Profitable business with Single owner - offering me Partnership & Equity - Advice?

Discussion in 'Growing and Managing a Business' started by taurmaps, Jan 3, 2013.

  1. taurmaps

    taurmaps
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    Hello! I am new to the community and seeking advice for proper structuring of my being added as a partner into an existing profitable business.

    The owner has an online business which brings in a high $xx,xxx in profits (nearing 6 figures) with minimal costs (hosting, etc). Owner is looking to start fresh with an LLC setup and a partnership agreement specifically for this venture.

    I will do the day to day business management, manage outsourcing, etc -- Owner will be there to provide guidance and direction as needed, but will keep main focus on other separate ventures.

    Initial offer was:

    ~$50k yearly salary
    20% potential equity stake
    4 years to vest (0% 1st year)
    No profit sharing

    My thoughts:

    I would also like to structure in some sort of profit sharing and goal setting for increased profit sharing that is fair to the partnership and provides me with incentive for increased performance.

    I'm not required to bring anything financially to the table other than hard work and dedication.

    Owner has asked me to come back with my own thoughts and my own idea for how to set it up - basically giving me an opportunity to negotiate the terms.

    Community thoughts?

    (Thank you.)
     
  2. Fergal

    Fergal
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    It sounds like a great opportunity taurmaps and I hope it works out very well for you. I agree with you on the profit sharing idea and I feel that it would also be beneficial to the owner as it would encourage and motivate you to perform better in the business.

    If I was in your shoes, I'd tell the business owner that I was very happy with the offer and that I would also like some form of profit sharing. Perhaps the owner would agree to give you a percentage of any increase in profits. E.g. if the business is currently making $100K in profit, the owner might agree to give you 10 - 20% of all profits earned over $100K.

    Also, welcome to Business Advice Forum, thanks for joining and posting your business questions.
     
  3. ArcSine

    ArcSine
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    Congrats on the opportunity, Taurmaps.

    How does the equity stake included in the offer differ from what you have in mind when you refer to "profit sharing"? Generally speaking, the equity interest gives you 20% of the profits in excess of your base salary.

    If you'd like to see your share of the pie increase over time (above the initial 20%) you could negotiate to have it ratchet northwards upon the attainment of certain specified benchmarks. For example, it could be a provision of the agreement that if you are able to increase the operation's net bottom line up to $X or by %Y, then your cut of the profits increases to (say) 25 or 30%.

    As long as the actual numbers are set such that your partner gets more income from 70% of the increased profit level than he was previously receiving from 80% of the pre-increase profits, he'd certainly be interested in granting such an incentive provision to you.
     
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  4. taurmaps

    taurmaps
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    thanks to you and Fergal for the responses re;

    I am new to partnership agreements and this type of negotiation in business structure, but from my understanding of it all a 20% (vested over time) Equity Stake does not provide any immediate profit sharing. All it offers me is the opportunity to (potentially) receive 20% of the Equity in the company if it were ever sold, invested in, etc.

    What I'm working on trying to determine now is the proper negotiation for Profit Sharing (assessed monthly, quarterly, etc?) that is separate from the Equity Stake.

    A proper negotiation - I feel - would have me switching from the base salary to pure profit sharing after some certain milestone is met. Again to provide incentive for continued upwards progression and performance.

    The profits will need to be structured in such a way that they are like: (This is my pulled from my arse assumption!)

    10% profit sharing to me
    50% profit returned back into the company
    40% profit shared with current single owner

    And as you said, if I'm able to increase the operation's net bottom line up to $X or by %Y, then my cut of the profits increases to (say) 25% or 30%. I believe my Equity position would always remain as is. From what I've read elsewhere - being offered a 20% vested Equity Stake is definitely on the higher side when I am not bringing anything financially to the table.

    Additional thoughts?

    THANKS! :)
     
  5. ArcSine

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    The preliminary proposal you've described is somewhat typical; offering an "incoming" partner-to-be a fixed compensation, along with a share of the pie, with the latter taking effect in stages with the passage of time (and attainment of specified benchmarks).

    The motivations are fairly common-sense: The fixed salary provides immediate compensation for the services you'll be rendering day-to-day, while the equity interest is the incentive to take the company's performance to higher levels---to the economic benefit of both you and your partner.

    It's important, though, to recognize that every business and every partnership arrangement is different from every other one, and hence the terms and provisions of your particular agreement must be crafted in light of the idiosyncrasies of your particular fact-set. Very generally, for a situation involving an established business and a new incoming partner, the "fixed salary now, share of the equity pie later" is typical. More so when the business is an established winner with a solid earnings history and the incoming guy is an unproven variable.

    On the other hand, of course, an incoming partner who is a proven rainmaker in past (similar) ventures can sometimes negotiate for a %-age of the profits starting from the first day; more so, naturally, when the biz is a little wobbly and is clearly in need of the rainmaker's special magic to save the day.

    All that to say that the details of how and when you begin sharing in the profits---and the extent thereof---will be a function of the particulars of your situation. There are no set-in-stone percentages or guidelines, nor should there be, as that would negate the tremendous value that exists in the negotiators' flexibility to craft an arrangement tailor-made to the situation.

    So while I can certainly agree with your principle that your relationship with the company should morph from salary to pie-sharing, I can't look at particular percentage numbers and say they're right or wrong for the situation. Couple of side notes I can offer up, though...

    • Re the attainment of future profit-based (or however based) targets, there's no reason for your equity stake to necessarily remain fixed at 20%, a thought to which you allude in your post. It might be that you guys have already decided on this thing you're calling "Equity Stake", and further, have already decided that it'll be a fixed 20% across time. But absent such an agreement, this animal called "equity stake" can behave in whatever manner the two of you see fit, including a provision for an increasing share of the equity.

    • Be sure to rent a sharp tax advisor in this deal. Tax laws can be a bit complex here and there, but those portions of the tax code dealing with cobbling together partnership agreements are the gold standard of complexity. But therein also lies opportunity, and a seasoned tax pro can make sure the deal is structured in way that optimizes the after-tax returns.
     
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  6. 2misi.com

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    I have good article for you to learn before start your own business.

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