olumaxi:
No money no bizness....idea needs money to bcome ideal

So true! so what do you think the formula should be like please?

pepperandsalt:
share according to initial partnership agreement

The agreement is yet to be worked out hence this post Sir. Your view is very welcome.

muffyt05:
There should have been a partnership deed before the commencement of the business and well spelt out sharing formula as well as incentives accruing to each partners. Doesn't matter who the partner is,whether you best friend or a blood brother,the partnership deed highlights what each partner is entitled to cos at the end of the day,Yoruba will say "owo koniran" i.e money nor get family. As for this case,since there was no deed in place before the business commenced, a 50/50 formula won't be a bad idea to eliminate every bad blood but strongly suggests they both come up with a partnership deed ASAP

thanks Sir for your views. Very thoughtful I dare say!

You should realise that in business the organisation is also seen as a person, and as a person HE ought to grow and for it to grow a percentage of the profit has to be ploughed back into it... Because a person not fed will die. And one of the purposes of any business is continuity. If the business is meant to continue then at least 30% of the profit should be ploughed back into it and then you, the partners share the rest equally.. *(35%-35%)

Since there are no written agreement on the profit sharing ratio its automatically implies that profit will be shared equally

4C2215131:
Hello All

Please, your opinion would be very welcome given this business scenario with regard to profit and/or Equity sharing between two business partners thus:

1. Partner one invested 85% of the monies needed by the business. He is a sleeping partner.

2. Partner two does ALL the job required by the business down to marketing at the very elemental level. He has the expertise and is an authority on the type of the business partner one invested in, in fact, it was the strength of his business plan that convinced partner one to invest in his business idea. He is the active partner and is investing all his time in driving the business to success.

To put it in perspective, it's a type of business that demands all of partner two's time involving much networking with people coupled with mental and physical work. For starters partner one has invested 2million (may be little by some people's standards but times are hard o!) with the possibility of injecting more fund into the business if performance within a set time frame meets with acceptable standards.

So there you have it. one man risking his money on the business idea of another without lifting a finger in terms of work save writing the cheque to fund the business. The other not bringing much (just 15%) in terms of fund to the table, all he does is put in all the work that generates the profit and drives the business.

how do you suggest they go about sharing the profits? please, business minded folks should chime in as I believe folks here may be engaged in this type of business arrangement already. thanks.

Seen, lalasticlala,I would very much appreciate it if this could make FP so more views and consequently comments could be generated. Regards.

There are laws governing this. There's the Companies and Allied Matters Act. It covers every situation in a business. Besides, what are you doing in a partnership business without involving a lawyer?

4C2215131:


So true! so what do you think the formula should be like please?

the person with d largest capital has d largest share......d 'active partner' shld knw dat his runnin around would av been nothin assumin there was no money for d biznes in d first place.........d only benefit is dat d 'active partner' would av known d pros and cons of d biznes,and would av met mor people wch can also b used to his benefits

Yinkatolu:
Profit should be shared based on agreed and documented profit sharing ratio.

And where there's no agreement profit should be shared equally according to Partnership Act 1960

Exactly there should be an agreement between the two partners on profit sharing ratio. Op, the sharing ratio should be shared Fairly if not equally.If the sleeping partner wants 90% to himself as the highest contributor, he should be active as well. Its more like he lent money to the active partner. Just like interest is given to every fixed deposit by banks, even though the depositors money might yield more money, banks will still give you 5% for every 100k deposited at the stipulated time depending. I think the profit should be shared for clearity as follows :Divide it into 4 parts, two parts goes to the sleeping partner as the main contributor, one part should go to the active partner for his own contribution, the remaining part should go to the active partner for the running of the business and compensation for his hardwork in putting the business in progress. If the sleeping partner wants to partake in this, he has to get active as soon as possible. This is my own advice to you Op.

InvertedHammer:
60/40.
Investor: 60
Managing partner: 40

The person with the fund has more to lose. If the venture fails, both of you walk away. But he will walk away with additional N2m loss unless you have a forgone alternatives that are valued as much. In such case, both of you will be even. But your situation doesn't fit that scenario.

With your expertise, can you start the business without the fund? No.
With his fund, can he start the business without expertise knowledge of the intricacies involved? Yes.

If you want to appreciate his input, try getting a business loan from a bank. The risk is if you get a loan from the bank and the business fails, the bank expects their fund with interest back. The extra 10% you are giving up should be looked at as the tuition you are paying for the startup. Once the business is running and profitable, you can then re-negotiate for 50/50.

