Ask HN: Frustrated with my co-founder. Any advice?

[throwfrustrated]

Hello everyone,

I wanted to share the situation that I currently am with my co-founder and ask for some advice, and maybe even get it from people who've been in similar situations.

In the beginning, him and I were co-workers (both web developers) and really good friends. One day we decided to start some project together, and shortly after that he proposed we do something he'd been wanting to do for a long time. After quickly evaluating the feasibility of the idea and the current competition in the market, I agreed we should do that instead. I wasn't part of the target market for it, but he was, and knew plenty of people who were, too. After a few months of struggling to make decent progress on our free time, I decided I was gonna start working part time, and spending the other half of the day on the startup. I had a lower cost of living and I could do it, and I've always been more risk averse. He needed his full salary and couldn't do it, but appreciated my gesture. He asked me if I wanted more equity for it (the deal was 50/50), and I said 'no'. I know. BIG, rookie mistake. I thought we'd be making a living out of it in a few months, and didn't mind working a bit more and earning less for that long.

Well, after six months of me working part time (during which, his job was basically to give his opinion on look&feel, features, etc), we launched, and since then he also took responsability for system administration tasks, since he knows about that and I don't. Our startup has quite a lot of traffic, so its sysadmin necessities are a bit high, but definitely not even a part time job. I'd say now, two years after launch with +20M pageviews a month, it's about 5 hours a week on average. Some weeks a lot more, others nothing at all.

Two monhs after launch, I decided to quit my job and work full time on the startup. I had a side passive income business that gave me enough to live by, and to be honest I was only excited to work on this, and not my job anymore. It took us an extra year from this point to make any revenue for the business, so for another year I was working full time, while he did the occasional (but important, none the less) sysadmin tasks. Also, he'd convince his friends, who were target market, to become users. It's true, we wouldn't have been able to grow our user base without his connections (or it would have been a lot more difficult), but it's not like he had to convince each one by one or anything. Our users are already using competition services, so it's a matter of knowing them (check) and sending invitations with some custom message on his behalf. From there, it grew pretty much on its own. He also dealt with a friend of his who's a jackass, but a partner who brought an important number of users in the beginning.

So one year after we launch, we start getting revenue. In 2-3 months, it's the same that he's making at his day job (which is a good salary), and increasing every month. 3-4 months after that, it's already 30-50% more than he makes. And here we are, about 10 months after starting being profitable, and he's still raking in his average 5 hours a week on sysadmin stuff, still no word on when (if ever!) he's gonna quit his job to work full time on the startup. To be honest, I am very disappointed in his behavior and commitment, and I don't think he deserves the 50% share of the company he has. Not to mention the fact that he's just a reactive person (something breaks? we fix it. customers complain? we address it.), but nothing really "creative" comes out of him: let's do this, even if noone asks for it; let's try improving this metric; let's aim for higher revenue; etc. Long story short: for the last year and a half, I've been the one who's been running the business, while he's the sysadmin guy who for some reason, I have to check with first before doing anything major, and who also takes 50% of profits.

For a while I tried to just think of him as some early investor that was lucky to get into the deal, but it's just there in my head all the time. The unfairness of it all, and it's really affecting my ability to focus on the business. I'm constantly thinking of new ideas and projects (even spending time on some of them), even when I know there are just a shot, and I already have a great, profitable business in my hands. Only because I wouldn't have him in those businesses.

I'm sure most of you will be thinking of "well, just talk to him and ask for more equity!" The thing is, we've had difficult conversations before, and they didn't go well. For example, in the beginning we said (yes, nothing on paper or concrete, again, rookie mistake) that I'd get some compensation for my extra time spent (part time, then full time) on the startup once we were profitable. Once that time came, the conversation was more like "well, nobody told you to do it, you did it because you wanted to!", so the compensation he thought was fair was ridiculous to me (like a two month salary, for a year full time and half a year part time).

Also, I'm sure he'd be quite on defensive if I brought this up. "You're trying to take what's mine!". Keep in mind he's the one who's part of the target market, so he feels very emotionally attached to the business, a part of it, after so long. And on top of that, he's in quite a bad personal situation right now, and it's gonna last at least a few months, so even more of a reason to take it badly.

Any advice on what to do? Has anyone been here before?

P.S. I'm using a throwaway account because I don't want this whole drama to be traceable to my startup, sorry.

EDIT: I guess I should've answered as well "What would make me happy? What's the ideal outcome?". Well, talking to him and him accepting to lower his equity significantly would be the ideal outcome. 25/75 would be ideal, 40/60 would be OK as well. I guess what I'm afraid is having the conversation, not getting to any agreement but instead worsening the situation with him. We went to such a phase before, and it wasn't pretty (and I was totally unproductive).

[bdfh42]

OK - you recognise that it was an error not to change the equity split at the point when your level of commitment to the project abruptly changed and exceeded your partners.

In your current situation I assume you are now drawing a salary as a full time employee of the business. Any income split between you and your partner would be on the profits - so you should get your salary plus 50% of any profit after expenses (including your salary). Provided your salary remains at a commensurate level then your respective incomes should reflect the realities of your current situation. No harm in your partner receiving a small salary for his administrative tasks - just make sure it reflects the level of work and (perhaps) industry norms.

[throwfrustrated]

Well that "equity split" was when I decided to go part time, at that point, we effectively had done the same work (almost nothing).

And no, I don't get any salary as a full time employee, all profits are divided, so we effectively get the same amount of money every month.

[gyardley]

Your business is doing well enough that it should be set up properly - proper legal structure, proper accounting, etc.

When you do this, your accountant (at least in America) will happily tell you that to be 100% kosher, full-time employees should get paid full-time salaries at market rates, whether they're owners of the company or not. Both the IRS and individual states take a dim view of small-business owners dodging 15% or so in payroll taxes by paying themselves solely via corporate distributions.

You can and should also pay yourself out of corporate distributions, of course, but to be legal your salary should come off the top first, and only then should you be splitting profits 50-50 with your cofounder. If your cofounder also wants a market salary, well, he'll just have to come work on your business full-time with you.

[throwfrustrated]

As far as I (and our accountant) understand, the structure we have is not a problem at all from a legal point of view (We're not from the U.S.), so no worries there.

[bdfh42]

Amen, In the UK the "Revenue" take a pretty dim view of those who only pay themselves dividends.

Take a proper salary and see how that changes things.

[kellros]

Honesty is best policy.

Effectively there's a difference between investors and partners. Investors put in money and reap profits. Partnership has to do with sacrifice (time).

In all fairness I'd say it would be good if you take your current salary ( from startup ) + his current salary ( from startup + job ) and divide that by 2.

It is only fair if you both do equal amounts of work a week that both get the same benefit in a 50/50 partnership.

If that's not viable, propose the reallocation of shares - you could always visit a lawyer.

Alternatively, if you're running the business - take a vacation and see if he picks up the slack.

[throwfrustrated]

While I would prefer commitment and involvement, if he'd done as you say on his own (hey, I feel I should at least give you half of my salary), at least I would've thought he's not committed, but fair. At this point, I don't want or need half of his salary.

About taking a vacation, I feel he wouldn't step up (or he'd do a bad job), so it'd would be basically abandon the business to its own luck (or best case scenario, waste time in limbo). Not sure I want to do that unless it's a last resort option.

[ianpurton]

Have you considered using a mediator ?

There are people who come form a counselling background who are experienced in settling business disputes such as this. I would present it to your partner as business strategy consultation or something like that.

But basically, you both need to talk and come up with a solution that works for both of you.

[throwfrustrated]

This is a really good piece of advice, thank you. We actually have some common friends who are either web devs or entrepreneurs themselves, and I've always had this whole thing hidden from them. Might be a good time to bring it up and ask them to mediate.

[helen842000]

As defensive as he'll probably be you've got to have the conversation.

Make it about the future not about the past (we all know how tiring "I did this" - "no you didn't" conversations can get)

Sit down and say - look we're doing great aren't we! This is the point where we need to decide how we're moving forward. Options are he matches your work hours - you're both at full time, you both keep 50/50. He keeps his job and scales back to 25/75. OR you match his working hours (i.e very little) and you're then free to pursue whatever else you're interested in.

Make it clear though that you're really keen to work full time on the project and you want him to do his bit.

It seems he's on the greedy-train seeing how long he can last with a full time job and 50% of the lucrative project income. Talking about the past will probably just cause arguments. Make it like now is the time to make the right choice.

[chrissie1]

Am I right in saying that it was his ideas and his contacts that got it all going? Than it seems to me you got a good deal in the beginning. If not than 50/50 seems fair. What you should do is go for a higher salary as an employee of the business, that will of course mean less profit.

[throwfrustrated]

Well his idea in the way of "let's do this!", but he's had it for years. Don't we agree that ideas are a dime a dozen if not executed?

