8 {{ upvoteCount | shortNum }}
8 {{ upvoteCount | shortNum }}

Business Startup Partnership Advice

by Knowledgepa
7 replies
I am in the beginning stages of forming a partnership with a local computer company. The idea is to do a "Division of" under the DBA of my company name. This would allow the business to utilize all of the existing benefits of the current company. The company is a S-corp and my startup would be under their EIN # . They have a staff of about 7 people and a really nice office building that I have an office at. I am currently working my fulltime job until enough revenue is generated to move over full time.

The agreement proposed is that 30% goes to overhead (employees, insurance, rent, utilities and all), 70% revenue is split between myself and the company ( 35% ea.). The company is doing all of the financial backing and I am not investing any capital at this point. The idea is to spin off my company into its own after a certain profit margin is reached. I have full control of the division that my company is in. The company wants to use a seperate line in quick books to keep track of the finances instead of opening another business account.

A lot of this is to keep taxes at a minimum and I trust them at this point but have to be smart.

The company has been in business over 15 yrs. with a long term good standing in the chamber of commerce. I am hoping to utilize the companies credibility to get me going. It is my dream to start this business and I have an opportunity to do it within this corporation.

I am also thinking of asking the corporation for an upfront "Good Faith" payment until we are able to generate revenue.

Does this seem like a fair agreement? Are there any suggestions?
#business #partnership #startup
  • Profile picture of the author kilgore
    Speaking personally, it's not the sort of agreement I'd be comfortable with, but that's less to do with the revenue split than the ownership issues. Since you'll be essentially a subsidiary of their company, it doesn't sound like you'll have an actual ownership stake. I'd much rather prefer to do a separate incorporation and slit the ownership between you and the S-corp in whatever way is fair. That said, you know these people. I don't. But I do know that even good relationships can turn sour and the way you describe things, it doesn't sound like you have a lot of rights -- even, if they've verbally told you you'll have control over your division. At a minimum, I'd talk to a lawyer about this. Alternatively many municipalities and/or universities have small business centers that may be able to help you think this through or guide you to resources that can help.

    As to whether the revenue split is fair? Only you can know that? If they're putting in $1 billion and your not putting in anything, but they're still giving you 35%, that would be a great deal. If they're only putting in $7.32 and a pack of gum and your office space is a cardboard box in the alley, I'd say you're getting a bad deal. Moreover, is this a indefinite revenue split or just while you're getting started? If you're only making $100 and you have to give them $35, who cares? But if in 10 years you're making $10 million... well, you might want to reconsider... What's "fair" is extremely subjective and depends on the level of investment and effort put in by the parties, so I doubt you'll find much help here. Again, you might want to talk this through with a lawyer or small business center.

    Good luck!
    Signature
    {{ DiscussionBoard.errors[9577008].message }}
  • Profile picture of the author Jack Gordon
    Yeah, I don't like this either.

    Who determined 30% is the right number for overhead? Is that equally true whether you are making $1500/month or $15,000/month or $150,000/month?

    If you must do a partnership, I would prefer to see a true 50/50 split, with actual expenses coming off the top (even if they have to accrue for a bit until enough revenue is coming in). This, of course, does not include whatever is financially invested by your partner, as their reimbursement is to be paid off by your future success. As it is now, they are a 65% partner and you are a 35% partner.

    On that topic, you have to carefully consider whether whatever they are investing now (that IS spelled out in your agreement, isn't it?) plus the value of their good name is truly worth half of all future revenue.

    In other words, how much better/worse off would you be taking your vision to reality by bootstrapping it with a little seed money from relatives, but keeping 100% control (and profit) forever?

    I don't know enough to help you answer that, but you should think very carefully about what you are getting yourself into. Partnerships are complicated, and in small companies they rarely make everyone happy.

    And finally, what leverage do you have to ask them for an upfront "good faith" payment? It sounds to me like they are already taking 100% of the risk to make this happen. You are thinking like an employee or a contractor. If you are going to be an entrepreneur, you need to think like a business owner. Business owners don't ask for good faith payments from their partners. Clients maybe, but not partners. You are both supposed to be in this together.

    Act like an employee, and that is exactly how they will treat you.
    Signature
    Fifteen Lessons I have learned over 15 years and six businesses (or, My 1000th-Post Manifesto)
    {{ DiscussionBoard.errors[9577047].message }}
    • Profile picture of the author kilgore
      I agree with the above, except for one thing. I really don't like 50/50 splits. Splitting down the middle seems like an easy way to divide equity, but I think can create some long term issues. For one thing, founders' contributions are rarely (if ever) completely equal and this can breed resentment, which is definitely something that can kill a venture. Unfortunately, I know this from personal experience.