There you have it.
\

Thanks Sir very much for your input.

Going forward, whose name should machinery bought for the business be under. considering the fact that if the business goes south, partner two can claim that since the machinery needed for the business is still functional, partner one has lost just little as he can sell off the asset (seeing it is invoiced in his name and not the firm) though at a loss to recoup his fund while partner two is left with nothing.
In fact this brings another issue to you fore; who owns the asset of the business, under whose name should equipment bought be invoiced-partner one, two or the firm. Your wise comment is needed. Thanks.

JoRev:
Great idea's can not be bought with Silver or Gold (Money), but Ideas without Capital = daydreams.

I suggest, Partner One should accept 35%-40% and partner Two %65-%60.

Reason is: Partner One though you have all the monies and you plan to invest more, Partner Two has got the ideas and also invest his time and energy into it more.

When Partner Two realise you are not greedy for Monies, he will be happy,double his effort and bring more ideas that will creat trust and even make the Business grow bigger.

If you go for 50/50 I can assure you once the business is strong;Partner Two may, start another Business (on His own)and let the one you both have fail!

Make sure you have any sharing formula in written and documented form.

Thats just my Two cent.

Many thanks Sir, for your input in this issue. wise words.

Maybe you can comment also on the issue of ownership of you firm's asset i.e whose name should be on the receipt of equipment bought by the firm for its use?

Is it partner one, two or the firm. If any of these, what repercussion does this have on the sharing formula?

sisisioge:
50-50 won't be a bad item for now considering that if the partner that invested 15% were to decide to sleep too, they would have to pay a professional with his capabilities to handle the work. In other words, the equal profit sharing will compensate for all the works he does.

50-50 appears fair to me for now. They could decide on a change of agreement in 2years.

Your view is appreciated Sir! Thanks.

yomi007k:
Financer partner 1 60 percent.

Manager partner 2 40 percent.


The manager shud know dt he needs d investor in ds initial phase n shud keep building his confidence.

In d future he can do wtout d investor.


My take.

Thanks for taking time out to consider the post, truly appreciated.

4C2215131:


Thanks for taking time out to consider the post, truly appreciated.

No problem bro....we r here for each other.



If u can give him 65 percent seff do it...

In d long run u will be d winner....he will come to u n u will den quote 30 percent for him.



But pls build ur business well.

kaboninc:


Both partners are contributing what the have to the success of the business. One stakes more money than the other and the other stakes more time, effort and skills than the other. Personally, I would have love a debt-kinda partnership whereby as I own the idea, and I have a high certainty of the business succeeding, I'll rather you loan me some money to support my seed capital and repayment will be stretched over period of time - the longer the better.

Truth is, without money, business won't survive and without work business won't survive. If they share it 50/50, the guy who is bringing the bulk of the money would not be comfortable with it. He who brings the money always have a position of strength to bargain.

On the side of the entrepreneur:

So I'll suggest that the capital be turned into a Debt (and if both parties can agree, the debt can be turned into Equity should there be a default in agreement at a later date).

On the side of the venture capitalist, I would go for 70:30 - I take 70% and the other partner takes 30%. Lol I am greedy but what of the risk of uncertainty that the business will go south?

However, this should have been sorted out from the onset.

Partner one is not interested in the loan-debt idea hence the debacle.

Thanks for your take and your comment on whose name should machinery bought by the firm be under and it's impact on the sharing formula will be deeply appreciated.

kaboninc:


Both partners are contributing what the have to the success of the business. One stakes more money than the other and the other stakes more time, effort and skills than the other. Personally, I would have love a debt-kinda partnership whereby as I own the idea, and I have a high certainty of the business succeeding, I'll rather you loan me some money to support my seed capital and repayment will be stretched over period of time - the longer the better.

Truth is, without money, business won't survive and without work business won't survive. If they share it 50/50, the guy who is bringing the bulk of the money would not be comfortable with it. He who brings the money always have a position of strength to bargain.

On the side of the entrepreneur:

So I'll suggest that the capital be turned into a Debt (and if both parties can agree, the debt can be turned into Equity should there be a default in agreement at a later date).

On the side of the venture capitalist, I would go for 70:30 - I take 70% and the other partner takes 30%. Lol I am greedy but what of the risk of uncertainty that the business will go south?

However, this should have been sorted out from the onset.

