Question about % in partnership

[Ron B]

Hi, I am currently entering a 3 way partnership and the initial investment is similar to Mitch ( see this thread (http://www.small-business-forum.net/starting-your-business/5284-percentage-split-between-partnership.html) ). I would be investing
time, my skills, and the necessary equipment. In fact, my equipment would allow us to produce our product. One other partner is going to also invest time, skill, and no money. The third would be investing a little time and focus more on our business model and set up. We have lightly talked about a three way split. What would be a fair split seeing that I am bringing in all of my equipment and investing in additional? Please note that out initial two clients are BIG and I brought them to the table. I'm just looking for something fair. Any input helps.

[vangogh]

Welcome to the forum Ron. Hope you don't mind that I moved your post out of the other thread and started a new one with it here.

This is one of those questions that gets asked a lot and I think the answer always comes down to the individuals involved, what they feel is fair, and how well they can negotiate and still maintain good relationships with their partners. I think that unless all partners feel like the deal was fair to them, there will likely be problems down the road.

One thing I usually suggest is for all partners to think about and write down what they'll be contributing to the business and what they'll be responsible for. Then all partners get together and start talking through the lists. It should help everyone see who's contributing how much to the business to help you determine what's fair for each person to get from it.

Based on your description it sounds like you'll be contributing a little more than partner #2 who isn't putting any capital into the business, not to mention the clients your bring on. Is partner #3 putting in some capital? You mention #3 focusing more on the business side of things, but I wasn't sure if capital is involved or if this partner will be putting in a similar amount of time into the business once it's formed, even if that time is spent on the business side.

I realize I don't have all the details, but your description makes is sound like your other partners will be contributing a somewhat equal amount while you'll be contributing more than each. Seems reasonable to think you deserve a larger share of the business. The only mention of capital is yours in the form of the equipment. Unless you set up a contract that gives it back to you 100% if things don't work out you're the only one putting up risk. That usually deserves something extra. Bringing the clients to the table also has to count for me.

I don't know what the right % is, but a split where you get 40% and your partners each get 30% came to mind. Your partners aren't giving up much (3 1/3% each). You do get more because of your greater contribution, but don't have a controlling interest. The business will still need 2 partners to agree on decisions where you differ. Again I don't know if that's the right split, but the idea is to give you something more, without giving you too much so it's still a partnership and not 2 people essentially working for you. Maybe 36%, 32%, 32% is enough extra for you. The exact numbers are likely in the details.

[huggytree]

if it was ME....id do it all MYSELF....if you need the other guys experience then hire them as employees

it doesnt sound like you need them....lots of people go into business and get partners because they are afraid to go on their own....most partnerships fail....since it doesnt sound like you need them i dont see why you'd want to start your business in a position that will most likely fail

hire them as employees and give them some bonus or sweetener to make them agree (if you really need them at all)

[JohnB]

From your description, I think you can come up with an arrangement where you get a bigger piece of the pie than the other 2. I would have some open discussions with the other people, and see what you come up with. You want it to be fair for everyone including you, but you also don't want anyone to feel that they're getting the short end, right at the beginning.

But another issue here (although you didn't ask about it) is that you should be very careful if your legal entity will be partnership. I suggest having at least a consultation with a small-business attorney to get some basic advice. With a partnership, each of you could be legally liable for something that another partner does/doesn't do. Unfortunately, people sometimes don't realize this until it's too late, and something happens that they couldn't have anticipated. This is a strong argument for something like LLC which gives each of you personal protection of a corporate shell. And in that case, you can decide on the ownership of the LLC, which for all I know, could be what you're talking about here.

Good Luck!

[vangogh]

Good point about forming an LLC John. And welcome to the forum.


You want it to be fair for everyone including you, but you also don't want anyone to feel that they're getting the short end, right at the beginning.

To me this is key when you're working out an agreement with people you'll be working with and relying on. I know a typical negotiation you think how you can get the best deal for yourself, but when it's something like a partnership, the best deal is making sure everyone is happy with the agreement and motivated to make the business the best it can be. You might be able to squeeze a few extra % out of your partners, but if that then leads them to not performing as well as they can you lose out in the long run.

However in this case, given what we know, I think Ron would be justified in getting a larger share of the business since it seems he's contributing more to it. The trick is finding the balance where he gets a little more, but the others get enough to satisfy them.