Help me make a deal: I do all the work, he has all the money.
July 26, 2009 4:46 PM   Subscribe

NegotiationFilter: An old acquaintance who I trust is giving me the opportunity to invest in a business in which I would do all the work and he would provide all the financing. The amount of money he is talking about is in the mid six figures.

I am quite familiar with the business but have never personally operated at that level (though I have a close friend who has), whereas he knows next to nothing.

He is curious enough about the details that I would have to explain to him more or less exactly what I'm doing and how I'm doing it, but his concern is (for now) more about the given risk and rate of return like any other investment. He would provide all of the starting capital, and I would be doing most or all of the actual work, at least initially.

How should I present myself and what should I offer in order to get the best deal?

(I am thinking along the lines of how hedge fund managers charge their clients, which can be anywhere from 20% to 50% of the profits before passing on the rest of the gains, but hedge fund managers are also heavily invested in their own funds, giving them risk exposure, whereas in this case there is essentially no potential loss to me except the time spent and the opportunity cost. In any case I want to push as much as possible for a percentage-based or commission-like income rather than a fixed payout or salary.)
posted by anonymous to Work & Money (14 answers total) 1 user marked this as a favorite
It's tough to pin anything down without knowing the business or what else you'll be up to, but I would pick what I would want as a starting salary and say "I want all of the income up to X, the I get a pay bump as income gets to X+Y... etc."
posted by craven_morhead at 4:54 PM on July 26, 2009

You're going to want to talk to a lawyer. These sorts of arrangements are commonplace, and not that difficult to set up, once you figure out exactly what it is you want to do.

Regardless of how you want to divvy up responsibility and risk, you are almost certainly going to want to create some kind of business organization to shield both you and your friend from liability. Depending on what kind of operation you're talking about and what jurisdiction you're in, an LLC or LLLP might be appropriate. Again, talk to a lawyer.

As to how to go about the conversation... you really haven't given us enough information to go on. Is this his idea or yours? Is he actively looking for a place to invest this money or is he doing you a favor? How much can he afford to lose? Are you willing to work solely for a cut of the profits or will you require a salary? Do you want to gain an ownership interest in this enterprise or are you content to be an employee?

All of those questions, and more, will affect how you want to present yourself.
posted by valkyryn at 4:55 PM on July 26, 2009 [1 favorite]

This is a discussion to have with your lawyer, not ask metafilter.
posted by dfriedman at 5:08 PM on July 26, 2009 [2 favorites]

Hmm, this question looks suspiciously like the sort of partnership essay question I'm liable to get at the bar exam on Tuesday. That being said, there's a reason they put stuff like this on a bar exam - because it requires legal knowledge and it's easy to screw up if you don't know what you're doing. Hire a lawyer, he or she will be happy to come up with a bunch of ways to protect both parties, etc.
posted by Happydaz at 5:10 PM on July 26, 2009 [2 favorites]

Make a list of everything you're afraid of, everything that you can think of that might go wrong and what you think you need to be "protected" from.

THEN, list in hand, talk to a lawyer. A good one will be able to explain why some of the items on your list are wise, some are silly to worry about, and "by the way here are sixteen other things you may wish to consider."

If that isn't the way the lawyer addresses it (if, for example, they just say "sure we'll draft something to protect you from these risks."), find a different lawyer. Repeat as necessary.
posted by rokusan at 5:29 PM on July 26, 2009

Be wary on the emotional side of things. What? But this is business!!

Well, sure. But does your investor/partner know this?

Had a v. bad ending experience with almost an identical sitch. Once the product was launched, my know-nothing investor thought they KNEW EVERYTHING and OWNED EVERYTHING - and all that despite the Operating Agreement, etc.

Your experience could totally be different, and I hope it is:))

But in my case, it turned out the investor wanted to buy my skill and cache. Offer of partnership and all paperwork relating to partnership was kinda an illusion in the end. Any agreement is only as valid as the understanding and trust behind it. I thought they wanted to make money, and I was wrong about that. I was paid adequately, but my heart broke watching my heartfelt efforts go wasted in the end as a perfectly viable and profitable endeavor fizzled due to investor's ego. Sad.

Totally do it! But lawyer-up and make sure you build payments into the endeavor so that you get paid out appropriately in case of ...wahatevers. Lawyers know the pitfalls better than you or me, so use one;)
posted by jbenben at 5:33 PM on July 26, 2009

Normally the way to do this would be to setup a corporation with the two of you owning some percentage of the stock. A lawyer would be needed to set it up, though.
posted by delmoi at 5:52 PM on July 26, 2009

... what should I offer in order to get the best deal?

(I am thinking along the lines of how hedge fund managers charge their clients, which can be anywhere from 20% to 50% of the profits...

