Business Partner Blues 50% was not a good idea....

**hondaspeder** · 12-02-2007 09:27 PM

Ok, so here is the situation.

When I was 20 I came up with an Idea for a business. A friend and I invested invested $10K and started a company. We set it up as a 50/50 deal assuming we would each put in the same amount and quality of work. Over time I have realized that my definition for amount and quality of work is different from my partners. He is good at some things but simply put doesn't carry the weight of "equal partner" if that makes sense.

My problem is I am not sure what steps to take next. We have talked about it and he agrees in most cases but also feels like he stuck in there and tries his hardest etc etc. I am just not sure how to lay it all out for him without sounding like hes a piece of crap etc. I just want the situation to be more equal so that I can focus on my company.

One solution I had was to simply adjust our ownerships to 60/40 and call it a day. I had no basis for this number I simply wanted to have a majority ownership. What if its still not right?

I am just lost in terms of what to do. I love the company and feel that he is holding me back. I simply don't feel like I am being compensated for the amount of work that I am doing and feel like he is being over compensated for his....

I am putting in all the hard work of setting up a company and he is going to reap the benefits equally...

Any help questions or ideas would be awesome!

Thanks

**ltressel** · 12-02-2007 11:12 PM

I'm curious-when you said you set up a company...did you actually form an entity? The reason I ask is during the formation, had you sat down with an attorney-everything regarding the terms of the partnership regarding responsibilities and ownership would have been defined.

With that said, it would be clear how to buy out a partner in the event of disagreements, bankruptcies, and even death. Consult an attorney whatever decision you make. It's always good to have a 3rd party to re mediate issues like this.

Hope this helps.

LT

**rogercbryan** · 12-03-2007 03:13 PM

That would be my question as well. Did you incorporate or form a legal partnership? I’ve been down this road in a real estate investment that cost me $200K. If you have no legal partnership then just drop your dead weight. Business and blood don’t mix. Never work with friends or family, because you’ll only end up broke and alone in the end.

**hondaspeder** · 12-03-2007 10:11 PM

We formed an LLC, so its legal etc.

When we set it up I researched what needed to be done and did everything. I decided that since we put up the same amount of money and since we were "supposed" to bring the same time and work ethic to the table that 50/50 was a good idea.

I do have my attorney I guess the main question is how do you tell someone they just don't have what it takes.... especially when they truly want to...

Its like I just know what needs to be done and he needs to be told what to do...

I guess ultimately no one can tell me what to do just looking for ideas or suggestions.. feel free to ask more questions so I can paint a clearer picture.

Thanks for the input so far.

**akula** · 12-03-2007 10:33 PM

Originally Posted by hondaspeder

One solution I had was to simply adjust our ownerships to 60/40 and call it a day. I had no basis for this number I simply wanted to have a majority ownership. What if its still not right?

Good questions...no, everything you're thinking pretty incorrect.
Your problem is one of "how do I allocate shares in a startup"
The correct answer is "by using premoney vals and vesting schedules"...and not just because it's more fair, but because this mechanism is accountable. If your company is sucessful, you'll have to take on other shareholders and explain to them why the cap table is the way it is; and saying "we just split it 40/60" is gonna to put your new shareholders at a disadvantage and make your company unattractive (because it's gonna have shareholders who have more control than they should)

Read this:
Equity for Web Designer
Allocating shares in a new start up

Essentially: To allocate shares, you have to put a premoney val on your company, then u treat the individual work that you guys do as a cash investment, and have the company sell you securities, based on the amount of work you do (i.e. your investment).

Point: The wrong way to allocate shares is to allocate 100% of all your equity at the point of incorporation (i.e. 60/40). The correct way to do it is to have your company own all of its own shares (or have a trustee hold them on behalf of the company) and then (over time) have the company sell shares to you, him and other people depending on how much work you do

**clp11479** · 12-04-2007 12:19 AM

You have two possible solutions (I myself had this same exact situation in the past). Either you can buy out your partner and then find a new partner and sell them a share in your company, or you can tell your partner that you guys will keep track of how many hours of work you put in each week. At the end of the year it should be 50/50 or if one person is putting in more work then he either gets a bigger stake in the company or he gets paid out for the extra work he put in.

**MikeAnd** · 12-04-2007 09:36 AM

I would highly recommend talking to a lawyer who specializes in corporate entities in your state to find out what options he/she recommends.

If it looks like a situation might not be working out the best, make sure to protect yourself and your investment as best you can.

**rogercbryan** · 12-04-2007 03:26 PM

You can always use consulting pay outs (talk to your tax prep people). You all may be 50/50 partners in the buiness, but that doesn't mean that you can't mutually agree that you get a $10K bonus for your efforts. We do this with the owner/directors of some of our companies.

**haze** · 12-04-2007 03:52 PM

It seems like you just need to sit down and discuss buying if not all then some of his hold on the company. Explain to him that you don't want to take him out entirely but that you'd prefer for personal reasons owning a little more than 50%. Just make sure that you approach it the right way and always put options like this in partnership agreements. Everyone has different strengths and sometimes work isn't equally matched because of this, so you can never assume some one will do the same amount just because they say it or put up some money.