This is a common and interesting situation, so here are my thoughts.

1) If he wants to be bought out in cash & wants to stay on as an advisor (won't be doing product updates, coding tweaks, etc.), I'd look at sales trajectory of the app he worked on overtime. If it's trending down, it's okay to make an assumption that it will continue to do so, at some reasonable rate, an calculate the present value of projected future earnings / 2, assuming that you won't make any product changes. There is nothing wrong with keeping him on -on a rev share basis, but be sure you know what you are getting.

If he doesn't want a cash up-front buyout and just wants nothing to do with the app anymore, just keep his 50% share alive up until a max of the agreed upon future earnings of the app, as is.

However, if you are planning on keeping the app going, any agreement has to codify the terms of your relationship, contingent on accepting the buyout (consult an attorney). Who knows where things will go in the future and who else you will be bringing on-board.

If you are on good terms, coming up with a number shouldn't be a big deal. Especially, if he has a specific need for the money. If not, this might be the time to incorporate your venture, issue him some stock for contributions thus far and let him participate in whatever upside there may be.

Good luck,

thanks for the detailed reply! he does indeed want a cash payment for his side of the business.

quick question:

when projecting future earnings, what time period is fair to assume?

the business has been steadily chugging along, growing some months, shrinking some months. we both planned to invest more time into it, but have been busy. the idea is that if i own most of it, then i'll have more incentive to invest new features into it.

I've heard that, "you know a deal is fair when neither party is happy". Which is to day, I have no idea.

Maybe 1/2 average rev from latest sales trend period x 12 months. I commend you on trying to be fair, b/c most deals don't happen that way.

There are a number of things your need to consider, not least that without a contract if your thing hits big time he'll want his 5%, and it'll be worthless.

What I'm trying to say is that a notional 5% is actually worth nothing unless you have some form of company set-up.

Here's where it starts to get tricky, because the set-up costs of the company are something that both of you should carry equally even if he's leaving. At the end of that process you'll have a value for each share based on the actual worth of the company. I'm not sure what the rules are in the states (or wherever you are) but in the UK at least the company is worth the sum of it's assets, at the start of it.

He'll be selling you 45% of his 50%, but you'll find that the sum of the assets to be far lower than the 17K that you have now. You may also want to consider what type of shareholding he has and what are his options for selling the 5% to someone else. That's just the tip of the iceberg of possibilities.

What you might be able to do, is agree a smaller payment now with a larger payment should the company meet certain targets, and nothing if it doesn't. That might give your partner the feeling that he still can benefit, and it gives you the flexibility to take control.

Honestly speaking the legal and accountancy fees in setting this whole thing up may just eat into the whole budget.

EDIT: On reflection, you could just say "here's 10K (if you're feeling generous) for your 50%, I'll set up a company worth 100 dollars that owns everything and give you 5% for which you pay 5 dollars."

Let us know how it turns out!

You make an offer, he can either take it OR he can pay you that price and buy you out of the business. Sign an agreement to that effect before you make the offer.

Thus, you will offer enough that if he decides to buy you out, you'll be satisfied with the amount. This is the fair price. You cut the cake, he gets to choose which half to take.

this sounds like a fair approach - a shotgun clause right? i feel emotionally invested in the product since it was my idea, but he put a bunch of time into it and we both believe in it.

"i feel emotionally invested in the product since it was my idea, but he put a bunch of time into it"

Ideas often aren't worth as much as execution.

we've both contributed equal time to it, using our different skills. he's written more of the code, but the designs are mostly mine, and i've done all the research into advertising, CTR, managed our intern, and done the biz admin.

The buyout depends on the method in which you make your money. If you make money on advertising you have to make sure your users are as engaged as they have been since your launch (this often doesn't happen if it is a short game or you don't add features etc).

If you make money on app purchases then you need to be careful that you continue to have as many users buying it.

If it is in-app purchases then you need to make sure that features are promoting users to purchase.

Anyway, you probably know all that - the point is, you have to realistically forecast your revenue projections for the next few years. IF you think you can make the same amount then it is not a big deal to buy out for 2x his share of revenue (so $17K). If it looks like projections for next year will be $10,000 you need to seriously consider the offer. Good luck

One common option to valuate the company is to take its estimated 5 year revenue. In your case, assuming 20% YoY growth it works out to 141K (20K + 24K + 29K + 35K + 41K), 45% stake buyout -> 67K.

YMMV, etc.

Maybe he takes the $17k and keeps 5% and you get 95% of the future?

How about 50% of valuation - valuation of his 5% share?

Not sure the best way to get business valuation is an online form... but here's one: http://www.caycon.com/valuation.php

:)