How do we split profits for our startup?

December 20, 2006 8:01 PM

SmallBusiness Filter: I need help with how my business partners and I get paid.

My partners and I have formed an startup LLC to do one line of work. Partner A has expanded into another line of work. While this is a good thing, since he does a majority of the work, he wants 80% of the profits. Partners B and C just provide the tech support and money to run the operations, so they get 20%. A needs the money to live, while B and C are taking their cut and reinvesting it into the company. How do we make this situation work for the company? We had planned on not taking any pay from the company until at least 6 mos. out, now we have to give a significant portion away, leaving us to wonder how to ensure that the business can grow. I hope I have related this clearly, and if not please ask me more questions so I can explain more. Help me hive mind, your my only hope.

posted by xyberspam to work & money (3 comments total)

Just to get this straight in my own mind:

- Partner A has 2 lines of work -- Foo and Bar
- Partners B and C only work on Foo, and not Bar.

Questions:

- Partner A wants 80% of the profits of Foo + Bar?
- Partners B and C are reinvesting their total 1/5 profits to grow the business of Foo only, or Foo + Bar?
- Are the profits being distributed in the same proportions that each partner has invested into Foo?
- Partner A is reinvesting zero into Foo?
- And finally, what written and signed agreement (by all partners) do you have to the effect of any of the above?
posted by brain cloud at 8:43 PM on December 20, 2006

Correct.

A has Foo and Bar
B and C have Bar but finance and do minimal work on Foo

1. A wants the profits
2. B and C are reinvesting in both Foo and Bar
3. Currently distributions were supposed to be evenly split amongst A, B, C
4. A is not investing anything
5. See 3
posted by xyberspam at 10:25 PM on December 20, 2006

Profit distribution is largely a matter to be negotiated between the three of you and has a lot to do with the value of what each partner brings to the table (A's "majority of the work" vs. B & C's "tech support and money to run the operations").

Depending on the specifics of your business (some of which it may not be in your best interests to tell us) it's entirely possible that Partner A's contribution is worth four times as much as what Partners B & C contribute, although A's work would have to be extremely difficult to replace and the company's capital needs would have to be extremely low for that to be the case. If that is the case, though, I have to wonder why A would bring on partners rather than borrow or save the money needed to start the business by himself. In many cases, providing capital is considered at least as important as performing work.

I think it could be very difficult for us on AskMe to determine the relative value of your contributions unless you give us details that might be best kept confidential. For the three of you (and your appropriate legal representatives), however, it's entirely possible for the three of you to come to a fair division of profits.

Also, you may consider paying Partner A a salary rather than increasing his share of profit distribution, especially in light of his lack of capital investment in the company (am I correct in reading you above posts to say that A has not invested any money in the company at all?) and in B and C's continuing reinvestment. B and C may also seek to ensure that their reinvestment in the company is reflected in their proportions of equity in the company (and their related distribution percentages). If they continue to introduce money into this business, then it is reasonable that they should expect to own more of it. If Partner A seeks to maintain his percentage of equity, it may be most appropriate for him to do so through reinvestment of his own, or through negotiating a periodic grant of equity (possibly linked to the profitability of his work) as a part of his compensation.
posted by concrete at 11:15 PM on December 20, 2006 [1 favorite]