#AskPS
Piyush Soni .

How to split profits with a co-founder if he has not invested in a particular asset?

Let’s say that a Founder and a Co-Founder are running a business with a 50/50 share in the company.

However the Co-founder has REFUSED to invest his money towards a particularly risky asset, but Founder did!😕

As a result of this risky investment (which Co-founder has no involvement in), Founder has managed to achieve huge profit gains for the company!😎

Do the Co-founder is still entitled to 50% of these profits even if he didn’t invest anything in this?

Is this something he needs to highlight in a shareholder's agreement?

Originally Posted Here
52 Comments

Krishna Arora

No. Ideally yes it should be mentioned in agreement

Piyush Soni

So the Founder takes all the money regarding that assest?

Krishna Arora

yes. Keep in mind i m assuming no work was required in nurturing the asset else the ratio may change.

Piyush Soni

Lets say that founder was involved from the starting (nurturing)growing that asset! How would the things change now?

Shivam Malhotra

Why profits,why not equity? And who came up with the 50-50 number?

Piyush Soni

Its just a thought! if founder and cofounder have started a business together, they can go for a 50-50 share!

Amit Ahuja

Ideally Idea|Money|Management holds equal value. Normally if both of you are actively involved, but only your money is at stake, a practical number would be 70:30

Piyush Soni

Ohk thats a reasonable answer! But isn't all these things decided at the beginning of the venture, what split a founder and co founder has to take?

Amit Ahuja

This is a framework which can be used as per situation & honestly its more Art then science. Yes you have to do this initially, post that further equity allotment will be at premium, at a valuation mutually decided by board

Shubham Bajaj

Lets say both started by putting 100rs each into the business with a 50%-50% partnership, the moment when another 50rs was infused by one founder and co-founder refused to do the same, the share structure should have been adjusted accordingly.. say the new share structure would be 60%-40%..

PS: This is just my opinion and a very OVER-SIMPLIFIED version of the scenario.

Piyush Soni

Oh so basically share structure changes with time and investments or is it established at the beginning itself?

Shubham Bajaj

It does not change on its own. You are supposed to change it or define what happens with the profits/losses from such investment.

Piyush Soni

Ok, So it is better to renew the process at each stage! Right?

Shubham Bajaj

As I mentioned this is just my opinion.

Piyush Soni

Ohk fair enough! Thanks, brother!

Shubham Bajaj

real world matters are much more complex.. plus as long as you are 50-50, you need your partners YES while proceeding with a business decision

Piyush Soni

Yeah 100% agree with you! Afterall it is a combined effort venture!

Arpit Kapoor

The moment you invested more! Its not 50:50

Piyush Soni

Ohk that correct! But shouldn't these things are established at the beginning of the venture! Like what % each would get irrespective of the future?

Arpit Kapoor

thats correct! Many things are established in the beging, if the profit are shared, so is risk and investment.
From whatever i read the amount was not invested from the business account, But your personal. Business is a different entity. Business did not invest that amount you did.

I have a friend who partnered with another and started a dance school. My friend conducted all the classes for more than 2 years and the other partners contribution was hardly anything. Say 5:1. But he took 50% of the profit each month. At the end my friend parted.

Piyush Soni

I got it ! so basically, founder has to do 50-50 split here irrespective of he is investing money on this fully or partially ?

Arpit Kapoor

yes you owe him 50%

Gireesh Likhyani

If the founder is asking such questions and having such issues, then there's a huge trust issue too

Nothing can fix that tbh

Consider Plan B (you know what I mean)

Piyush Soni

Yeah taking trust issues and all things aside!All those things matter a lot while running business! But when someone is contributing towards something in a jointventure,I think involvement of both should be there! What's your opinion?

Gireesh Likhyani

Subjective

Two people can't be on the same page every time

When there are two people with equal stakes, you have to rely on a third person (or more)

Advisors - before making a decision put it front of them

And if they agree, both are gonna contribute

If they won't.... You know how it works.

Piyush Soni

Yes correct! Board of advisors decision is a good approach for this case!

Alan Yeap

If cofounder don't do work and don't invest. What is he even In the company for? He is free loader that I despise very much. Too many such people

Piyush Soni

Haha, basically the scenario is that in the beginning, both of them were involved in the things as 50-50 but some asset came where only founded is investing, co-founder sees a damage in that investment! He is not a free loader in this case!

Alan Yeap

then the asset should be consider as loan from founder. And the profit need return the money to founder.

Jay Puranik

Split the profits in proportion of the contribution of the risky asset to all other assets in generating that profit. Messy situation unless documented ASAP.

Piyush Soni

Interesting approach! Definitely a fair one as well!

Vivekananda Rongali

Who ever invests gets the pie. If the co-founder is steve jobs desigining products, give him 20% not more than that.

