How to split up income from a product between co-founders?

Question

We are 4 mates that founded a company a year ago.

• A: high skill, works a lot (the architect)
• B: low skill, high motivation, works even more (the motivator)
• C: high skill, works only 5-15h a week (the admin)
• D: low skill, high motivation, works about 10h a week (the helping hand)

We had only projects with fixed payments, that were split into task with fixed rewards, so everyone was paid fair. Skill was rewarded by the effect that the fast one could do more tasks. Wasting time was no issue. Everything was fine.

But now we are working on a product that will be sold multiple times. And we need a suitable model, how to split the income. Because a product is a work in progress, we can not count hours, lines of code or something like that and split the income by a factor depending on that. Maybe during later maintanace colegue C will have a stronger commitment? B and D have higher skills in aquisition. Made deals sould be rewarded somehow.

What would be a fair system on dividing the earned money among us 4?

Answer 1

Easy - just split it equally four ways. You're all co-founders, so it is fair.

Answer 2

Why don't you try asking the people what they think is fair? If anything, you'll get a good feeling about what people are looking for.

Answer 3

Why are you asking us? This is all about interpersonal relationships. Sure you're all friends, when it comes to money, people always get nasty. Not right away, but give it a while, until the wife of the guy getting paid less nags him enough (or any number of other situations), and he'll be unhappy, and blame you.

The only sane way I can think of out of this is for all four of you to sit down in a meeting and discuss it until each and every one of you is happy.

Answer 4

If you'd all agreed to "Partnership" then it has to be split equally no matter what. All small startups face this issue. I also suggest this should be done legally, trust me, after a few months or a while, someone will start showing signs of "I think I shold be making a bit more"...don't forget...you guys are building a company while working on your product so in essence it should be split 5 ways....my 2 cents.

I agree with Orion Edwards

Answer 5

Here's a formula I've always thought would be a fair starting point.

You can pay the founders with equity according to hours worked multiplied by their full market rate.

EDIT: I've changed the link since there were some people who could access it. Other links including the same information and more are here in html, and here in pdf.

This was written by a guy named Wayne Lundberg, who I believe is a small business consultant / trainer in California. He was very active on usenet, and I found this in the entrepreneur newsgroups. I haven't read too many of his other ideas, but I've always found this one as a very fair place to start some type of equity sharing arrangement.

I don't want to just copy and paste what he's written, so I'm just going to leave the links.

Good luck.

Answer 6

This came during one of the question sessions at the Business of Software Conference 2008.

A few of the interesting points that were mentioned:

1. If everyone isn't putting in the same effort to build the business, then they probably should get different equity

2. Founders' equity get should probably come with contractual obligations about how much work people will be doing

   I though these were good points. They centered around the idea that things can go sour if you have people putting in different amounts of work, but all getting the same benefit. It dealt with the situation where everyone started out working the same, and then later some people decided that for one reason or another they didn't want to put in the same amount of effort they used to. That can cause a lot of bad blood and a lot of disagreements. Those kinds of disagreements can sink a startup.

It seemed like good advice to me.

Answer 7

• Create an anonymous ballot for everyone to indicate what percentage of the profits they think everyone deserves, including themselves
• If your four responses all seem reasonable (no one seems to be allocating 80% to themselves), consider averaging together the responses
• If the responses do not seem reasonable, consider someone else's comment!

Sorry I'm lacking a good response to the last condition, but I believe you'll find that your mates are fair.

Answer 8

Split equally - you are partners, not billable consultants. The last thing you want in business is to attach a stop watch to a partner. Such business is doomed.

Answer 9

Seek legal counsel. You can probably agree to at least split that cost equally. Be sure to ask each partner about their feelings regarding a "survivor clause". i.e. what happens if one of the partners crokes? Does the wife or next-of-kin get to have a say in the direction of the business even if he or she has no business knowledge and no technical skills? You may want to consider buy-out clauses for that purpose and, in general as well. Good luck!