Just a quick one if I may, this is the 'onset' as the business is about taking flight save this little issue.

kolaish:
BESIDES THE EQUITY SHARING RATIO (85/15)THEY BOTH CONTRIBUTED, THE 2ND PERSON SHOULD BE PLACED ON SALARY AS THE MANAGER OF THE BUSINESS. I HAVE BEEN INVOLVED IN BUSINESSES LIKE THIS BEFORE AND WHAT WE DO IS FIRST OF ALL SHARE THE PROFIT ACCORDING TO HOW MUCH EACH PERSON CONTRIBUTED TO THE BUZ. SECONDLY, THE PERSON WHO SPENT HIS DAILY LIFE RUNNING THE BUZ IS PLACED ON A MONTHLY SALARY SCALE.

OK then, nice one. Many thanks for your contribution.

greggng:


In addition contribution should not be ruled out. In my own opinion profit should be shared 40/60. The one bringing capital should collect 60 percent while 40 is for the one with the idea. The risk in looking at contribution is that it will bring less motivtion from the one managing the business.

Many thanks Sir for your contribution.

Numericals:
They should have spelt that out in their deed of partnership. My opinion is of little or no importance.

The 'spelling out ' is the reason for this post. Please, your opinion does matter. Regards.

phyllosilicate:
Q: How do you divide the equity if two partners have money to invest, and the third has the idea and will put in the work?

A: This is a huge foundational issue that can make or break your company, as it will affect every aspect of the business and will have consequences for the entire life span of the venture. Therefore, it is important that you set yourself up for success.

The person who has the idea and is going to do the work should be the majority owner of the business with the money partners getting a small minor share. Too many founders make the mistake of giving away too much ownership, control, influence and power to the money partners.

While they should be super grateful for the offer of an investment, it is important to remember that the blood, sweat and tears, the long hours, the stress and the grind is for the founder to carry, for the most part, alone.

That said, the money partners are super important and are major reason why your business will succeed if you don’t have access to your own money. Just make sure that the terms and conditions are in the startup’s best interest. The money partners will not be running the business and they will have other careers and businesses to focus on besides yours. When the going gets tough, most investors will not be arm in arm with you solving and fixing the problems. Those that do are golden so try to seek them out.

The founder should be adequately taken care of with majority equity ownership percentage, stock options and a parachute should his/her employment be terminated down the road.

It is also very important that the investor is adequately compensated for their trust and belief in you. In many cases you can get a convertible loan or straight debt financing instead of giving away too much equity, as these are usually more attractive from a tax perspective to the investor.
The question of valuation and percentage ownership for the business partners is always a thorny and uncomfortable subject. Get a valuation formula or mechanism agreed to and in place up front before you take their check in order to avoid downstream problems.

Many businesses fail because the partners cannot agree on the value of the business and the ownership percentages. Most of the time this is because the founder thinks that their idea is the next billion dollar unicorn, blinding them to the reality that almost every business fails.

If your business is pre-revenue and pre-profitability it can easily be argued that the business is worth zero. So don’t kill a potential financing opportunity because the investor wants to value your "idea" at $ 500,000 or $ 2 Million. Be grateful that you are one of the few that actually get financed as most start-ups never do.


Do not make the mistake of trying to own a large piece of a small pie when owning a smaller chunk of a bigger more viable business would be better for you, your partners and the company.

Try to avoid investors who are looking to control you through the legal documents. Beware of agreements that force you to give up board seats, veto rights, anti-dilution rights and approval rights. Instead you want partners that believe in you, who trust you and most importantly who empower you and support you. We call this ‘friendly money’.

You want partners who add significant value by rolling up their sleeves, working in the trenches, providing mentorship, expertise, and/or connections. These folks are called "smart money."

If you can get both friendly and smart money then accept the investment with gratitude and run hand in hand with your new money partner towards success.

https://www.entrepreneur.com/article/274735

Hmmmm...some rhema!

Sir, will you be kind enough to comment on who owns the assets (machinery and stuff) of the firm. Should receipts bear the name of partner one the financier, two the manager, or the firm as an entity in itself. if partner one insists receipts should be in his name or partner two insists thus, how does this affect the sharing formula? Thanks for your input.

VEE2010:
@OP, from your explanation here, I think partner one is just playing a role not more than a money lender. To me, he should not earn more than 35% of the profit. My opinion though.

Very well. Thanks for your input.

How many ideas has Dangote. Idea is good but capital is better. Many ideas are in the grave that could not transform into money. So the guy that brought the capital should have a higher percentage. The field guy should be paid salary and his 15% profit.

lonelydora:
I was involved in such business model and it failed because we didn't sign an agreed sharing formula before i doled out the money. In my own, I brought 95%(including cash and machinery) required for the business.

