as a partner and have a really deep conversation about your goals, views about running a business, even where you’re at in your personal life. It’s a marriage and the more open & brutally honest you are with your partners and yourself the better it is for everyone.


#11

To this I would add, if speaking up doesn’t bring about a change in behavior, don’t be shy about exercising your options to boot the offending partner. I’ve known a lot of people who languished because their partner merely added drag to the operation and didn’t contribute enough.


#12

Even then I would greatly prefer a 50-50 split and try to find other ways to compensate for the difference in initial commitment and risk. For example, if only one of the founders is able to contribute funding initially, you could agree to compensate for this with a larger share of the first profit (e.g. to pay back the initial funding + X% where X could be any number to compensate for the additional risk).


#13

Strongly agree with @itengelhardt, no matter what you do, always get it in writing! Even if, or especially if you are close (friends, family). Then when disagreements inevitably arise there is something concrete and concise to examine and improve.


#14

May not apply directly to your situation, but if you have the time it can be nice to “test” a partnership before making a full commitment. It can help avoid some of the horror stories I’ve heard from other entrepreneurs.

I’m currently in a legal partnership for our app Harpoon. But before we started Harpoon my partner and I had worked together on a variety of smaller side projects. It gave us a chance to test the business “chemistry” between us and solve problems together on a smaller scale before committing to something larger.

Because we know each other’s strengths and weaknesses, work habits, etc, both of us felt very confident and comfortable jumping into a legal partnership for larger projects.


#15

That Joel Spolsky response was excellent and covers pretty much all the bases. Ideally in any partnership, you will each bring equal levels of effort, energy, skills and focus to the table to warrant an equal split. If the scales are tipped too far in one direction, I think that is a possible source of conflict down the road - especially if shares are split equally but responsibilities are not.

Another key thing to work out up front is how to split up if one of you decides things aren’t working out. The vesting of options is good advice to help there since each founder will slowly gain their shares over time. Standard partnership agreements typically have a mediation clause and valuation clause to help as well.

I also have a friend who added a “Shotgun clause” for his company which basically says something like “Any partner can make an offer to buy out the other partner(s) at a specified price. The other partner(s) must either accept the offer or purchase the other partner(s) shares at the same valuation”.

Hopefully you won’t need any of that advice, but best to work out these details at the beginning.

Good luck,
Tom


#16

I’ll echo the advice to pay lots of attention to performance & exit clauses in the partnership agreement, contract, or what have you. Going into a partnership really is a lot like getting married - easy to get into, painful to get out of, and no matter how long you’ve been happily “dating,” things can go to hell in a hurry.

I was in a disastrous partnership some years back. I ended up closing the doors, but the experience cost me a few $100K I really couldn’t afford. That was a painful, expensive lesson in the perils of partnerships…


#17

Our LLC operating agreement is about 10 pages long. The exit agreement is 30 pages. :slight_smile: