How to Split Early Profits in a Bootstrapped Software Startup

On day one you should decide on the minimum amount it'd take for you both to be ramen profitable. And that amount should be considered as an expense. Then out of the remaining profit, you should decide what % will go back into the company, and what % will be given out as a bonus.

So if for example you decide on $1,500 and 10% - on a $10,000 profit month, $3,000 will go to salaries, $700 will be split among founders as a bonus, and $6,300 will be spent on buying additional ads.

And if you for example have a 3x ad return. Meaning your ads make you $3 for every dollar you spend.

1st month you'll make an additional $18,900 that you wouldn't have had otherwise. Out of that $1,890 will go as bonus, and $17,010 will be spent on ads for next month.

If that trend continues(lets say your product is only limited by exposure), 2nd month that $17,010 will turn into $51,030, out of which $5,103 will go as bonus and you'll have $45,927 to spend on ads for next month.

And on the 3rd month, that will balloon up to $137,781, out of which you can get $13,778 as a bonus and a whopping $124K to reinvest.

So in 3 short months, you'll make an additional $14,471 for yourself and an additional $124K for your company, that you wouldn't have had otherwise.

Early on every penny counts. If you withdraw an extra penny on day one instead of buying ads that would net you 3x return, you are losing a ton of money

Month 0: $.01

Month 1: $.03

Month 2: $.09

Month 3: $.27

Month 4: $.81

Month 5: $2.43

Month 6: $7.29

Month 7: $21.87

Month 8: $65.61

Month 9: $196.83

Month 10: $590.49

Month 11: $1771.47

Month 12: $5314.41

You're also right that if you're reasonably comfortable with planning on a 200%+ return on an ad, your founders will likely agree to invest in the ad rather than take the split. But it's best to have (and propose) that clear use for the money opposed to making people sacrifice out of principle.

The later point of my post was that founders should be able to agree to their "buffer" and shared expenses. What you don't want to do is reserve money based on the philosophy the company COULD use it better, but not actually execute on that. You can quickly demoralize quality people by saving up a war chest for ads, while people are trying to do their best work on "ramen" draws after the release (and reality sets in).

When intelligent people know they get a percentage of the profit at weekly checkpoints, they can do the math on how their time is being spent in the present (opposed to thinking it will rain money at the finish line; which maybe it will, but it's rarely that easy).

Very early on, you are right; it doesn't make sense to pay founders before you pay the bills and invest in your product/marketing. But when you maintain the bootstrap mentality beyond the very early days, and when you add people who aren't programmer types, you need to think about incentives rather than sacrifices. The fuel that keeps people going very early on is thinking about launch/release, but realistically very few things achieve overnight success. Organic growth can take a while, and my point was by giving people a fair, scalable taste of the profits (at a weekly interval, out of real profits) you can keep morale and creativity up.

-Jeff