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How Not to Divide Ownership

September 25, 2021
By James Gussie

The process of dividing ownership is one that has been in place for centuries. It is a long and complicated process, but it can be done with the right legal team.

When dividing shares between three partners, it is important to make sure that each partner gets the same amount of shares. There are many ways this can be done.

Here’s a case for debate. You make the decision.

Parker comes up with a brilliant iPhone app concept. In his free time, he works on it for three months… creates drawings and concepts in the hopes of figuring out how to make it work… Looks at other iPhone apps that perform similar tasks.

After spending around 10 to 20 hours on it thus far, my excitement has faded about three months in. Leslie, a close friend says, should be spoken to about it. They get together for coffee. Leslie is a programmer who works for a local firm that specializes in web development. She is also an avid iPhone user who has been considering taking an online course on iPhone programming. Parker’s enthusiasm is rekindled by Leslie’s eagerness. They agree to work together in a new company based on this first iPhone app.

Four months have passed. Leslie takes Parker’s original concept and expands on it. As the real coding begins, it becomes clear that what Parker envisioned isn’t feasible on an iPhone. Leslie drastically changes the concept, makes it feasible, and creates a prototype. Parker and Leslie meet three times, speak, and Parker reluctantly accepts his adjustments. Parker’s total hours have dropped to 15 to 25, but Leslie has put in a lot of time on the programming, perhaps about 120 hours.

He and Parker, at Leslie’s suggestion, take the prototype to Terry. Terry is familiar to both of them, but none of them knows him well. Terry has experience with a failed company, as well as a business education, and is searching for a new venture to work on, this time the right way. Terry’s expertise is mostly in marketing, but he also knows how to create a strategy and get funding. Terry creates a business plan and seeks out angel investors via local business development organizations. They are selected to give a presentation to an angel investment group.

Three more months have passed. Parker has put in about 40 hours, Leslie 250 hours, and Terry 120 hours thus far.

The three of them get together to discuss their strategy for approaching angel investors. Leslie wants to leave her present job and work full-time on her new project, but she needs to be compensated. Parker doesn’t want to leave her present work, but she does want to remain engaged; she just doesn’t know how. Terry intends to take over as CEO of the new business as soon as it is able to get funding.

According to the business plan, it will cost $250,000 to grow the company for the first year, and then another $750,000 to become cash-flow self-sufficient.

Parker, Leslie, and Terry come to an uncomfortable conclusion during this meeting: they’ve never actually discussed who should own how much of the business, much less how much they’re prepared to sell to investors in return for $250,000.

So, what are your thoughts? This is a common scenario.

How do you think Parker, Leslie, and Terry should split the company’s 100 percent ownership now, before it goes to the angel investors? Who owns what and how much?
What are your thoughts on the leadership team here? When there is money to pay them, Leslie and Terry both want to work full-time on the company. What should their titles be? What is your annual salary?
For $250,000, how much of the business should these three give to the seed investor?

The how to divide shares in a company is a must-read for anyone who wants to learn how not to divide ownership.