Not sure if you meant it this way, but this makes it sound like "how much of his money should I offer to give back," which is definitely not the situation you're going to be in. It's going to be more like you propose a starting salary for yourself (probably kind of a pittance, at least for 2-4 years), and an equity split between the two of you in the enterprise. And he gets to basically say yes or no, because it's his money on the line. Then you should have a business plan that estimates your monthly expenditures with reasonable granularity, and demonstrate how you aim to achieve profitability in X years by doing this thing you're really good at.

I don't think you can really sit down at the table saying "I will return your money within Y years and give you Z percent of my profits during [whatever time period], then we're done and thankyouverymuch." A canny investor is going to want an equity stake - he will anticipate a period of loss before you can get to profitability, but will want an ownership stake going forward with a proportionate share of the profitability forever, or at least until you buy him out.

Plus, as everyone else says, you need a lawyer to draw up the papers and create the various entities.
posted by rkent at 6:14 PM on July 26, 2009

posted by JohnnyGunn at 6:55 PM on July 26, 2009

You should really push for a salary. Lets face it, most businesses fail. And if you ask only for a percentage there's a great chance you'll end up with a percentage of failure. Make sure there are at least minimal benefits in there. The last thing you need is medical bills while you're bootstrapping a company.

...there is essentially no potential loss to me except the time spent and the opportunity cost.

Yikes. Time is more valuable than money. Your time and energy is a non-renewable resource. There's always more money from somewhere, but once you spend your time on this you will never ever get it back. (Unless you're working on immortality drugs.) If you don't treat it like the valuable commodity it is you will get screwed out of it. Yes, even by kind and well meaning friends, mostly because they don't know they're doing it.

There are a number of ways to work profit sharing, those can depend on the legal entity you set up and on a bunch of other stuff. One way to do it is straight up 50/50. His half is putting in the money, you half is putting in the work, you split the profits 50/50 from day one (Which you get on top of your salary.) Another, more common way is pay the investors first. The most straight forward way is that all profits go to the investor(s) until they get back their investment (plus interest). Then profits are split 50/50. This is less good for you, but is very common, and in the long run, you'll make out nicely. (If the company survives.) Of course you need to work out how much money is retained for operating expenses, who makes purchasing decisions, etc. But that stuff will be covered by the lawyer.

Don't just get a lawyer, consult with several and pick the one who understand your needs the most.
posted by Ookseer at 7:31 PM on July 26, 2009 [1 favorite]

Several have suggested you push for a salary. If I were investing, I would not make a deal with you for anything other than a token salary. I am risking money, you risk time and opportunity cost. If you are not willing to do that, you are looking for a JOB, not an entreprenurial opportunity.
posted by JohnnyGunn at 9:23 PM on July 26, 2009

What a pain the 'talk to a lawyer' answers are. This is a question that is totally answerable by non-lawyers, who could then approach a lawyer to draft an agreement reflecting the structure, without the lawyer fees charged to walk you through the various permutations.
If it were me, I would seek a salary equivalent to what paying a staff member to do the work would be. I would seek a 50/50 partnership with the understanding that when the business is sold/IPO/etc. the original investor gets 100% of their money back, then splits the rest with you.
If the business tanks, they lose all their money and you are out of a job.
Such an arrangement gives you an income while the business is growing, and a powerful incentive to grow the business as much as possible to make your stake worth more. If the business starts generating income above what can be sensibly reinvested, it should be split 50/50. I would also suggest a shotgun clause to defuse any disagreements.
posted by bystander at 10:29 PM on July 26, 2009

>This is a question that is totally answerable by non-lawyers,
> who could then approach a lawyer to draft an agreement
>reflecting the structure, without the lawyer fees charged to
>walk you through the various permutations.

Legal malpractice lawyers and commercial litigators love this type of advice. Keep it coming.
posted by GPF at 8:21 AM on July 27, 2009

I won't answer your question directly, because there are many factors affecting your approach and the form of your eventual agreement. However, in general terms, you should offer a target-based payment scheme for yourself, where you take higher percentages of his profit as you earn him higher returns. That is, if you only bring in 4% on his investment, you get minimal percentage X%. If you bring in 9% (or whatever his target return is), you get X% plus a "promote" of Y%. Yes, it's true that you have incentive to maximize performance even when you take a straight percentage of profits, but he'll be happier knowing that you only hit the jackpot if he gets his desired return on investment. The formula is less important than the concept that you have special incentive to make his target return. (you can also add bonus targets above that point, which give you even bigger payouts if you meet them). Here's the psychology: since the capital is his, all the profit rightly goes back to him except for whatever he shares with you. that's the way he looks at it, and so you need to look at it that way too. cash is king and your sweat equity is only worth anything when you bring your investor a higher return than the other opportunities he's passed up to give you a shot.
posted by Chris4d at 10:28 PM on July 27, 2009

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