Entering Partnership agreement, Need some help before continuing on. Sweat equity

[jgold05]

Ok so here's a bit of a background,

I have done consulting for the guy before he agreed to pay on handshake bring me on and get a contract at the end of the month in place once his lawyer got everything in place.

At the end of the month I was told that it just didn't work out and was paid upon agreed for my services so I wasn't totally screwed; live and learn.

During the final meeting i had informed him that without me or my associates that he would not be approved for his contract.
A year later (a week ago today) i have been contacted and long behold he didn't get approved. He has asked to bring me on board but this time I want a contract in place.

So the tricky part is that, the whole business hinges on the contract and our partnership would seal the deal but he is supplying the whole capital.

So to make the numbers easy; I and four others on my team, currently make 100kaverage a year for the past 3 in our respective fields.

Essentially we are bringing in 400k sweat equity a year.

Which i know is a hard sell, so what i want to have a back heavy contingent contract that essentially gives me a small sallary for initial work (IE: 2k base +added hours for employees, which i will try and reduce by doing most of it myself), and based on being approved for the contract that we are guaranteed a percentage of the company plus salary and bonus.

A VerY important NOTE: If they get this contract, with costs amortized over 5 years, profits will be over 6 million a year.

So I was thinking something like 2k+hourly month then once approval 25%. 250k bonus. +Long Term contracts for everyone.
I feel that this would be fair as our sweat worth is easily 400k and the profits of the business is around 1million a year give or take 200k. So i think the offer is reasonable.

Some feedback would be appreciated Thanks

[Fulcrum]

50/50 deal after structuring for salaries. He's got the money, but you've got the talent and team. Have your lawyer draw up the agreement and include a clause that makes getting this, or a similar contract, a required item in order to properly execute said contract.

[Freelancier]

You have two different things going on here (maybe three, but we'll focus on the two you care about right now):

1. You have an equity situation (no way this is going forward as a partnership; more likely an LLC or a corporation)
2. You have an employment situation

Take them separately, because it's two different types of agreements.

You want equity in the resulting entity, especially if the entity wins the work. How that gets structured and what voting rights you'll have is up for discussion. If you get founder's equity, that's the cheapest kind, because there's almost no cost basis, so you don't get taxed on receiving it (i.e., receive stock, get taxed on its value without receiving the cash to cover the taxes, usually a bad outcome). This can be done as a restricted tax grant with the shares releasing periodically based on time/performance/whatever. Just know that private stock is hard to sell, so you're just getting a promise that if someone else buys the company or that dividends are paid, you will participate. Make sure that on a change of ownership event, all stock you are owed in the future accelerate into the present.

You want an employment agreement to pay you and your team a certain amount over time, likely the amounts escalating over time. He'll want some assurances in this agreement as well.

Everything is negotiable! You just have to keep an open mind and be ready to horse trade.

So... start the discussion and let us know what happens next!

BTW, I disagree that this should be a 50/50 split... capital is ALWAYS valued higher than work when it comes to new companies. Until you show a profit, real money is on the line, but work is just time lost. Real money is a bigger risk, so it gets a bigger reward. Once you are showing a profit, then the price of capital decreases. Just look at how private companies get funded... the initial capital will always get a bigger reward than the rounds of capital that come after the business is running and profitable, but the value of the company's work decreases if the company doesn't reach profitability and needs more money.