Minority Partner


5

I've decided to take on a minority partner for my startup. This individual will have a 25% stake in the business and I will retain 75% as the founder. My partner will not be putting up any money, but will be heading up software development--coding and managing. I have a couple of questions related to this arrangement which I'm hopeful that the folks on this site can help me with.

  1. My partner will be giving of his own time and skills, and will get a 25% stake in the biz for that contribution. What about expenses? Say we hire a developer consultant for a project and the total comes to $2K. Should my partner pay for part of that cost (25%?), or should I incur the cost as the majority owner since it's understood that his contribution is worth the 25% stake?
  2. How about profits? Should I be able to recoup my original investment in launching the business before we begin to split the profits 75-25 (assuming they even exist)?

Thanks!

Jon

Partner Equity

asked Jan 9 '10 at 02:58
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Kemmatech
33 points

2 Answers


6

Any decision you make on these choices is acceptable and normal. Here's some considerations:

  1. If you want your partner to put up money, then just establish that up-front. Otherwise I feel it's too complicated to track all that and it could get messy. For example, what if you want to spend $2k/mo but he doesn't want to kick in money for it. Do you "win?" But what if he doesn't have the cash? Just a bad situation.
  2. You can go either way on the profits. Since you'll have 75% share, you could still do straight profit-sharing and get paid back almost as quickly as if you kept 100% for yourself, but you're also rewarding your partner for working for free. Really this is a question that relates to the amount you want to share. For example, 25% but profit-sharing only once you're paid back (a point in time dependant not just on revenue but time to get revenue since you'll continue to put in money until you're cash-flow positive) might be renegotiated to a 20% share but profit-sharing is immediate. Either one sounds reasonable to me.
Personal Loan Another way to deal with #2 is for the money you give the company to actually be a personal loan to the company. That way "paying yourself back" is replaying a loan (i.e. a balance sheet transation not a P&L transaction), and cash-basis profits simply won't happen if you don't want because you can use extra cash to pay down that personal loan.

This is advantageous in your case for several reasons:

  • Easy accounting for "how much money you've put in" versus amount taken back.
  • You can set up simple profit-sharing (easy accounting, agreement) while still implementing "not until I get paid back" as in #2.
  • You can play it by ear how much you want to share. For example, maybe it's 6 months in and you haven't been paid back completely, but a big order comes in and you want to reward you partner a bit, so you elect to do a distribution and share with him. This flexibility sounds better than "all or nothing" as you propose.
  • If there's a corporate structure change (raise money, sell company, get another loan, ...) already having a loan in place makes the rest much simpler.
answered Jan 9 '10 at 03:46
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Jason
16,231 points
  • +1 for the Personal Loan. That's a great way to put capital in that is separate from ownership if that works for the parties involved. – Jarie Bolander 10 years ago

4

  1. Business expenses should be reimbursed by the company. You can write that off as a company expense. As for contributing capital, that depends on how you have formed the company and how much access to capital you have. If you have the capital, then you paying might make the most sense. Since it's a company expense, you can loan the company money and get reimbursed.
  2. Profit distributions are all about how the company is organized. If it's an LLC, then you share in the profit and loss as a % owner. Of course, you can set up any capital distributions as loans or have an agreement with your co-founder in regards to repaying investment capital first.

In the end, it's all about how you and the co-founder want to split things up. In general, if someone owns 25% of the business, then they should get 25% of the profit or loss unless there are other side agreements, like you paying for a developer.

answered Jan 9 '10 at 03:51
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Jarie Bolander
11,421 points
  • this is the right answer. There are 3 of you: you, him, and the company. All your questions are answered by using person #3: the company. Otherwise you are building a sandcastle. – Alain Raynaud 10 years ago

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