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HUMAN RESOURCES

Should I offer equity in my new corporation to a partner?
 

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We posed the following question from an inc.com user to several inc.com mentors:
I'm starting a corporation. I have the technical skills and entrepreneurial sense, and I have found a trustworthy partner with a good business background to handle finance and operations. The partner's job will be to run the business, and in return, he'll receive 50% of all net profits. What about business percentage? How do I divide the company, or do I need to?

Here's the response from Paul and Sarah Edwards, Running a One-Person Business mentors:
Make no doubt about it: you want an arrangement that will lead to a successful business and keep you both motivated. How this flushes out depends on whether or not your partner wants equity in the business. Just because he doesn't ask for it doesn't mean he doesn't want it -- and it may be in your best interest to share it with him.

If your partner develops a successful business and develops a loyal clientele, you don' t want him or her jumping ship to form his or her own competing firm. Resentment, the product of one party feeling on the short end of the stick, sours even successful businesses. So giving equity might be a good idea, and you may want to space it out over time.

You might negotiate with your partner for the equity interest to take effect after some period of time, such as three years. Perhaps you could stagger the growth of ownership -- for example, 10% a year beginning in the second year -- until it reaches whatever percentage you agree on. Maybe you could offer your partner a buy-out provision that will also give you the opportunity to regain control if you wish. (We deal with these issues in our book, Teaming Up: The Small Business Guide for Collaborating.)

Whatever you do, we strongly recommend you consult an attorney to customize an equity agreement that fits both your individual business situations, as well as the laws and tax codes of your state.

And here's the response from Kay Stepp, Personal & Professional Growth mentor emeritus: The term "partner" - according to my dictionary - means "one of two or more associates as joint principals in carrying on any business with a view to joint profit." Carried to its logical conclusion, a partner would share ownership of your business. So, you need to decide if you want a partner or an employee. Here are a few questions to ponder:

  • How critical is this particular person to the success of your business? Is this person singularly qualified to assist you, or are there others available who can run the business as well as you believe this person can?
  • If you must have the person you have in mind, then what will it take to attract and retain him or her? Is shared ownership required or will the share of net profits be sufficient?
  • Given that a relationship where equity is shared is more complicated to dissolve than an employer-employee relationship, can you envision a long-term relationship with this individual? Remember a partnership is very much like a marriage.

If the person you want insists on a share of the business, you could agree to a trial period before stock is shared to determine your compatibility in managing the business. You can use this time to work out mutual expectations about performance outcomes, decision making, problem solving, leadership style, and communications. Ownership to your partner could be transferred over several years as the company attains performance benchmarks.

Copyright © 2000 inc.com LLC

Related resources at inc.com:
The Art (Not Science) of Picking the Right Partner
Avoid Being Stuck by Stock Grants
Phantom Stock

Last updated: Oct 26, 2000




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