As of contacts, well they got in play after 6 months of part time work, and while they got the thing rolling, as of now maybe only 1-2% of our current customers are people he knows. Yes, it would have been a lot more difficult to get it rolling, but I'm not sure this "one time good deed" is enough to get 50% of it, while I've been working on it full time for years after that.

[bgill5]

I've experienced some aspects of this before and I know it can be difficult. The longer it goes on, the more set into the current deal you are and its very difficult to change.

One way it could be made easier is if there was an independent reference point. E.g. can you afford to hire an employee? (1) This employee could pick up some of the work and it would presumably have to be paid for 50/50 and (2) If you are still putting in many more hours than your co-founder then you can log those additional hours and you should at least get paid a similar amount that you are paying to the third employee.

[jannes]

Some options I can think of:

1. Stop working that much. Maybe he will notice. If he does, it would be a good way of starting the discussion.

2. Make him feel guilty. (Though this would be a bit mean)

3. Be open to him about how you feel and that you don't enjoy working anymore. Don't demand anything, just tell him how you feel.

If either of these approaches would work I can't say. You have to see for yourself if they fit your situation.

[throwfrustrated]

The first option I tried (not by choice), when I was for 1-2 months doing only the essentials to keep in running. This was like 8 months ago when we had another big dispute (told around the end of the main story), and he didn't say a word.

[jannes]

What was his justification to demand you to work more? He must have something, right?

[throwfrustrated]

Well he never demanded me to work more. I spent those 1-2 months barely working because we had serious issues. When we resolved them, and I decided to just think of him, as I said, as lucky early investor, I started working again. The thing is, I DO love the company and I think it can be very big.

[yogsototh]

What's wrong with a clear dispute?

You write down your point of view and ask what you really want. Start from here.

Hey, we are friends, but enough is enough. I feel the current situation is unfair. I work full time and I should get something like a salary but not you, because you are not full time.

If you cannot find a consensus, then, may be you should ask a lawer to know what is considered fair by law.

[throwfrustrated]

I guess my fear is that, confronted with the choice of: I get money, and you don't; or we rethink our equity; he'll say "You know what? I think I'm ready to be working full time on this!", which doesn't repare the past two years, and to be honest, at this point I'm not even sure I want him full time on this, given his total lack of commitment. "Deciding" to go full time when given an ultimatum, is not enough for me.

[yogsototh]

As other had said, you only way is honesty. The hard one.

If you have so much to get out of your chest, you should may ask the help of a mediator.

But in the end, there shouldn't be something you didn't tell him. Be clear about what you expected and how much you were disappointed. And also be clear about your point of view about him going full time.

If you can't find a mediator, the best way of telling him is by writing a list of facts. Try your best not to use judgment value. Just facts, then what you want and what you don't want.

If I understand correctly, your ideal situation would be for him to quit the startup for free. But let him explain his point of view. After a long discussion you might find a solution.

[throwfrustrated]

I'm starting to realize this may be the only way to go for me to feel good about the whole thing. Thanks.

[caw]

I think trying to agree on a salary is the best course of action, with or without mediation. Keep your 50/50 split since it seems that your friend is opposed to changing it. You will draw a salary commensurate with your experience and time put into the business. He will also draw a (very small) retainer or salary for his 5 hours a week. This will decrease the amount of profit the business makes, but you still split the profits 50/50.

[jerfelix]

Consider keeping the 50/50 equity split, but pay yourself a fair salary for your fulltime dedication to the business.

What's fair? Maybe your market value. Maybe his salary level in his other job. Maybe what it would cost to hire a replacement for you.

[throwfrustrated]

Even this way, it doesn't repair the last two years, where I've felt like I put it a lot more work, it would only make things fair from now on, which is only a small part of the problem.

[jerfelix]

Then ask for a cash bonus. Or a disprroportionate share of the next few month's sales.

Decide what you think is fair, and propose it. Being silently angry does no good. And you might just get what you ask for... or maybe better! Maybe your partner is oblivious, and this will provide the wake-up call your business needs!

[chrissie1]

What if the whole thing would have gone busted and you guys lost money, would you still change the equity to 25/75?

[throwfrustrated]

As a bootstrapped Internet company, we didn't invest any more money than to pay servers. And actually, a close person to me invested a certain amount of money (because I asked), and he spent most of it on things I didn't agree on (neither did I know of, since I didn't have access to the bank account at that moment). We gave it back to the investor once we made it back, but that's another experience that shows me this is not a guy I feel comfortable sharing a business with.

[somagrand]

IS there anything in writing?

[throwfrustrated]

Well our current equity is, but there's no vesting or anything about "what you have to do in order to earn that equity".