Questions

How to decide stakes in a partnership?

I am looking to level up my consulting/freelance business by forming a partnership with one other partner. I have had 3 people interested in partnership but I am worried as I do not know how serious are they. It’s all nice when they are very enthusiastic but I do not know whether they can do what they claim can do. As I am looking for a partner who is better than me in Business Development skills all these 3 posses them in varied aspects. So let’s say I’m taking one of them as a partner. His stand (Let's me explain about one of the potential partner) Here’s what I know about his profile. He is around 20 years older to me and has been working in SME as a Head of Marketing. Has several contacts (which he claims; He has introduced me to some - but all of them appear to be on the same boat as us). He’s been begging me to start the partnership with him on a 50:50 basis. He has agreed to pay 50% in setup costs & take 50% revenue earned through this business. He appears to be tired of getting business for someone else & wants to run his own business. He doesn’t have in-depth understanding of my business but he claims he has the knack of fixing a meeting with these clients in favor of my business. My stand: I have been consulting 2 clients over the past two years and have been doing side projects as well. 2 Months ago I introduced the new business to my existing clients so that I could associate their name with the new company. Very recently, one of the nationwide events highlighted the business name to a large extent in the industry. I am also promised PR offline for this activity which is happening right now. I currently take care of all the management of this firm & also focus on bringing in business (This part is really slow at the moment but I have been optimistic for 3 months now - My business majorly works on a retainer model where are charge about $600 month/client.) I have already built a website for the new business & I have invested in products worth $150 each. Partnership Roles If we are to go into partnership, we have agreed that my current clients won’t be a part of the new partnership firm and will continue to be a part of my own personal clientele. However the names will be associated with the new firm His role will be to leverage his contacts & get me a meeting. Then I take over the meeting & focus on conversion. Once I handle conversion, I will be looking at delivering the business services by putting up a team & training them accordingly to the new structure I design. (None of which the other partner will be focussing on) My questions: This does’t appear to be an easy 50:50 contribution. How should I distribute the stake? We are sharing our costs equally, but should I be sharing revenues equally? How do I deal with a situation wherein business that converts comes from my contacts & none from his? Does he still get to take a share of the revenue of the firm? Is there a better way to work out a deal? Do I add him as a consultant for a test period & give him a small stake cause I do not know how well he can perform & I cannot pay him a fee?

4answers

The best way to test a person's talent is to put them to work in the reality of your business.

If these folks are all onboard for being partners, promise to give them a cut of all deals they bring in. Structure the plan so that the contract lasts three months. Then, let them prove themselves and show (not just say) they really mean it. Make no equity promises until you can validate their claims.

What if someone balks at the offer? I'd imagine these folks will have main jobs during the testing phase. If they scoff or refuse, then you've won immediately. If they aren't willing to hustle a bit extra for a few months how in the world could they do this for many years ahead within a successful partnership?

Why three months? People can fake their behavior for quite a bit of time. At two months people can't help but being themselves. You'll get a taste for how they work, they're ability to close, and their personality. Personality is the biggest factor, as they may do a great job bringing in business, but be simply unbearable to work alongside.

A note of caution around the Head of Marketing SME: this person sounds like a problem. Are they acting immorally towards their current employer? Check, stealing business. Are they sure they can do it on their own, but for some odd reason never have? Check. Are they requesting for more stake than they deserve? Check. These alone are reasons to run. Immoral, unproven, and greedy at the start.

To me, you sound like you need to hire a commission based sales person. Give them a stake of each deal. Don't give up equity for something like this. This company is your baby and equity is a last resort.


Answered 5 years ago

Just like when nations form a coalition (partnership) against a common cause there’s always risk to that contributing nations blood and treasure. And lets not kid ourselves, it’s that RISK which you are refereeing to. So, that said, I would not recommend starting that partnership as a 50/50 division. Even your gut instinct in your question is saying that.

So, if not 50/50, how do you? One way is a common goal approach supported by a task-to-purpose objective base. For example, I recently consulted a small three-person partnership cell phone repair business. These young folks had no shortage of people with broken glass phones. They had the idea, they had the model, but they didn’t have the common goal. They convinced themselves that each partner had equal stake in “bringing something back to the business”, or “you need to do this, you need to do that”. That’s not strategy. What I had them do is free think and write down every task they could conceive of. Then I had them agree on their mission statement for their business. Once those where visible we simple placed each task into a prioritized list. Hence, task-to-purpose and moving towards the business objective.

The partnership was forms based on a common goal. Not a 50/50 equity split. Sure, they’re all equal partners, but they all have stake in ensuring the objectives are accomplished.

Just some thoughts from the Spartan Team.


Answered 5 years ago

Partnerships can be tricky. No matter how good of friends two or more partners are, we are talking about business, not personal. And sometimes making tough decisions is just business but understand that sometimes “personal” gets in the way (for good or bad). Having a very thorough contract in place is essential so there are no “guessing” or “now what” that may come up later.

Once you start running a business, you are no longer working in the business but rather working for the business if that makes sense.


Answered 5 years ago

This has always been one of the most contentious issues with entrepreneurs the moment they plan to join hands together. We had published "Happy Equity Index" for people going through the equity sharing conundrum. Rather than re-posting the entire content I'm dropping the URL for you to refer
http://366pi.com/one-business-with-multiple-co-founders-happy-equity-index/

Hope this could be of help to you!!! All the best.


Answered 5 years ago

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