Should I bring someone on as a business partner?

July 20, 2006 12:51 PM

Should I bring someone on as a business partner?

I run a small (4-person) company of which I am the sole proprietor. It's a web business, so a very large chunk of our expenses involve paying outside tech vendors/developers on a project-by-project basis.

What I'd like to do is get a developer to have a vested interest in keeping our technology agile and effective. An in-house hacker. A retainer may be a way to start, but I think that ultimately, we're going to need someone with a bigger stake in what we're doing. And that stake can't just be salary, b/c a lot of our future profits are contingent upon technological developments that have yet to happen.

I've found a great candidate, but I'm at a loss when it comes to how such a deal might be structured. What would a partnership entail, actually? When should I make such an overture?

posted by subpixel to work & money (6 comments total)

subpixel, I'm at the other end of such a deal-- I was brought into a small (advertising) company as the second partner. I would advise you very strongly to make any offer contingent, staged, and revokable.

In other words, contingent on performance for a certain period of time, however you define that; stages, as in ownership is purchased/given/whatever up to a certain percentage over a period of years, and revocable, as in you have 100% right to revoke the deal and repurchase the shares within a certain period of time.

in my case, I purchase my ownership interest over 4 years at 10% at a time. This is the second year, and the deal is 100% revokable until Dec 31 of this year. There are a bunch of other important clauses, including salary, life insurance, bonus structure, and much more.

However, IANAL, and you really should see one. These are just some ideas to get you started thinking-- if you have any specific questions feel free to email me off-list.

On preview, A great candidate for a job is not the same thing as a great partner. Before investing a lot of time in structuring a partnership, why not offer a simple test year of employment with the discussion of partnership deferred but still on the table until the end of that year?
posted by miss tea at 1:12 PM on July 20, 2006

PS Also learn how to spell revocable. Very important. :)
posted by miss tea at 1:13 PM on July 20, 2006

I am a partner in a small business with two other people. A partnership is much like a marriage. You must trust your partner(s) quite a bit. Each partner can commit your business to a course of action, without consulting the other partner. My partners and I work very closely together, argue a lot, but love working together.

There are other alternatives to get buy-in's (even long term) from your employess. This year we've created a bonus system that will share profits over x amount with the employees. They know that working a little harder and saving on expenses will mean more money in their pockets.

You can create performance based bonuses, or put together a long term plan that shares increasing amounts of income as the project progresses.

I would avoid bringing on another partner if there were any other way to provide incentives. Like my marriage analogy above, splitting a partnership up can also be very messy and expensive.

Also, we started our business together, a partnership was the only way we would all agree to work together. We've taken the risk together from the beginning. We've talked about bringing other people on as partners, for much the same reasons you state, but have always decided that we were better off finding alternatives to keeping our (valuable) staff happy. Most people are replacable and just because your important guy is a partner, doesn't mean he'll stick it out if he gets bored.

If you do go the partnership route, miss tea's advice is very good. Email's in my profile if you want more details about how we manage our partnership.
posted by rsclark at 1:44 PM on July 20, 2006

Whatever you do, consult a lawyer that represents ONLY YOU before you do anything else. Since your business is currently a sole proprietorship (and not an entity like a corporation or partnership), one lawyer can handle you and the business. Turn that business into an entity, and that lawyer can only represent one of you.

I realize there is always a tirade of "get a lawyer" in response to these questions. The reason is because its easy to get screwed on stuff like this. Spend a little bit up front, to help cover your butt in the distant future.
posted by MrZero at 2:19 PM on July 20, 2006

Thanks very helpful info, esp. miss tea.

So - anyone know a good small biz lawyer in NYC?
posted by subpixel at 3:20 PM on July 20, 2006

I know of no compelling reason to use a partnership as a form of business. It is the weakest of the business forms and fraught with serious implications that far offset its relative simplicity.

A sole proprietorship is preferable to a partnership.

LLC or standard C or S corps are way better. Your lawyer will explain why. ( And if you don't have a lawyer yet, you certainly aren't ready to bring on a partner. ) There are logistical, tax, organizational and liability-related benefits of incorporation.

I personally prefer subchapter S corporations because I find them easier to understand and have never run into situations in which I found them limiting. They require a level of formality which partnerships do not.

If you need more talent, hiring employees with a suitable compensation plan that motivates them in the same fashion as you THINK partnership will is vastly preferable to 'bringing on a partner'. That idiom makes as much sense as 'bringing on a wife'. That's the level of personal exposure you are signing up when you add a partner.

If your lawyer recommends partnership, I'd recommend a new lawyer.
posted by FauxScot at 6:24 PM on July 20, 2006