Partnership agreement advice -- I have the idea & ops, he has the marketing investment and industry exp


1

I successfully pitched a player in an industry about a business idea that offers a novel approach to creating leads in his industry. He presently runs a company that I'll call a "provider of services" and most of the game is in marketing where he competes with other industry players for customers.

I have the business plan (and original idea), am the technical developer, and once launched will staff the operations full-time. The verbal agreement is that he has agreed to invest $XXk over three months ($XX/mo) for marketing while I invest the same amount over the same period of time in sweat equity, building he company, and staffing. Verbally we have agreed to be 50/50 partners.

We have something of a pre-existing relationship as I had done some limited consulting for him -- we like each other, see things similarly, share a vision for the start-up's potential, and work pretty well together. I respect his skills and he respects mine.

We've met a couple of times since the initial pitch to discuss the model from a "devil's advocate perspective" but I don't think that we've broached any area where he's changed or added anything that has made the idea "ours" -- it's still very much as I documented it months before I pitched him.

We're at the point where our respective lawyers are getting involved to create a partnership agreement (as they're calling it, a "term sheet") where we are outlining who does what, who makes what, ect, etc.

The core part of the model is that we're driving leads to our network of other "providers" (like his current company) BUT we'll be driving more of the leads to his company -- a clear interest to him and his investment in this company. He will remain a completely silent partner. The business model and ops are extremely light and agile, and while the total revenue pie isn't huge it's more than enough to be compelling to this first time start-upper, and presents a model that could be applied to myriad other industries.

At this point I am pretty overwhelmed with how to structure the partnership -- in part because I increasingly see his role as being that of an "Angel" and not really as an operational "partner".

Once launched, I will be completely and solely running the day-to-day of the company and while he may be offering industry mentoring, he will continue to run his existing company where he stands to make significantly more revenue from the business my model pushes to him (as well as a cut from his stake in "our" business) than I will from my stake alone (I am ok with this, his business is his business and not mine) -- but should I negotiate a small percentage of the new business I push to him, for example?

I am meeting with my lawyer tomorrow, but any guidance from you sages is much appreciated? Was I a fool for offering 50/50 partnership verbally (I simply don't have that marketing investment upfront)? Did I give away the store? Should I insist on being the "founder" as opposed to being a co-founder with him?

In terms of salary, I expect some subset of FMV as we move into profitability, but should he assume a salary if he's not "working" for the company day-to-day? Should I ask for a small salary from the beginning?

Or, seeing as he's got the start-up capital, should I count my blessings that I have a 50% stake right out of the gate? Can I in good faith present a 51/49 stake or even 60/40 partnership at this point and still maintain trust? It is expected that the company can cover the initial budget that he's investing for marketing by the end of the 90 days... so once his active investment is done and the company can bootstrap the marketing budget on its own is he then only entitled to a percentage of net profit (as well as an agreed upon repayment schedule for his initial investment and my unpaid labor investment)?

Many thanks for all the great questions and answers here!

Co-Founder Founder Partnerships

asked Jul 25 '11 at 05:09
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Springster
23 points

1 Answer


2

Here are some suggestions according to my understanding of your post:

  1. However way I look at it, you should not be proposing equal shares to this person. As you indicated: "I have the business plan (and original idea), am the technical developer, and once launched will staff the operations full-time". That right there my friend, is all any reasonable lawyer needs to counsel you that you deserve more than 50%. How much more is entirely based on your bargaining power, but if I were striking this deal, I would be doing 60-40% or 70-30% deal especially because the service idea is proprietary to you. The only exception is that he is funding the whole nine yards, in which case he will be entitled to as much as 49%.
  2. Both of you might have a good interpersonal relationship, but I doubt you have tested it to the extreme. Greed is a demon that can possess even the most subtle of people - I've got first hand experience with this one :).
  3. "but should I negotiate a small percentage of the new business I push to him?" ans: I would say this is one way to work the deal. More on this shortly...
  4. "should he assume a salary if he's not "working" for the company day-to-day?" ans: I see no reason for him to be on a salary if he is going to be a passive investor. If it were an established firm, he'll get paid only for his leads which could be argued as a standard 10% of profits you make from any business he brings to you. In that stead, he's just acting as an agent - you still do all the work!
  5. "Should I ask for a small salary from the beginning?" ans: This is entirely dependent on you. If you have no other source of income, then this business must certainly take care of your well being. Either way, all expenses you make while running this company must be billed to the company's account. It's always best to keep records of those for the books, but that's for another topic!

BTW: Please quantify the value of your time, it is extremely important. E.g. If you would have been paid 1000 USD a month doing this for another company and you decide to pay yourself 300 USD, then logically you are investing 700 USD each month as sweat equity.

Now, you mentioned he's just investing in marketing. Is the service idea already functional? Are you funding the development phase? If so, then you don't need his money for starters do you?

PONDER OVER THESE:

If he's going to play a significant role in the building of the product/service then he might have valid claims on the intellectual property.


If his business needs your product/service, why doesn't he pay you to build an industry version. You can then continue to agree to a partnership in which your role is to build and maintain the product/service for that specific industry and his role is to push it. In that case you can negotiate a 70-30 profit sharing deal with him. To make him comfortable you guys can lock yourselves into that agreement so that he depends on your company to deliver such solutions and you depend on his company to send to market - but only for his very own industry. Hope you get it since you said your idea "presents a model that could be applied to myriad other industries." Think about how Microsoft was able to sell its software to other PC manufacturers and did not get tied to IBM for life!


Create a relationship that allows you to form more partnerships with companies outside of his core area. This way, your business can scale more quickly and not have to depend on a single business for marketing. If yours is a truly revolutionary idea, you'll get companies begging to work with you in the near future - I think!


After reading your post several times, I believe you're a person who believes not only in ownership but also in good business relationships, which puts you in a good position to be a major player at what you're doing.
Play your cards in that direction. If he's open to your success, it should not be hard for him to agree to a change in the partnership structure.

I have so much more to ask you, but this should be adequate for now. Speak to your lawyer openly and let us know how it turns out. Don't rush into anything you're not sure about. Take your time and be a winner in your own way and by your own terms ;)

All the best.

answered Jul 25 '11 at 07:10
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Paul Esuon
46 points
  • Wow, Paul -- what a tremendous reply! Thanks for shredding some of the boundaries I had in my head about the value of what I'm bringing to the table. Yes, the service is fully functional and is ready for launch -- the cover comes off the site once the necessary marketing (PPC) initiative is launched. My potential partner sees my idea as the potential evolution/innovation in his industry and without a partnership agreement that I know preserves my piece of the pie, I don't feel completely comfortable. You make some great points -- thanks and I'll let you know how it goes with the lawyer! – Springster 8 years ago
  • You're most welcome, and will certainly look forward to that! – Paul Esuon 8 years ago

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