Partnering to start a software business
/Partnerships are a common business structure for startups, with each partner bringing unique skills, resources, and expertise to the table. However, partnerships can also be challenging, especially when it comes to dividing shares and seeking investment without losing too much equity. In this post, we will explore some ideas about how partnerships in a new software company might work, how shares could be divided, and how founders can seek investment without giving away too much equity. Most of these comes from our years of experience working on software products for clients all over the world. Hope some of these ideas can help you set up and operate your own software enterprise.
Partnership
A partnership is a legal structure that allows two or more people to share the ownership and management of a business. In a startup, partnerships are often formed between co-founders who share a common vision and are committed to working together to achieve a common goal.
Partnerships can take different forms, including general partnerships, limited partnerships, and limited liability partnerships. Each of these types of partnerships has different implications in terms of liability, taxation, and management.
In a general partnership, each partner is jointly and severally liable for the debts and obligations of the business. This means that if the business is sued or cannot pay its debts, each partner is personally responsible for the full amount.
In a limited liability partnership, all partners have limited liability for the debts and obligations of the business. This means that if the business is sued or cannot pay its debts, each partner is only liable for the amount of money they have invested in the business. Such a partnership would have to be registered in the local business registration process, examples of such limited liability enterprises are LLC in the US or Limited companies in Bangladesh. Without a second thought, this is the way every software partnership should go - as it is a clean way of separating the personal from the enterprise. It is also well-regulated and provides a better way of operating the business in general.
Shares
Dividing shares in a new partnership can be challenging, especially if the partners have different levels of investment, skills, and experience. The key to dividing shares fairly is to consider each partner's contribution to the business and to agree on a formula that reflects this contribution.
One common approach to dividing shares in a software company is to use a vesting schedule. A vesting schedule is a schedule that determines when each partner's shares become fully available (vested) and can be sold or transferred. Typically, a vesting schedule will have a cliff period of one year, during which no shares are vested, followed by a four-year vesting period.
Another approach to dividing shares in a startup partnership is to use a formula based on each partner's contribution. For example, if one partner has invested $100,000 in the business and another partner has invested $50,000, the first partner might receive twice as many shares as the second partner. In this same method, the actual contribution could be “sweat” as in time and effort instead of money. Let’s say a partner says he won’t put in money but will actually spend time to write the code of the software - the value of the time spent needs to be converted to a dollar value and then that value can be used to determine the shares. For example, if partner A is going to spend 50 hours writing the code, and each of his hours at fair market rate is $100, his contribution is $5000. In that company, if the other partner B contributes $10,000 in cash then the shares could be distributed based on two-thirds for B and one-third for A.
Additional funding
Seeking investment is an essential part of growing a software company, but it can also be a challenge for founders who want to maintain control over their business and avoid giving away too much equity. Here are several strategies that we like that can get much-needed funds without losing any or too much equity:
Bootstrapping: Bootstrapping is a strategy in which founders use their own resources to fund the startup, rather than seeking outside investment. This can include using personal savings, credit cards, or loans from friends and family.
Crowdfunding: Crowdfunding is a strategy in which founders raise funds from a large number of people, usually through a platform such as Kickstarter or Indiegogo. Crowdfunding can be an effective way to raise funds without giving away equity, although it typically works best for consumer products or services with a broad appeal.
Strategic Partnerships: Strategic partnerships are partnerships with other businesses or organizations that can provide resources, expertise, or funding to the startup. Strategic partnerships can be an effective way to raise funds and build relationships without giving away equity.
Hope this short post helps you with some ideas about partnering for software business. Software startups are amazing and exciting journeys - but doing them right by following some basic tried and test formulas makes life so much easier!