That too, prepare vesting period for 5 years, i.e if he leave before, he loses the stake.

Read about CCPS (Compulsory convertible preference shares). Give this 20% equity in bits year by year - directly link to MIS (based on his performance/targets he gets to dilute)

Prepare a hard NDA/terms sheet. Ask him to sign it or leave it.

P.s Who ever invests gets the Pie. Remember this always.

Piyush Soni

Got it, so separate documentation is necessary at every stages of the business? Correct!

Vivekananda Rongali

Just one 20 page NDA/term sheet should do the job. But personally discuss these terms with CS (Company secretary) who will draft the board composition/term sheet.

Also sign a NDA with your co-founder. If he takes the idea/code with him whats the point.

Shivam Malhotra

I started building something alone and have invested a 6 figure amount till now.I'm a non tech guy so bringing the developer full time as a Co Founder/CTO at a salary of 35K (just raised pre seed money) + 10% equity vested over 4 years.The guy I've brought in hasn't invested anything in the venture and has billed me in the past for development.

I don't know why would you give 50% share to someone who hasn't taken any financial risk at all🙂

Piyush Soni

No! Basically Co founder and the founder are running the Business with equal investments! But not situation is co-founder don't want to invest in particular one asset who he might finding as a risk! As I mentioned earlier he is not a free loader!

Shivam Malhotra

why not treat that amount as a loan to business? because honestly speaking,if we take simple capital contribution of say even 2L alone and lets assume they both invested 50K at the start then now it would mean that the % ownership should be 83% and 17%.

in short,it cant be 50-50 anymore when one guy is investing because loss hua toh saara uska hai and agar profit hua toh 50-50,ye kya baat hui?

Piyush Soni

Fair enough I got you! Splitting 50-50 in such decisions would be a bad idea! These things should be separately documented!

Shivam Malhotra

and changes should be made accordingly in the AOA or MOA as required🙂should keep the CA & CS in loop about everything.

Bhavuk Chawla

There's a specific mathematical calculation which can be done which i read about recently in book called Before you startup by pankaj goyal . Read it . It has few pages chapter dealing with such questions

Ramchandra Kumble

It is decided before hand. If you are deciding later... You are already facing an issue.

Piyush Soni

Yeah, it's an issue which I think is the reason for most of the Business partnership endingd!

Ramchandra Kumble

i am a business coach and i have seen businesses fail just because of greed or many a times miscommunication.
Co-founder is ready to move forward with what the founder is offering and everything is gone because it is not communicated properly.

What can we do?

But we can sit and discuss and come to a conclusion because if you you don't value the co-founder then you will not pay him/her. If you value, then you will not mind paying. Everything is dynamic. No right answer.

Harish Ibrahim

Read Slicing the Pie, you will get an idea how to split fairly without breaking it.

Vineet Nandan Gupta

few years ago, I had read in The Economic Times that when two company would get into a JV, the JV agreement would run into 100s of pages and have each and every case listed and the remedial measures to it. It was compared to pre-nuptial agreement...

Have each and everything documented.

Imagine two additional cases to your story:

1) Both founders invest in the risky asset and the entire investment sinks.

2) Instead of profits made by risky investment it was 100% loss....

There are a lot of grey areas and variables in this scenario.

Shivam Malhotra

yes every scenario should be documented to avoid any confusion later on and if it warrants a scenario by scenario remedy then add that too even though, remedies available are mostly general

+ add the counterpart clause to easily make changes in future to the agreement.

Kapil Agarwal

Salary!

Ashish Mohanty

The Co-founders Profit sharing and equity split are separate things in startups with the private limited companies structure however permutations and combinations keep changing in case to case basis.
P.S: This is not a legal advice.

Piyush Soni

So what do you think should happen in this case?

Ashish Mohanty

they should resolve this amicably/arbitrarily as certain things I believe has been offloaded from the other Co-founder and that has to be offset while the 2nd Co-founder might be shortchanged.They should redraw their covenant and association reference point to offset this matter and revert to original configuration.They should sort it out over P&L calculation,time,labour and value added contribution to the equity of the business.
P.S: This is not a legal advice.

Abhishek Soni

This is pretty important Discussion to have with your co-founder while starting up a venture. The biggest mistake people tend to make is to share equity on the basis on intital investment or just come up with some ratio on their own.

We suggest to arrive at ratio after undertaking all the criterion like initial investment, skills, involvement in operations and what other benifits everyone bring to the company on each predefined milestones.

Yes, this process takes time but this way equity allotment is done fairly. Eventually lowring the chances of disputes among the co - founders.

Also, shareholders agreement plays an important part in this regard.

Ratnesh Dwivedi

If there is more than one founder, technically they will called as co-founder, no matter what share holding both have or who started early.:)

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