New Business Venture - Salary plus Shares

phatraptor wrote: »

Hi, I'll introduce myself first. I am a software developer, currently employed in a good job, with good experience.

A friend has asked me to consider leaving my job, to work for 8 months on the next version of his software package - he initially created the application and is selling it, but, does not have the skills to bring it on further.

He is offering me a salary comparable to my current salary, plus 20% of the business after working the 8 months to complete the software package. He is offering to transfer 10% after I work 4 months, if i finish the software earlier, he has said the full 20% will be transferred then.

I would like to ask for your opinions on how to go about this agreement in a correct and legally binding way.

Some questions I have are:

1. If we draw up a fixed term employment contract, including the details on equity transfer under certain conditions, will this be legally binding? Is it possible for him to fire me after completing the software and not be liable for the terms expressed in the contract i.e. the promised % share?
2. Do we need a witness/ lawyer/ accountant present during the signing of this contract? Or is a lawyer absolutely required throughout the process?
3. The company is limited, will this mean he transfer's 20% of his existing shares to me, or will he be issuing new shares? Does it matter which way?

Thanks,
p

The problem with all of this, is that if you were to get a legally binding contract done up, in conjunction with your solicitor, that if you feel that the terms of the agreement in the future have been departed from, it's you that has to step into the role of a plaintiff and take proceedings against this other person... You have to ask yourself can you afford to go to court to have a contract enforced?

If the answer to that is yes, you have to ask yourself, has the business that you have supported with the expertise you have provided, is it still trading and has the product you have helped to develop, been successfully brought to market, (and if this is the case, then why hasn't your agreement been honoured), or as would more likely be the case, if the idea has not worked or been accepted by the market, then have you effectively been left holding 20% of nothing???

My best advice to you is to insist on 20% from the outset as in before you start any work. If it is a start-up business, it is 20% of nothing or very little. So arguing over 20% now or 20% in 6-8 months when it is you that will be bringing value to this idea, I think is just arguing over a form of words as opposed to any real difference in value on the 20% that is likely to emerge between now and this side of you fully developing your software solution.

But don't forget, if you run with my advice, you are also taking 20% of the risk! If you spend 6 months developing a product and it doesn't get to market or it does but isn't well received, then you have 20% of zilch!

That's capitalism as the man says! :D

phatraptor wrote: »

I assume if the company was sold, then I would receive 20% of this money for having 20% of the shares, there is no way for the 80% holder to dilute the money I receive?


I was hoping that a signed agreement drawn up between us would be enough, looks like I should get a professional involved.


From my friends point of view, if I demand 20% now, what stops me taking the share and then not working for him... is this something a solicitor could mitigate the risk of? I think getting the shares sorted out up front while protecting my friend makes sense.

I do believe the business has legs, it is turning over 60k without anything approaching part time management or consistent phone bashing for sales, only now is my friend going to take the risk of leaving his job to work on this full time. He is good on the business side and I believe he will manage the potential of this idea very well.

Thanks everyone for your input, it has been very helpful, I'll be looking at contacting a solicitor.

In fairness, for something like this to work, there would have to be a fairly solid basis of trust, if you have concerns that the fairly generous access terms that you are offering will not be honoured in terms of access that your friend needs to a new technology, and by that I mean if your gut feeling isn't right on this, then my advice is don't take it any further, or at least not the way it is being suggested so far.

There are other options open to the two of you, such as you developing the software and leasing it to him on a monthly basis. If you can put together a well thought out leasing contract like this, it takes a lot of the risk out of the thing for you, because you still retain access to the code and the software solution, so if you stop getting paid your lease payments as agreed, then you just withdraw access to the software that you have developed.

I developed an e-commerce website for a friend once and I didn't pay enough attention to this kind of stuff, I sold myself short and just assumed that I'd get looked after and I didn't, (this was back when I was naive and lacked business experience I should add), the site was a great success but because we didn't get the terms properly agreed from the get-go and the reward system was not properly understood at my end (or the other end for that matter!), the outcome was that the site was deleted by me and the result of many months of hard work and grafting while I worked on nothing else, was a serious falling out and a lost opportunity for both parties.

EDIT: I think a lease agreement with an option to buy the product after 12 or 18 months is a better way to go at it than an equity stake, from your perspective anyway, the important thing is that you retain control until you are getting something from it financially I think...