I'm running a LLC that is a spin off of another LLC. I was working for the original LLC for a year when the 2 partners decided to start the spin off LLC. I let the partners know I wanted to be involved and they decided to let me run the spin off LLC by myself, which I've been doing for the last 2 years.
We are now in equity talks for this spin off LLC and one of the partners is under the impression that I deserve NO equity because I never invested money into the LLC (the other partner seems more flexible, but only for a very small percentage). However, I've run the entire business since inception! We're talking about 12-14 hour days here (Sweat Equity). That includes all sales, customer communications, marketing, creative vision, business development, website development and design (online business), and managing the teams I hire to execute upon development tasks and marketing work (The partners do participate in self promotion to bring attention to the original LLC; which brings attention to the spin off LLC. So, there is valuable marketing being done by them that has an impact on the sales of the spin off business). The partners spend their time focusing on the original LLC and self promotion while letting me run the spin off LLC; however, now that the spin off business is becoming more lucrative the partners are starting to get more involved.
A couple of extra facts:
So, since I never invested capital, but ran the entire spin off LLC since inception for deliberately very little money, do I deserve partnership (of the spin off, not original LLC)? What amount of the spin off LLC do you believe I deserve (assuming the 2 partners are split 50/50)?
Thank you for your time on this.
Thanks to everyone willing to share their thoughts. This really helps. I understand completely that anything I write will be biased. I did my best to present a balanced depiction of the situation without going into too much detail. Here's some extra info based off the comments below to help define the situation better:
I was approached by one of the partners today. He said they were willing to give me equity, but they are struggling with giving me anything significant; that is, over 10%. Here's their reasoning:
Nevertheless, to properly object to their line of thinking I believe I'll need a strong argument about my loss of income, sweat equity, and the partners making money from my work (or at least limiting losses from my work).
Update After reading OPs updates, I think my initial assessment seems right, and moreover the situation seems broken beyond repair. The two partners are stuck on the losses of the past, and emotionally unwilling/unable to let go of their sunk costs.
The 'new' LLC that OP runs is making money, the 'old' LLC that the two partners run is loosing money, yet the two partners think they "deserve" the overwhelming majority of the pie. Ideas are cheap, execution is what matters. Even if the idea was germinated in the 'old' LLC that doesn't make them deserve of 90% of the venture.
OP is additionally not getting any regular salary. My take would be to go see a really good lawyer, and learn exactly how far those non-compete clauses extend. Then consider leaving the company, and set up shop on your own.
Mandatory disclaimer: The decision to go solo and leave is yours and yours alone, you must own it yourself. Don't act just because someone on a board tells you to; act if it feels right for you, and only if a clear-headed market analysis shows true potential.
/update It's really hard to come in and offer impartial advice in your situation, for better and worse you've been 'married' to those two other partners for years. It is hard to tell who is right and wrong now.
I've been barely scrapping by for the last 2 years, but working night and day to run this companyThis isn't entirely clear, but I understand it to mean that you're getting a below-market salary and putting an above-market work week.
I'm sorry to bring bad news here, but I don't think there is any chance of you getting equity now. As I understand, you have been working for 2 years already, and the company formation was 2 years ago. The time to negotiate equity is generally before the company is formed.
Now the 2 partners are used to giving you a bad deal; and they have undoubtedly rationalized a number of reasons why this is "fair" (by which I mean it is not fair, but the two partners are telling themselves that it is in order to maintain their positive self-image). To give you substantial equity now would require the two partners to internalize that they where wrong all along. Worse yet, they'd have to face that you are a better businessman than they are. That's a very tough sell.
To answer the question in your title: Yes, you can absolutely become an equal partner on sweat equity alone. Had I been negotiating with you when the company was first spun off, and had I been somewhat impressed by you, then I would have offered you 1/3 ownership (so that it's an equal partnership, 3 people * 1/3) with an earn-in period (vesting).
You could try to negotiate for equity now. But be wary of them offering you a tiny percentage (3-5%) just to appease you, and then continue to operate as if they're the only owners.
Maybe you should start out on your own; and take your good name and personal connections with you?
Jesper is correct that this needed to be negotiated up front. Obviously, that comment is more to help someone in the future. Your current reality is that since the past is done, the more important you are to the future of the LLC the more likely you are to be able to negotiate a serious ownership position (20%-33%).
If you have not already signed a non-compete then do not sign one without a serious equity position. Then decide how marketable your skills, relationships, etc. are and make the tough call if these are the kind of people you want to keep working for. Might be time to start something else.
I can understand your wanting to be compensated for what you have done, but I can't understand why you want to stay. These two jokers don't appreciate you (At least one doesn't seem to.). Their main business isn't profitable. You're going to be a part owner of a spin-off LLC with the two main owners (they'll never treat you as an equal) siphoning off most of the revenue. I question whether or not they'll ever invest any more money into the company. They'll resent you not putting in amy capital.
Determine what the business is worth. Decide what you're worth and turn down any offer that falls short. Since they are struggling, maybe you can work some of the other stock/vesting suggestions in stages over time.
Unfortunately, they're going to kill the goose laying the golden eggs.
I would probably give you around 30% without further negotiation, though on a vesting / option plan that keeps you in for a lot longer and requires you to get substantial revenue growth to actually get the 30% (so that at the end I only spend money you still earn).
Unless the truth is different as you put it (and the truth is always a three bladed knife, as the klingons say) you deserve it.
Some of this depends on the risk you had initially. If you were getting fair market salary the whole time you were working on this then perhaps it is fair to say you really have no skin in the game and that you need to either prove your value or to put in money. If you took a lower salary and went above and beyond normal business practices then there is a claim on your side, but, most employees at software companies work lots of extra hours for no equity. Try to be objective and try to see this from their perspective - that will help you in getting what you want/need/deserve.
You need to show the value that you bring and that you deserve the equity stake.
Good luck! Let us know how it goes.
Based on the new content
I would definitely hash this out with them. It appears you deserve a significant stake. Ask them what it would take. If you don't get what you want be prepared to walk away.
10% is generous. Entering into a business with no equity nor a written contract does not entitle one to a "share" of a company. With this line of thinking, a person working at an entry level position could argue his "sweat & equity" made the company porfitable.