This transcript was generated from the episode audio and may contain minor errors.
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Here's a tricky listener question we have today. I had to think about this one a good bit because I always wanna make sure we're giving our listeners and our incredible global audience the most helpful information. They're wondering about what is a fair split in terms of equity. What's a fair founder-investor deal between friends? So as I said, this can be tricky.
Often partnership deals, if it's not clearly delineated, who's doing what, who's providing what, how much time, how much resource in this case, people are putting into it, then it can lead to difficulty later. But done well, it can actually lead to leverage, which is good, right? It allows the project to move forward because one person has more time, one person has more money. So today we've got two people, Tessa and Rico. Rico's got some money to invest.
I think it's $25,000. Tessa has the idea and the grind, the hustle. She wants to make it work. So their instinct is to do 50/50. Is that the right split?
What does the vesting path look like in terms of like, when does that person get their equity back and all that kind of stuff? So I'll try to keep it simple 'cause we wanna keep things simple and easy and light, but also, as I said, helpful. And maybe if you're ever thinking about doing a partnership or you're just curious about how these things work, hopefully it'll be interesting to you as well. Detailed question from Tessa. Coming up after this quick shout out to our sponsor.
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Greetings from North Carolina. My name is Tessa and I'm a designer with a prototype travel accessory. My college friend Evan loves the idea and can invest 25,000 in cash. Well, I'll handle product development, branding and ops. We're both worried of resentment down the road.
If we go 50/50 now, but I'm working nights, well, he's mostly passive. Is that fair? On the flip side, without his capital, I can't fund the first production run. So my question is, what equity split keeps our incentives aligned and feels future-proof for both work and money contributions? [Music]
Great question, Tessa.
Thank you for the details as well. The most important thing to do at first is to value the cash. And what I mean by that is you just pretend your idea is worth $0 for a moment, okay? So if Evan puts in $25,000 and you both agree that the company is worth $100,000 at day one, then his money equals 25% of that. And so then you reward the idea plus the groundwork because you created the prototype in this situation.
You're gonna manage the daily operations. It is mostly your project. So I think you give yourself the remaining 75% upfront. So now you've got 75/25 instead of an arbitrary 50/50. And both sides kind of see how the numbers came about.
So I think if you can agree on like what the value of the idea is or whatever the company is, I know it's not a company yet, but you're making it a company, then that helps you determine a fair valuation for both of you, as opposed to just saying like, let's just split everything 50/50. And especially if this other partner is a silent partner for the most part, not actually involved. It's a little harder if, okay, this person is involved, they're gonna do some things, but not as many things as the other one. I actually think it just makes things more seamless if they are pretty much just the investing partner and you are the one doing the work. Then you say, okay, I'm gonna receive a higher percentage of that split.
And then second, you want to protect the future with some simple vesting. So add something like a one-year cliff. That just means if either of you walks away in the first year, you both forfeit the unvested shares. And then after that time, the equity vests monthly over whatever period you decide. It could be another year, it could be two to three years.
If Rico stays passive, but he's still on board, he earns his 25% gradually. If you put in the work, you earn yours too. If he later invests more cash or if perhaps he gets more involved, then perhaps you'd draft a note to adjust shares proportionately as you go forward. You can just make an easy amendment. I think the main thing here is to think about the concerns.
Like how do people, both people feel valued, feel like their contribution is valued, but also recognize that the person with the idea and doing the work probably is making a greater contribution, at least based on the information we have so far. I think that's a good way to think about it. See how that feels to both you guys. Listeners, let me know what you think. If you've had some experience in a partnership, good or bad, sidehustleschool.com.
We've got notes pages for every single episode. We've got some free resources there, an email newsletter I send out every week. And of course, everything is completely free. Thank you for being out there. Much more is coming up.
My name's Chris Guillebeau. This is Side Hustle School. [Music]
From the Onward Project.
