How do you work out the split of a business when you have a co-founder?
Friday, August 19, 2011/
How do you work out the split of a business when you have a co-founder? We are putting equal money in but I will be doing far more work than my potential partner. How can I work out a fair share?
How to split a business with a co-founder is always a difficult question and there is no magic formula that gives you the “right” answer.
It ultimately depends on what the co-founders are each happy with, relative to what they contribute to the venture.
The most important thing to remember is to work it out upfront and have that arrangement properly documented in writing.
One thing that I have learnt over the years is that each co-founder rarely contributes exactly 50/50 to a venture, and that the split often changes over the life of the venture.
However, many entrepreneurs, in an effort to avoid conflicts with their co-founders or the time needed to work out a fair split, simply settle on a 50/50 basis.
While that may work for some entrepreneurs, I take the view that the difficult questions should be addressed early in the venture rather than later.
If the relative contributions of the co-founders and/or the value of those contributions are not clearly agreed and outlined upfront, my experience is that the risks of having a significant disagreement at a later date increases dramatically (and often happens at the most inappropriate time, such as when negotiating a trade sale with a buyer!).
There are a number of methods that co-founders can use to try and quantify the value of their different contributions.
For example, I have seen a points system used where each of the key “ingredients” of the venture’s success is given a rating, and then the co-founders discuss and agree how many points they contribute towards each “ingredient”.
The number of points are then tallied, having regard to the ratings given to the “ingredients”, to calculate a percentage for each co-founder that represents the value of their contribution towards the key “ingredients” that will drive the success of the venture.
After the co-founders have agreed in principle their split of the venture, this should be clearly documented in writing so that the co-founders are clear as to the value they bring to the venture and their ownership stake in the venture.
At this point, the co-founders may want to consider whether or not the split should be adjusted if the co-founders’ contributions change over time.
For example, it is not unusual to see that a co-founder’s split reduces if they work less or if they leave the venture within the first few critical years.
Such arrangements should also be clearly documented in writing to avoid future arguments.
However, care should be taken to ensure that adverse tax consequences are not triggered as a result of these changes in ownership.
In summary, there is no easy way to work out a “fair share”. However, experience tells me that these discussions are important early on in the venture, and once agreed should be clearly documented.