How can the technical co-founder be bought out of a partnership (LLC)?

[gregoll]

Hi,

How can the technical co-founder who built the entire software of a software company be bought out of a partnership (LLC)?

I am the technical co-founder and I have been building the product from scratch for about one year. After many issues, e.g., one partner not being available for months when it was time to take customers in, I decided to stop and turn the page. The remaining partners do not want to dissolve the partnership with everybody getting back his own contribution. They can therefore buy me out. I am not against the idea of being bought out but the only proposition I received is to start paying my contribution after the company starts making money which I do not accept. Our agreement says that I shall be paid fifty percent (50%) in cash and the rest over the next 60 consecutive months with interest.

1) What if the remaining partners cannot buy me out because they cannot pay?

The question of the purchase price arises as well.
The remaining non-technical co-founders are saying that if an appraiser were to come, the price of buying me out will be extremely low since there has been no revenue.
I do not think a lack of revenue is a reason to underestimate the value of the development of a fully functional software.
Quotes from web agencies in 2012 the two non-technical co-founders received before I joined them were: $450k for the minimum and $650k for everything and 14 months for development.
When I use the COCOMO method (COnstructive COst MOdel) which is an algorithmic software cost estimation model, I find a cost estimation of about $1 million.

2) Will an appraiser take into account the real value of development of the software?
I want to understand whether an appraiser could just say that my ex-partners can buy me out for a few dollars.

Thanks
Greg

 

[justalayman]

I do not think a lack of revenue is a reason to underestimate the value of the development of a fully functional software.

but unless there is revenue, there is no proof the fully functional software actually has any value. Without revenue, it is nothing more than speculation.

2) Will an appraiser take into account the real value of development of the software?

real value? If you can't sell it, it has no real value. Do you have purchases lined up for your product or is it being marketed only after development is complete? At least an estimation of revenue derived is going to have to be calculated to come up with some reason to include the software itself in any valuation. Otherwise all the company is worth is what it's assets total.

When I use the COCOMO method (COnstructive COst MOdel) which is an algorithmic software cost estimation model, I find a cost estimation of about $1 million.

cost of the software is irrelevant unless you are intending on purchasing software. Your partners are considering buying your interest in the company. Cost of the software is simply going to give them a basis to determine what your work to date is worth. It does not give rise to a means to estimate the value of the company. Many companies have discovered that their product was worthless regardless of how much they spent on development of it.

1) What if the remaining partners cannot buy me out because they cannot pay?

do not divest yourself of your ownership interest completely until you are fully paid. You could also try to enter an agreement where you retained your full ownership interest until paid in full.

If you divest yourself of your ownership interest prior to being paid, you are risking not getting paid at all.

 

[gregoll]

Thanks for your response.

It is a SaaS company so the software is not meant to be sold as-is but it is a subscription service where people register and pay a subscription.
If there is no software, there is no company. Period.
I do not understand how the software could not even been included in the value of the company for a SaaS company.
If we say the software is company property then it means that it is an asset of the company correct? So how could not it be taken into account to estimate the valuation of the company?

If the company had to pay an agency to develop the software, there is definitely some cash to take out of the company to acquire the software.
If a partner brings the software, why would it have no value then?
Would my work and contribution be considered free?

Thanks

 

[justalayman]

It can be included but you are not considering it as a corporate asset but attempting to utilize the calculated cost to create it. There is a world of difference there. You can build a house that costs $27 MM and it be worth nothing if nobody is willing to buy it. Same thing with software.

The value of the software (for your purposes) is not an individually calculable value but it is what it adds to the company that gives it value.

It is a SaaS company so the software is not meant to be sold as-is but it is a subscription service where people register and pay a subscription.
If there is no software, there is no company. Period.

the company may not be worth anything then. You are the one with access to market projections and such, not me. That is what gives your company any sort of value. The software itself may have individual value, to somebody, but since it is the company, you would have to find somebody that wants your company essentially. If nobody wants to operate a company such as you are involved in, the company has no value.