Minority Partner Protection

[JMasterJ]

Hi! Quick question... as minority partner in a company, how do you prevent yourself from simply being "fired" or dissolved?

The reason? I dont like to work on commission (as they first proposed) in internet marketing because 90% of the work is done in the first 10% time of the company's services. So either I can charge 10x the rate for my work or I think a partnership is much more realistic to the rewards of the company. But then if they do make me say, a 10% partner with commissions only on net sales above current net sales (to be fair so I only earn what I am bringing in), how do I prevent them from getting rid of me next year when the company is flourishing and they think they dont need me anymore?

Thanks!
P.S. NO initial monetary investment from me, ONLY services/time/effort etc.....

[nealrm]

Never be a minority partner. In this case you would end up with 10% of the financial risk with zero say in how the company is ran. Instead, work out a commission rate that include commission on accounts you maintain.

[JMasterJ]

Never be a minority partner. In this case you would end up with 10% of the financial risk with zero say in how the company is ran. Instead, work out a commission rate that include commission on accounts you maintain.

Oh sorry, in this case I didnt mention (not a business expert here so didnt even know what factors were important!) I am putting ZERO capital in... ONLY services/time/effort etc.... does that change things?

[nealrm]

No, you since you would own 10%, if the company were to go under due you would be responsible for 10% of the debt.

[JMasterJ]

No, you since you would own 10%, if the company were to go under due you would be responsible for 10% of the debt.

Why is the company all of a sudden in debt? I dont think anyone goes into business worrying about when the company dissolves there is debt. You are saying there is no good businessman/entrepreneur who goes into a business being a minority partner? I doubt people just give away 50%of their startup to people only doing like maybe 25% of the work. I have no idea what you mean here.

[nealrm]

Starting a business has risks. All the planning, experience and knowledge in the world can't assure that your business will prosper. Sometimes plan bad luck steps in and the business fails. That is a fact of life for business.

When and if a business fails, the owner(s) are personally responsible for all outstanding debt. It is possible to shield the owners some by using LLC or corporations, but most loans and lines of credit will require a personal guarantee from the owners.

So would you be willing to accept the possibility that 25% of the business debts would fall back on you. That your home and personal assets could be seized and sold to pay off 25% of the debt, yet your compensation for that risk is less than 25% of the profits.

Even if there are no loans or lines of credit, the business owner will generally need to provide funding to start the business. Would you be willing to put up 25% of the costs of starting a business, yet receive less than 25% of the profits in return?

In short, you need to separate the investment portion of the business from the work side. Use the salaries to compensate for the differing amounts of work. The amount of work each owner puts in can easily change over time, it is easier to change salaries than to change an ownership agreement.

[JMasterJ]

Starting a business has risks. All the planning, experience and knowledge in the world can't assure that your business will prosper. Sometimes plan bad luck steps in and the business fails. That is a fact of life for business.

When and if a business fails, the owner(s) are personally responsible for all outstanding debt. It is possible to shield the owners some by using LLC or corporations, but most loans and lines of credit will require a personal guarantee from the owners.

So would you be willing to accept the possibility that 25% of the business debts would fall back on you. That your home and personal assets could be seized and sold to pay off 25% of the debt, yet your compensation for that risk is less than 25% of the profits.

Even if there are no loans or lines of credit, the business owner will generally need to provide funding to start the business. Would you be willing to put up 25% of the costs of starting a business, yet receive less than 25% of the profits in return?

In short, you need to separate the investment portion of the business from the work side. Use the salaries to compensate for the differing amounts of work. The amount of work each owner puts in can easily change over time, it is easier to change salaries than to change an ownership agreement.

Ok I understand what you are saying, but that seems like either a very cautious way or a very negative way to start anything. I think I can take care of what you are fearing by just telling a lawyer to put in a clause in the partnership agreement that I will never be responsible for any debt incurred by the company that was not my department's budget or something of the like. That way if they decide to borrow an additional $50k for a TV spot despite on their own, and we end up crashing the company, I will not be responsible for that amount, etc....

Most of this work is all such that it requires almost no significant capital investment. It is a web site, already live, and SEO/marketing to drive traffic and then convert to sales. There is no office, no overheard, no equipment to purchase, nothing.

However, you are saying I should still favor a contract type of job agreement, to just charge for my hours and get out of there? Honestly, that really isnt worth my time because in that case, he will not want to spend more than a few hundred dollars maybe. Then I will right off tell him that is not enough to even scratch the surface to increase sales. If I tell him how much it will really cost out of his pocket before he even sees a dollar more in sales, he will not reach into his pocketbook or borrow that much money to get that done. The only reason he is doing this is because of the business structure that is possible with low start up costs for everyone, with reward potential later. If he has to pay me what it will take to see more sales, I am pretty sure the site will just sit there and he will continue his full time job and pretty much forget about this one, unless by some miracle he seems traffic increase by pure luck.

I hope I am making sense... if I am missing something vital, feel free to tell me, but I think we have been on 2 separate pages here.

[Paul]

What you need is a non dilution clause. That is that you will never own less than 10% no matter what they do. They cannot dissolve you or dilute you out. If they ever sell out you will be entitled to your share. However, since you are not contributing capital they may want a "vesting" agreement for your share. That way you can't just quit and still own 10%.

Remember, ownership and employment are two different things. You can be fired but still own 10%. So, you also need a employment agreement or service contract for the commission part of your work.

You also want a profit distribution agreement or clause. You want 10% of the profit payouts.

As a minority owner you have virtually no rights unless they are written into the original documents or by contract.

[dave@businessecon.org]

JMasterJ: What type of business entity is the operation running? Is it an LLC, traditional partnership? How many partners/Members? Then let's go from there.

Dave