Discussion: How Not to Divide Ownership

(This discussion was created as an option for use with Session 3: Business Basics.)

Here’s a case for discussion. You be the judge.

Mary comes up with a great idea for an iPhone application. She works on it for three months in her spare time. She creates sketches and designs, trying to figure out how it would work. She looks at other iPhone apps doing related things.

About three months into it, her interest in the project has waned a bit, but she’s still thinking about it. She’s spent 10 to 20 hours on it so far. Her best friend suggests she talk to Ralph about it. She doesn’t know Ralph, but her friend does. They meet for coffee. Ralph is a programmer. He works for a company in town doing Web programming. He’s also an iPhone user and has been thinking about taking a course on programming the iPhone. Ralph is excited, and his excitement rekindles Mary’s excitement. They agree to be partners in a new business based on this iPhone application.

Four months go by. Ralph takes Mary’s idea and starts developing it. It turns out, as he gets into the code, that what Mary imagined isn’t quite possible on an iPhone. Ralph revises the idea radically, makes it practical, and develops a prototype. Mary meets with him three times, they talk, she accepts his changes begrudgingly. At this point Mary’s total hours have gone to 25, but Ralph has worked almost 120 hours on the programming.

At Ralph’s suggestion, he and Mary take the prototype to Terry, who both of them know, but neither of them know well. Terry has been through a failed startup, has a business education, and is looking for a startup to do again, this time the way it should be done. Terry’s skill is mostly marketing, but he knows how to develop a plan and look for funding options. Terry does a business plan and networks with local business development groups, to find investors. They win an opportunity to present to an angel investment group.

Another three months have gone by. Mary has now put in approximately 40 hours, Ralph 250 hours, and Terry 120 hours.

The three of them meet to plan their approach with the investors. Ralph wants to quit his job and work full-time on the new thing, but needs to get paid. Mary doesn’t want to quit her job but wants to stay involved, she’s not quite sure how. Terry wants to lead the new company as soon as he can get financing.

The business plan indicates it’s going to take $250,000 to develop the business for the first year, after which it will need another $750,000 to have enough cash to run on its own.

During this meeting, Mary and Ralph and Terry come to a difficult realization: they’ve never talked about who should own how much of this company, or how much they will offer to investors in exchange for $250K.

Class exercise: solve this problem. Suggestions: depends on style, but …

  • you might choose volunteers to represent each of the three characters in the story, and let them do a mock meeting in front of the class;
  • or, another alternative, divide the class into three groups, keep the groups separate, and then ask them to report to the class on what they came up with.