How to Distribute Partners’ Shares in Business?

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How to Distribute Partners’ Shares in Business?

Partnership. Have you thought of launching your business with a partner? I am quite sure that almost all novice entrepreneurs have thought of opening a business in partnership with a friend, spouse or (the worst case) relative.

It is important to define the concept of partnership right away for this article. We speak here not of like-minded persons implementing a project, but rather of partners who cooperate with the aim of distributing profits in business. Profit is the key factor, and namely the money you earn for your contribution to the company’s activities. In another meaning, partnership can rather be understood as team building or a work team, where you have particular tasks and milestones, but you don’t have profits to be distributed in the long run. Why so? Because money is always the backbone here. I would even say that money is the vector predefining both the mood and the behaviour of all participants.

In total, I had like eight partners in the projects I opened. Thereafter, I sold them. Therefore, the partnership was temporary, and I should note that my business partners performed successfully the role assigned to them. I accepted this partnership knowing that it would end quite soon. Because my long-term partnership experience (which lasted over three years) was almost deplorable. Let’s speak a bit more in detail of this experience. We were three, and we were united by a common idea, business goals and the desire to fulfil ourselves upon the end of our university studies. However, the problem consisted in the fact that we all had different vectors. When you find a partner, you should understand clearly what this person needs. What are his goals in life? What are his goals in business? What are his financial goals? Those are three vectors which should go in the same direction. What matters is in which direction and how you want to develop, and how much you want to earn. Would you like to be an entrepreneur for the rest of your life? Or probably you dream of becoming an international business concern in some time? It is important that your partner support you in those directions and share your mutual idea. In our alliance, I had a goal of creating a large educational centre, my second partner wanted to earn some great capital quickly, and the third partner wanted to have a mid-level salary to cover his main expenses. But we weren’t aware of it since the beginning, as almost no one was thinking of the future, and we were all obsesses by the entrepreneurial euphoria of the present.

People consider partnership as an option for four main reasons:

  1. Lack of own capital. A novice entrepreneur who has already drafted an initial budget often understands that he won’t have enough money for launching the business. Often partnership becomes a solution.
  2. Need for experience in some field. Imagine that you have some capital, an idea ignites your interest, but you lack any experience in this business sector. You think that hiring a third-party specialist is expensive, and it doesn’t motivate to achieve the desired results as a proposed share in the company. So, you find a specialist wishing to develop an own business, and you invite him to be your business partner.
  3. Time factor. You’d like to start a business, but you have no time for it at all. Or you have a full-time job, or you have another business which takes all your time. Or, finally, you are on maternity leave and have to spend much time on children. As a possible solution, you seek a like-minded person with much free time, share the idea with him, and agree in advance that he will be developing the business mostly, and you will be an investor or at least will be working some limited time.
  4. Often partners are taken in a business for their contacts or reputation. It is lobbying as a basis of your successful business. You think that having close access to the source of your profit (legislation, resources, etc.), your new partner will apply maximum efforts for promoting the business in which he acts as a partner himself. This doesn’t mean that you want to bribe someone. This only means that you want to attract a person understanding the processes. Partners of this type are persons who earn some interest for lobbying your service or product.

What should be the legal basis in all four types of partnership?

The law has stipulated the types of partnership. Speaking of a commercial entity, we can emphasize first of all limited liability companies and joint-stock companies.

Reason 1:

In the first case of partnership, the legal base is explained by the very motive for establishing the partnership business, and namely the lack of capital. In this case, the company’s aggregate equity and investment are distributed between partners in line with their funds invested in the business. Based on the funds invested, the shares are distributed, and thus future profits.

The problem of the lack of funds for financing an elaborated business idea is the main problem of start-ups. So, what should you do, if one of the partners doesn’t have any capital but has an idea, and the other one has capital and the desire to invest in a promising business? In this case, the conditions of partnership and share participation (in corporate profits) are distributed in accordance with the agreement between the partners. In addition to financial and physical participation, other factors affecting the legal form of partnership should be taken into consideration.

Reason 2:

The partner’s experience in the company’s field of activities is quite an important asset too. If you think that your partner experienced in this business sector guarantees the multiplication of your capital, it might be reasonable to offer such a partner a share in the business on particular conditions (which would protect you first of all against your partner’s potential desire to separate and create a competitor company). Taking into account the fact that experience in business is an asset which you can buy even without offering a share in your business (for example, by hiring a third-party specialist), the partner’s share (future specific share) shouldn’t exceed possible costs for hiring an employee.

Reason 3:

If you have decided to invite as a business partner a person to cope with operating activities and fill your absence and direct participation in the company’s activities, you can attract him by a share in profits too. In this case, we speak of the actual presence of a top manager in your business, who would devote all his time to the development of your activities. So, in addition to a share in your business, which can be used solely as an additional factor of motivation, such an employee should be assigned a monthly wage. At the same time, his share in the company shouldn’t exceed 10% of stocks (profits), and it won’t necessarily be a sufficient stimulus for his greater performance.

Reason 4:

If the promotion of your business requires using the connections, contacts or name of your potential partner, but all activities and funding will be carried out exclusively by yourself or by hired staff, the partner’s share can amount to 10-40% of stocks (profits). The greater your dependence on your potential partner, his contacts or reputation, the greater the share which should be assigned to him.

 

In all cases noted above, the details of partnership should be thought over, and all force majeure conditions and your actions should be taken into account. Partners leave, take a part of your business or the full business with them, create competitor companies or merge with existing market competitors. Such actions might not only affect your profits, but also ‘drown’ your whole business. So, in addition to the main conditions, stipulate in your partnership agreement aspects such as the prohibition of competitor activities, confidentiality of data, and the minimum period of partnership relations without the opportunity to terminate them. And don’t forget that the same rules apply to you in the same amount.

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