Ask Dr. Dana
- 11 January, 2000 12:01
Q: I'm 37, with extensive technology and finance experience. Several months ago, I was approached by a 22-year-old acquaintance who wanted me to team up with him to launch an Internet start-up based on an idea and a rough business plan that he wrote. The original idea came from a third party, who in return was promised 1 percent of the equity if the business got funded. I rewrote the business plan and arranged VC meetings my partner wouldn't have been able to get on his own. Our verbal deal was that I'd get 62.5 percent of the founder's equity; he'd get the balance of founders' shares.
No VCs have bitten and I'm having second thoughts. If I drop out, how do we redetermine the split of founders' equity? If my partner drops out due to lack of funding, after I've dropped out, who retains the rights to the plan and concept going forward?
A: "Winners never quit and quitters never win." This expression holds particularly true for entrepreneurs in the Internet economy. The fact that no venture capital has been attracted to your idea does not necessarily mean it is time to "jump ship." Listen very carefully to the feedback you are getting.
Are there things that you need to think through or strengthen to make your plan more viable? Are the second thoughts you are having a result of the plan itself or have you determined that you are in business with the wrong individual? Has the reality of having what it takes to found an Internet company hit you head on, and you are not sure you have what it takes?
My first advice to you is to go through a self-analysis to determine why you are willing to walk away from your plan. If it is fear of the unknown or if you feel risk aversive, than face it. Analyze the risk-reward ratio. Realize that if you face your fear and proceed, you will open yourself up for a real adventure. You may not be able to get where you set out to go - but there will be lots of life's lessons on the way to getting there. You will learn a lot on the road to building your plan into a company and you will be building your expertise and your skill bank.
If you have lost your passion for the idea, have real questions about the business model or the opportunity in the competitive environment, or feel that you are embarking on the adventure with the wrong individual, then get out!
Your verbal deal must now be turned into a formal agreement where all parties come to an understanding about the future of the business. Each of the parties should be represented by counsel. How the equity gets divided if and when the plan gets funded will be at the heart of the negotiation. Who owns the underlying intellectual property will be a key issue to be discussed and negotiated. In some instances, a buyout price (as a combination of cash and equity) can be negotiated for the founder that is leaving. If your co-founder drops the idea, you may want to consider a turnaround clause in which case the rights to the plan could revert to you. In that instance, you may owe your cohort cash and equity if and when the plan sees the "light of day." This agreement should also take into consideration any and all third parties that you have also verbally included in the initial equity split.
It is in your advantage to come to an agreement whereby your partner is still incented for pursuing the plan. Do not be greedy! Equity in a business plan is worth nothing unless there are individuals that grow and nurture that plan into a thriving company. It is better to own a small stake in a big idea than a big stake on paper that will never amount to anything. You may also want to consider a board seat or an advisory role so that you may stay involved and continue to make valuable introductions and have input to the company's future.
You could negotiate future warrants so that you have the right to buy more of the equity if and when the company takes shape.
Move quickly and decisively once you have decided to back away from the idea.
The last thing you want to do is slow down the evolution of the company. It is time for all parties to move forward - after all, we all move at Internet speed.