      The other reason I don't like 50/50 splits is that in the end, someone needs to be able to make the final decision. The OP says that he get to do that, which is great, but the ownership split says differently. Personally, if I were the one doing all the work on this, I'd want to make sure that I got to make the final decisions. Anyway, you might find this article interesting: The only wrong answer is 50/50: Calculating the co-founder equity split - GeekWire. It's simplistic, to be sure. But it also provides an easy to understand guide to some of the factors that you might want to consider when dividing up equity stakes.

      But I definitely agree with Jack Gorden's other comments about overhead (both now and in the future) and getting an upfront payment. I'd also think about his idea to reconsider bootstrapping. As he says, asking "Friends, Families and Fools" for seed money is pretty normal if you can't bootstrap it alone.
      Signature
      {{ DiscussionBoard.errors[9577179].message }}
      • Profile picture of the author Knowledgepa
        Deleted comment
        {{ DiscussionBoard.errors[9577268].message }}
        • Profile picture of the author kilgore
          The problem is we have no idea what you're getting from your partner or what they're getting from you. For instance, you mention under overhead you'll be getting "employees, insurance, rent, utilities and all". Does this mean you'll have employees working under your "subsidiary"? If so, how many? What kind? If you're getting a team of seven expert-level software engineers and they're going to build you a massive server farm, that's one thing. If on the other hand, "employees" means some guy is going to empty your trash can once a week, that's another matter.

          Regardless, I don't think you're going to get a satisfying answer here. Again, I'd refer you to a lawyer or a small business center. Someone you can trust more than you can some strangers on a public forum and give all the nitty gritty details of your arrangement to. And ideally someone with a lot more experience in these matters most people here do. For instance, I've been involved in several partnerships, but I've never seen one structured as you describe. That doesn't mean it's bad or unusual though -- it's just that I've obviously only ever been in partnerships when I was one of the partners. And my own personal preference is that I wouldn't like something structured like that.

          Sorry I couldn't be more helpful, but I really think you need to speak to an expert advisor. If it's true that this is a once-in-a-lifetime chance, you want to make sure you do it right!

          P.S. It's not a once-in-a-lifetime chance. There are always other ways to get this business funded. And there are always other businesses you can start!
          Signature
          {{ DiscussionBoard.errors[9577623].message }}
          • Profile picture of the author Steve B
            How long have you been in business and do you have a sufficient track record to know what your revenue, expenses, and taxes will be for the coming year or two?

            Do you know that your business model is profitable and sustainable once you quit your full time job and move into the new office?

            If the parent company goes under, where does that leave you?

            Do you have a well-thought out and practical yet comprehensive partnership agreement in writing that covers both you and your partner?

            Have you considered cash reserves and what's available if your business doesn't take off like you expect it to?

            Just a few questions I would want to have answered before committing.

            Good luck in this new venture,

            Steve
            Signature

            Steve Browne, online business strategies, tips, guidance, and resources
            SteveBrowneDirect

            {{ DiscussionBoard.errors[9577692].message }}
  • Profile picture of the author Sid Hale
    I have to agree with the above responses, and think that you may be giving your future "partner" more trust than they deserve.

    You said:
    my startup would be under their EIN #.
    In other words, you are GIVING them your idea/product/service. Unless you receive equity (ownership) in their existing S Corp, they own the results of any effort you put forth from that point forward.

    The agreement proposed is that 30% goes to overhead (employees, insurance, rent, utilities and all), 70% revenue is split between myself and the company ( 35% ea.).
    As has been previously pointed out... you cannot split revenue. Overhead and capital expenses must be paid first, and only the profits can be split.

    The idea is to spin off my company into its own after a certain profit margin is reached.
    They can keep you hostage forever. You have NO control over the profit margin. It's too easy for them to allocate excessive expenses to your division, thereby reducing the "profit margin".

    I am hoping to utilize the companies credibility to get me going.
    Credibility is nice... but not really necessary for a start up. It can be gained relatively quickly once you get going.

    It is my dream to start this business...
    Be careful. That could be your downfall. You may be too anxious, and this "opportunity" may be perceived as the answer to your prayers.
    Signature

    Sid Hale
    Coming Soon... Rapid Action Profits (Pro)

    {{ DiscussionBoard.errors[9578268].message }}

Trending Topics