Forums: Discussions for entrepreneurs and small business.

 

At the moment I am considering starting a new business with another partner. The situation is as follows: I will bring in the developed product while my partner will contribute extensive business expertise in growing the company (good track-record as vice president of a small company in the respective field of business). The seed capital is put up by me, as my partner does not have sufficient cash right now. Moreover, he would start part-time and demand a minimum salary at the beginning. How would you handle the equity issue, what percentage would be fair (part-time vs full-time)? Would you make a partnership agreement with a profits-only clause as long as he does not inject cash or offer a low percentage of equity with an option to increase his share at a later stage when he contributes on a full-time basis? Thanks for your advice.

 

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My first reaction is that you aren't getting a partner but an employee. Certainly you want to encourage him to be committed and reward him for his contributions, but I would avoid presenting any significant equity on the front end. Consider relating the award of equity to performance /results over time.

 

When I work with clients on this question, I find it is helpful to look at four main areas which are:

1. Ownership
2. Control and the decision making process
3. Distribution of results (profits/losses)
4. Compensation

Hope this helps. If you want to discuss your specific situation further, feel free to drop me a PM or contact me directly.

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Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
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When starting a business you need to have a strong group of professionals you can call upon for advice such as this.  You need a lawyer, an accountant and a business advisor.  These pros will be able to answer the questions you need answering.

When it comes to partnerships, you must have an agreement in place outlining all the things that you think right now are not an issue. and those that you have identified already.  Are you incorporating?  Are you just a partnership?  Lots of questions before you can get the answers.  Put the team together and use their expertise to help you.

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www.plan2profit.ca

Hi d_miller,

You sound like you have the upper hand and I would try to negotiate the partnership details as such.  Why not offer him one or the other.  Either he gets a salary w/ performance bonuses and no equity or equity but no salary.  Make sure you get everything in writing and think everything through for a very long time before entering into any business agreement.

Thanks for your insightful posts so far.

 

I would definitely want to have a long-term partner with me in the founding team that shares my commitment for business growth. I thought about the following solution:

 

- granting him a minimum salary during the first months of part-term contribution, a certain percentage of equity e.g. 10 % and percentage of operating profit in relation to his work contribution (+ making a partnership agreement for 5 years of commitment in the business, deducting some percent of equity for every year of exiting earlier)

- equity share is increased over 5 years to 50 % (compensating the fact that no cash injection was made by my partner)

- each partner is continuously paid a salary on the basis of his work contribution

 

Another issue that came to my mind is the legal structure my new business. It seems clear to me that I may be able to self-fund/bootstrap for 8 to max. 12 months and would later need venture capital. An LLC would only be sufficient for the early stage but is not suitable for getting VCs on board, and would therefore need converting to a C-Corp.

What's your opinion on my thoughts? Thanks a lot.

 

D. Miller

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