equity, partnership, co-founder, salary, exitI founded a business in 2012 with one partner. My partner and I own the business 50/50. We have both worked full-time on it until now. The business is profitable and revenue is around $300k per year.
We currently don’t have any staff. I run the technical side and my partner runs the business side.
I am ready to move onto another project. The business hasn’t grown for at least the last 1-2 years, and I don’t feel confident that we can grow it further. I would like to find a buyer for the business, but my partner enjoys her work, and believes she can grow the business further.
We don’t have any partnership agreement covering what happens in this situation, so even though I would prefer to sell, if my partner doesn’t want to sell, then I don’t think I can force her.
One possibility is to hire a new CTO to replace me. My question is about what a “standard” and reasonable agreement would look like in this case, given that my partner will continue to work full-time. For example:
1) Would it be normal for our equity stakes to remain 50/50?
2) Would I have an input on the salary my business partner gets paid (given that I will no longer get a salary).
3) Would I have an input on the dividend that my partner and I both take from the company?
On the one hand, my partner is entitled to take more money from the business, given that she will be working full-time on it. But on the other hand, I am also entitled to benefit financially to some degree as I have invested 4 years growing it to this point.
Any thoughts or stories of similar situations would be great.
Thanks, Andrew
What you’re dealing with is very common. I am not sure if you have talked to your partner about this yet as it’s not clear from your question, however, that is definitely the right place to start. I am assuming you have the best interests of both you and your partner in mind and I will base my answer on that assumption. If your intent is to get as much as you can out of the situation without regard to what happens to the business or your partner, this is not the answer for you.
The most ideal situation would be for your partner to buy-out your 50% stake and, after a transitional period, for you both to go your own ways with regard to this business. I’ll talk more about this at the end.
While you can certainly make suggestions on how the business should proceed (eg. hiring a CTO) as you have one foot out the door, it is not fair to your partner for you to have such marginally massive influence in such a small business over future decisions. It’s great if you want to provide suggestions, train your replacement, or provide consulting on a part-time basis for a period of time to make sure things transition well (in fact you should do all these) – but make sure you let your partner call the shots on how the business is going to proceed because she’s the one who has to live with the circumstances.
1) Would it be normal for our equity stakes to remain 50/50?
Given the size of your business and the nature of your cash flows: no, it would not be normal. You’re running a small business that is not investable. A business with $300k in revenue with little potential for growth, even with very low expenses, is not an appropriate place to hold an equity investment (in this case, a “limited partnership”). It may be a great small business that has provided you and your partner with a satisfactory income, but it is not large enough (by any measure) for you to treat as an investment.
2) Would I have an input on the salary my business partner gets paid (given that I will no longer get a salary).
I mean you could put your one vote in to limit your partner’s salary and she could vote not to limit it and you could end up with no decision and a whole ton of anger – or you can just do the right thing and step away. It sounds like you are trying to become your partners boss which simply isn’t going to happen since she has just as much say as you.
3) Would I have an input on the dividend that my partner and I both take from the company?
Dividends should be distributed based on equity ownership. The owners can decide to retain some earnings or to pay them out fully. The rate at which they are distributed after that depends on equity stakes (50/50 in this case). Of course if you two have a conflict, you will not be able to make a decision with your 1-1 vote and be in a very difficult situation.
One possibility is to hire a new CTO to replace me.
I am also entitled to benefit financially to some degree as I have invested 4 years growing it to this point.
How much do you think the CTO that will replace you needs to be paid to perform the same tasks as you? If it’s about the same as your share of the profits, then your half of the business is literally worth zero on paper, regardless of how many years and how much blood, sweat, and tears you’ve poured into this.
The best way to handle this situation is for your partner to buy out your half and for you to help with the transition to a reasonable degree (possibly with compensation). If your partner does not have the financial ability to pay you in a lump-sum, she can pay you in installments over time. The exact amount of the buy-out would have to be determined between the two of you, but just based on the raw numbers you presented, it should not be particularly high.
If it becomes difficult to come up with an exact buy-out number, you can hire a financial analyst to value the business and make a decision based on that. There are professionals who deal with this exact situation all the time as it is very common.
In your next partnership, it would be smart to set up rules for situations like this from the start. That way resolving situations such as when a partner is no longer in the business becomes easy. Your situation is actually pretty simple. This stuff can get really nasty when, for example, the spouse of a deceased general partner inherits a business she does not understands and expects it to produce the same income in perpetuity with no participation.
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