Partners Sharing

Discussion in 'Growing and Managing a Business' started by smoovo, Aug 25, 2011.

  1. smoovo

    smoovo
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    Hi Everyone, this is my first post.

    Me and my 2 friends would like to start a new business, not online though. We have a product to develop and sell.
    I am the engineer and the developer.

    One of them has a lot of experience with our field of development, so he is in charge of the future installations and development helper (with new ideas).

    The third will be in charged on the management (paper work) and promotions.

    At the beginning i thought that we should share equally, since they asked me to join them. But, I'm working on the project for 6 months now, almost alone (99% of it) and the only thing they have brought was the money for the parts (around $1,000) and the product. I have to mention that it's not a new invention, it's in the market already. They just asked me if it's possible to take it and develop better one.

    I have a thought that i should get more than 33.33%. I will always work the hardest as developer and tech support manager.
    Also, can i ask for salary (not a full one), from them to help me with my private expenses?

    What do you think about this? I need honest answers.
     
  2. James Greg

    James Greg
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    It depends on their interest in the business. Since it has not been fully launched and they are showing negligence in it. First of all you should all sit down and formulate a plan to dedicate your working hours for this business and stick to it and if you are working alone and they become sleeping partners I doubt they would give you any salary. You would have to carry on this burden alone. I think it would be better to finalize such things at the start to keep the friendship being damaged and business getting hurt.
     
  3. Fergal

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    smoovo I'd agree that if you have put a lot more into the business than either of your friends, then you are entitled to something in return for that. Perhaps you should get some financial reward for your efforts or you should get a greater share of the business. You also ask about getting a salary from the business and this is something that you could certainly ask the other partners for. Perhaps your reward for the work you have done so far could be that you receive a salary for sometime, while your friends don't receive one. For example, if you have put 1,000 hours into the business already and if you begin to receive a small salary now, your friends might agree not to take a salary until they have also each put 1,000 hours into the business.

    Good luck with your new business and welcome to Business Advice Forum. Please do post back with your thoughts and any updates you have.
     
  4. smoovo

    smoovo
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    Thank you both for your advice.

    We have sat together and i told them that i want a salary from now on until the project will be done. This salary won't be a full one, but it will include all of my expenses.
    We also decided to sign a contract that will include each partner of his responsibilities. This way we all sharing equally.

    Something that got into the conversation was that if someone will not continue with the business as a worker he won't get a salary or bonuses, only the sharing he has.
    Is this normal? What is really happened when a partner want's to stop working and starting being only a partner?

    Thank you again, you helping us a lot.
     
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  5. ArcSine

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    Smoovo, I'm glad to hear about the sit-down and the resulting agreement.

    The question of handling a "retiring" partner (one who won't be hitting the ol' 9-to-5 for the company any longer) isn't uncommon. The details are situation-specific, but the thinking generally runs across one of two broad paths...

    • The retiring partner is required to sell his/her equity interest back to the firm (or to the remaining active partners), at some valuation price.
    • Retiring partner is allowed to hold his %-age share of the profits, but perhaps with some restrictions.

    The first line of thought stems from a belief among the partners that the "excess" profits of the firm ("excess" meaning any residual profits remaining after deducting all the partners' regular salaries) are dependent on the partners' ongoing, active participation in managing and promoting the biz. Hence, once a partner steps away from the day-to-day, not only should his salary be discontinued (obvious), but so too should his share of the residual profits terminate. Again, this comes from the idea that whatever above-salaries residual profits are generated post-retirement are most likely due to the efforts of the active partners.

    The details of how the retiree's equity is to be priced (generally, at some estimation of the company's value at retirement) is set forth in the partnership agreement.

    The latter line of thought tends to be found in a situation wherein it's likely that the "excess" profits of the firm are primarily the result of the groundwork and firm development undertaken in the early years---an effort to which all partners contributed. In other words, it's a situation in which the partners created a "cash-generating machine" which now requires only "maintenance" work by the active partners to keep it running. As long as the active partners are being compensated (via salaries) for their 9-to-5 "maintenance" work, then the residual profits should be shared by all the partners who built (or invested in) the "machine". A similar analogy might be your ownership of Wells Fargo stock. You share in the profits, but without devoting any personal services to the company's activities in any way. Your get a cut of the profits because you invested capital in the company---and a founding partner invests time capital during the creation of a company.

    With this latter approach, it might be that you'd want the retiree's equity to convert to a non-voting form; i.e., he still gets a piece of the pie, but no more say-so in the day-to-day management.

    So you might evaluate your question by considering which of the two scenarios above best describes your particular situation.

    Side note: While you're drafting the partnership agreement to incorporate whatever provisions you guys agree to, be sure to consider sale-restriction clauses (aka "first refusal rights", "buyout options", ....). These generally prohibit a partner from selling his/her equity to another party without first obtaining permission from the other partners, and/or first offering the equity to the remaining partners. You don't want to find yourself unexpectedly locked in a partnership with some party who's more of a drag than an asset.

    Best of luck with it!
     
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  6. smoovo

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    Thank you very much for your answer. It is well answered and very helpful.
    I will run a new meeting with them and we'll discuss the above situations.

    Basically, it's more like a product that has to be developed all the time because of the new technology that appears all the time.
    So, your first line of thought is more like our situation.

    Thank you again ;).
     
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  7. ArcSine

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    Happy to chip in my two cents, amigo. Now, here's to the success of your new biz!
     

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