At a time, my partner started feeling cheated, even though, we were sharing the initial profits 50-50, because I was still doing my 9-5 work and he was the one running around for the business. He said afterall he runs the day to day activity. He demanded for 60-40 in his favour and I rejected it. He started doing some jobs behind me for months, and taking the profits alone, and when I ask him, he will say, there's no business because things are hard. He did this for months before I found out. We had to call it a quit. I'm yet to recover my money.

My advice: document and sign every single detail or agreement about the business. When signing the 'agreement' just remember that "I shall" and "I will" have two different meanings. Involve a lawyer and get every damn thing signed. You can share for now 50-50 until the biz stands because remember he has the expertise required. Goodluck and God's grace.

can u tell us more about this pls? the details..so we can all learn

If I was the partner that invested bulk of the startup capital, I'd agree easily to 50% sharing formula but with no 'buying back clause of shares' clause.

If I invested bulk of the experience, I would agree to even 70%:30% sharing formula but with 'buying back of shares' clause

4C2215131:


Partner one is not interested in the loan-debt idea hence the debacle.

Thanks for your take and your comment on whose name should machinery bought by the firm be under and it's impact on the sharing formula will be deeply appreciated.

Partner two needs to find a way to at least get a commensurable benefits for all his efforts. Let me ask again, what is the ownership structure of the firm as set out in the CAC Forms? From there we can say that share of profit should be according to each one's holding. Partner 2 can also draw up an agreement entitling him to a certain percentage of profits or bonus.

Every machinery bought should be in the company's name and owned by the company. It should not be in the name of anyone not even a staff or shareholder. When the partners wants to part ways then the asset can be valuated and based on mutual agreement then the sharing can be done.

Please never purchase company's assets in the name of any other entity except the company no matter what unless it's a lease arrangement or something similar.

4C2215131:


Just a quick one if I may, this is the 'onset' as the business is about taking flight save this little issue.

Very good.

Please discuss and set out these terms and have it signed by both parties.

lonelydora:
I was involved in such business model and it failed because we didn't sign an agreed sharing formula before i doled out the money. In my own, I brought 95%(including cash and machinery) required for the business.

At a time, my partner started feeling cheated, even though, we were sharing the initial profits 50-50, because I was still doing my 9-5 work and he was the one running around for the business. He said afterall he runs the day to day activity. He demanded for 60-40 in his favour and I rejected it. He started doing some jobs behind me for months, and taking the profits alone, and when I ask him, he will say, there's no business because things are hard. He did this for months before I found out. We had to call it a quit. I'm yet to recover my money.

My advice: document and sign every single detail or agreement about the business. When signing the 'agreement' just remember that "I shall" and "I will" have two different meanings. Involve a lawyer and get every damn thing signed. You can share for now 50-50 until the biz stands because remember he has the expertise required. Goodluck and God's grace.

I've also found out that even after signing agreements if one does not follow up, demanding for status update periodically then one is still prone to be cheated.

So insightful

banio:
How many ideas has Dangote. Idea is good but capital is better. Many ideas are in the grave that could not transform into money. So the guy that brought the capital should have a higher percentage. The field guy should be paid salary and his 15% profit.

You are wrong bro, Dangote had an Idea and his uncles sponsored it, so Dangote actually owned his business not his uncle.

From what the Op said, The partner B approached partner A to join him to develop an idea into a successful business, so I think partner B actually owned the business and should benefit more.

apache77:


can u tell us more about this pls? the details..so we can all learn

Details how? It's self explanatory

kaboninc:


I've also found out that even after signing agreements if one does not follow up, demanding for status update periodically then one is still prone to be cheated.

Yep, but that's where you need lawyer incase one party derail on the agreement.

icelord:
partnership act was in 1890

Noted Sir

Cwhyte:


You are wrong bro, Dangote had an Idea and his uncles sponsored it, so Dangote actually owned his business not his uncle.

From what the Op said, The partner B approached partner A to join him to develop an idea into a successful business, so I think partner B actually owned the business and should benefit more.

All the cement industries, crude oil refining etc are Dangote's idea. My friend money is the man. It is only the rich that speaks in family meeting.

4C2215131:



Hmmmm...some rhema!

Sir, will you be kind enough to comment on who owns the assets (machinery and stuff) of the firm. Should receipts bear the name of partner one the financier, two the manager, or the firm as an entity in itself. if partner one insists receipts should be in his name or partner two insists thus, how does this affect the sharing formula? Thanks for your input.

I'm sorry I can't answer the question as I am not a financial expert. I only shared the article.