Advice on "touchy" partnership agreement between friends

Discussion in 'Growing and Managing a Business' started by avirex, Jan 6, 2012.

  1. avirex

    avirex
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    Hi there.

    I need some help coming up with an mutually acceptable partnership agreement with my partners. I am joining forces with 2 other individuals, who are brothers.
    My friend is from a marketing/distribution background, his brother is an entrepreneur and has a lot of capital, and I am from a technology background. I'd like to mention that we are on great terms, and can freely discuss our agreement but I want to make sure it is solid before we sign anything.

    We are starting a company that will sell a particular technology product and eventually additional service offerings. My friend already has a company with a deep distribution network which targets the exact demographic we want to sell our product to. My friend's brother likely won't play much of a role but he is bringing the most capital. All the planning and technology work (doing research and design, working with developers, working with graphic designers, designing website, talking to manufacturers, etc, etc) has been MY job. So far my partners haven't contributed much time/effort since they are not "technical" people, but my friend intends to get more involved once we progress further.

    I am hoping that my capital investment will be minimal or nothing, and I have expressed this to my partners. Let's say we need $250K total. I might put in $5K or so, but other people have told me don't bother putting in any cash since I have dedicated so much time to the project already (literally hundreds of hours). But my partners want me to put in some capital, at least to show that I am committed (as if my time isn't enough ;)).

    The agreement that we discussed basically looks like this:

    Our company (let's call it Acme) will be buying the product in bulk from overseas for around $80 (after shipping, packaging, etc). Then we will be selling the product at wholesale to a sole distributor which is actually my friend's company (let's call it Distro) for a set wholesale price of say $140. My friend's Distro company will handle the distribution and relationships with the stores, vendors, and resellers. He already has a staff and warehouse space to handle that. His Distro company will then sell it to the vendors and stores for something like $250. And these resellers will sell it at MSRP of around $300. All of these figures are just rough estimates, and are still up for negotiation.

    So essentially the way it works is that we split the profit that Acme makes 3 ways between myself, my friend and his brother (so $20 each per unit). Then my friend (and his brother) make the profit that Distro makes on the sale to the distributor ($110 per unit), but I don't see anything from that revenue. So they are getting paid twice.

    I convinced him to let me do the same for online sales. So similarly my company will purchase the product from Acme for $140 and sell it online for $300, which is all profit for me.

    Given the fact that I'm not investing much in the company do you think this is a fair deal or am I getting ripped off? I was thinking about Angel Investors and VC's and that they would typically invest a large sum of money and then take a portion of your company, but not 33% right??

    Also my partners mentioned they will split the profit of Acme 3 ways, but they won't split ownership (shares) of the company 3 ways since I'm not investing enough. So on paper my ownership would only be whatever amount of money I contributed, and they won't take into account the amount of time that went into research and development.

    Sorry for the long post, any thoughts or insight into this would be very helpful. Need some suggestions like "D
     
  2. James Greg

    James Greg
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    In practical business life money maters more than friendships so do not expect to receive friendship benefits too much. Since business runs on capital so your friends have the upper hand here because with out investment, many ideas get washed away. I don't see this partnership lasting much long as without ownership rights they can make any decision without consulting you. Once they get hold of the full cycle it is most probably that you might be left behind.

    Insist on having atleast some share in the ownership and have everything written down legally for your future rights. You would have to take the risk but a partnership like that is less likely to last very long.
     
  3. avirex

    avirex
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    Thanks for the reply.

    It's not so much the friendship I'm hoping to take advantage of here; we only became good friends after this project got under way so we are not old buddies or anything. I am trying to figure out if my time/work invested is a factor when discussing the split of ownership. I liken it to a start-up that takes some capital from an Angel or VC. They don't take majority of your company right? So in this case I would expect to have more than say 5-10% stake. Without my work there would be no company to speak of. They haven't done any work yet and once they do start marketing/selling it they are going to reap the benefits on my work as we sell via Acme but again as the Distro company which a I am not a part of at all.

    When it comes to profit sharing I'm fine with 33%. But the fact that their making money twice on a sale is making me uncomfortable.

    Any advice on some terms that would be agreeable to all parties?

    Thanks.
     
  4. Kay

    Kay
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    See, there's your problem. You yourself are confusing the value of your time investment vs. cold hard cash alone and that's clouding your thinking imho. You already said you'd dedicated hundreds of hours to this. Did you intend to do it all for free or next to nothing? Here's what I suggest.

    I would decide on an hourly rate for the type of work you did (if you've never charged for it, Google pay scales/rates and pick the closest match to it) and calculate out how much you've already put into the project, eg 300 hours @ $x.xx =? Show them exactly how much you have saved them in monetary terms with your contribution to date.

    Having just read it through once, my first impression is that yes I think you're getting the short end of the stick because that's not being taken into consideration enough to treat you as a full partner, but if you don't present them with that in a more solid context, they'll never see it. So break it down as much as you can to prove that - think of it as an invoice. It sounds to me like now they have had you lay the foundations of what they needed, they don't see your value to them quite so much in the same terms as they did.

    Even better idea, see a lawyer and get an opinion about your best options AND your legal obligations if they list you as a partner. You may find it's more trouble than it would be worth to have that status. Many will give you the first hour or consultation free.
     
  5. avirex

    avirex
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    Kay, thanks for your reply.

    I guess I was thinking of this as my "own" business and the amount of work/research I was putting in would benefit the success of this endeavor. However after all the work that I've put in, I feel it should definitely translate into more stake in the company. I will take your advise and try to put an "invoice" together to help them understand the real world cost.

    Regarding the partnership, I actually found that comment enlightening. It might actually be a good idea to distance myself from the actual partnership of the company for liability reasons. As long as I can still have a sufficient stake in the company, I'm not interested in having that partner status. Is there any real advantage to being a "partner" as opposed to just being a stakeholder?
     

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