How to Word a Profit Sharing Agreement | Hacker News Reader

How to Word a Profit Sharing Agreement

20 pointsneospice12 comments

Hello,

I am a founder of a startup along with two other non-technical founders. I handle all technical/software/deployment etc.

Our corp. is about to release a product which has promise to be quite profitable. My personal goals are:

1. Share equity in the product evenly with my cofounders (does this follow from us having equal shares in the corp. that owns the product?)

2. Sign a profit sharing agreement which will entitle me to a slightly higher share of the profits due to the vast amount of technical labour involved in launching the product which I'll face alone. (The other founders are receptive to this)

3. Word or stage the profit sharing agreement in a way that it cannot be modified by my other two co-founders.

Is this possible? Couldn't they simply use their collective majority to change the nature of the profit sharing agreement whenever they see fit? Or can I introduce a clause which covers my ass?

Thanks!

EDIT: If anyone can direct me to some literature on this subject that you think would be beneficial that would be greatly appreciated. Also I forgot to mention, we're based in Canada (in case that makes any difference).

1.0 All this should have been spelled out in the articles of incorporation.

2.0 If your goal is a greater benefit than the other founders, then:

2.1 The system is based on a finite pie model.

2.2 The process is inherently adversarial.

2.3 The goal is very short term.

3.0 If the concern is over distributing profits to founders rather than reinvesting net revenue into growing the value of the founders' equity then the enterprise is not a startup in the "Silicon Valley Sense".

3.1 It's more of a Lifestyle Business

3.1.1 There is nothing wrong with that.

3.2 Startups in the Silicon Valley sense are organized around creating value for founders via increases in the value of the company rather than increasing the value of their take home pay. The quintessential example is Amazon which "loses" money but becomes more valuable because a large proportion of its expenses go toward growing future revenue streams rather than toward recurring operational expenses to maintain the current revenue stream.

4.0 Your goals are consistent with everyone "lawyering up".

4.1 That's probably not a healthy company culture.

Good luck.

Are they really cofounders if you are trying to structure it this way or are they just valuable employees? If you don't trust them now it will only get worse later when real money is on the line.

That said, there are ways to structure it through stock classes like restricting the voting of their shares etc. Probably best to consult an attorney that is familiar with corporate structure and setup though.

Also you can word the profit sharing agreement and even the AOI so that any changes to the profit share require all shareholders to agree not a simple majority. This protects you all from two people icing out the third.

Legal questions should be asked of a lawyer, not HN. Pay for one yourself, rather than use the corporate counsel. The concerns about culture below are separately worth considering.

I agree with your advice, yet the part about not using the corporate council is a consequence of the big problem...the OP's goals are inherently adversarial with the other individuals rather than about promoting their collective interest as manifested in the company.

You're doing it wrong (unless your are not a tech startup but a partnership such as a lawfirm).

The money coming in belongs to the company, not to any individual, therefore you cannot share it the way you describe. There are two main mechanisms that you can use to share profits among individuals:

1) stock in the company: as shareholders and co-founders, you must have split the equity somehow (check http://foundrs.com for a calculator to figure that out).

2) the company can offer commissions to employees, as part of their compensation

Something in your description doesn't make sense: either you are the sole owner of the corporation, and those two other people don't own any shares. You are wondering how to bring them on-board. Or they are already shareholders, and you already had the discussion about how to split the equity.

An LLC (at least in many US jurisdictions) can be structured with orthogonal profit distribution and control structures.

Yep. So can corporations (at least in DE). Check out Delaware Gen. Corporate Law § 122:

"Every corporation created under this chapter shall have power to:

...

(15) Pay pensions and establish and carry out pension, _profit sharing_, stock option, stock purchase, stock bonus, retirement, benefit, incentive and compensation plans, trusts and provisions for any or all of its directors, officers and employees, and for any or all of the directors, officers and employees of its subsidiaries

...

http://delcode.delaware.gov/title8/c001/sc02/index.shtml

Assuming you really really really trust your partners, and that you completely see eye-to-eye on how future business matters will be handled and how cost structures will go as the business ramps up, use an LLC with everyone listed as a managing member. And meet regularly to make sure reality and expectations are aligned, and keep the books up to date.

This will probably still go horribly for you if you are successful. Instead what you would be better off doing, if you are launching the product alone, would be for you to have controlling interest in the entity, be the only managing member, and treat your partners fairly but ultimately be in control. This might result in a happier situation for everyone (yes including your partners).

Profit sharing is vulnerable to hollywood accounting, if you're serious go for the equity option (with proper vesting, also for yourself) dividends are all you need, otherwise expect a lot of bickering in the near future (and quite probably a falling out later on).

If you don't want these people as co-founders then of course that's another problem entirely.

1. The answer is yes. I personally think there's no such thing as 'equity in a product'.

2. You working harder than the other founders should be a salary negotiation.

3. If the company makes a profit, it should pay it out to the shareholders relative to their shares.

Can't you just pay yourself a slightly higher salary, and increase everyone's salary as the company brings in more revenue?

it seems all of it would change over time. Seems like alot of the effort going forward would be theirs. selling etc. maybe you set up a vesting schedule based on who accomplishes what. Initial customers etc.

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