Here’s a case for discussion. You be the judge.
Parker comes up with a great idea for an iPhone application. He or she works on it for three months in spare time … develops sketches and designs, trying to figure out how it would work … looks at other iPhone applications doing related things.
About three months into it, the enthusiasm has waned a bit, having spent maybe 10 to 20 hours on it so far. A good friend suggests talking to Leslie about it. They meet for coffee. Leslie is a programmer who works for a company in town doing web programming; and also an enthusiastic iPhone user and has been thinking about taking an online course on programming the iPhone. Leslie is excited, which rekindles Parker’s excitement. They agree to be partners in a new business based on this initial iPhone application.
Four months go by. Leslie takes Parker’s initial idea and starts developing. It turns out, as actual coding starts, that what Parker imagined isn’t quite possible on an iPhone. Leslie revises the idea radically, makes it practical and develops a prototype. Parker and Leslie meets three times, they talk, Parker accepts his changes begrudgingly. At this point Parker’s total hours have gone to 15 to 25, but Leslie has worked a lot, probably 120 hours, on the programming.
At Leslie’s suggestion, he and Parker take the prototype to Terry. Both of them know Terry, but neither knows Terry well. Terry has been through a failed startup, has a business education and is looking for a startup to do again, this time the way it should be done. Terry’s skill is mostly marketing, but also how to develop a plan and seek investment. Terry does a business plan and networks with local business development groups to find angel investors. They win an opportunity to present to an angel investment group.
Another three months have gone by. Parker has now put in more like 40 hours, Leslie 250 hours, and Terry 120 hours.
The three of them meet to plan their approach with angel investors. Leslie wants to quit a current job and work full-time on the new thing but needs to get paid. Parker doesn’t want to quit a current job but wants to stay involved; she’s not quite sure how. Terry wants to lead the new company as soon as it can get financing.
The business plan indicates it’s going to take $250,000 to develop the business for the first year, after which it will probably need another $750,000 to become cash-flow self-sufficient.
During this meeting, Parker and Leslie and Terry come to an extremely awkward realization: They’ve never really talked about who should own how much of this company, much less how much they are willing to offer to investors in exchange for $250,000.
So what do you think? This is a typical case.
- How would you suggest that Parker, Leslie and Terry divide up the 100 percent ownership of the company now, before they go to the angel investors. Who owns how much?
- What do you think of the management team here? Leslie and Terry both want to work full-time on the business when there’s money to pay them. What titles should they take? How much salary?
- How much of the company should these three offer to the seed investor for $250,000?
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
