|New web business venture|
How would you structure it?
Let's say you were considering a new web venture. You are thinking of collaborating with another person.
You have (but they don't have):
- a great domain name that cost a lot to acquire
- technical and SEO skills to build the site
- plenty of experience of running online businesses
- money to invest
They have (but you don't have):
- the passion to build the busines
- the skills to build the "people" network
- plenty of knowledge of the area the site will operate in
In other words, you have what they don't have, and vice versa.
How would you structure this deal to best advantage? Would you go in for a 50/50 split, throwing in expensive pre-purchased items such as domain name in return for their time?
Or would you propose a different split, as you're investing money and they are not?
Or perhaps you would retain ownership of the domain name until such time as it was paid for by profits from the busines, at which point transfer it into the business name?
Or some other deal?
How would you structure such a deal?
There is no one-size-fits-all rule for setting up a partnership. (Other than you MUST have some sort of written contract in the first place.)
I would suggest that all of the partners need to work together and agree on the valuations for the assets (money, domain name, computers, etc.) brought to the partnership. The more intangible assets (SEO experience, people skills, etc.) will be harder to quantify, but do need to be taken into consideration.
They also need to agree on the value of the work each will be performing for the partnership. If you're going to be paying yourselves a salary from the start, that's pretty easy- just agree on salaries based on the work you'll be doing. If you won't be paying slaries right away, you'll need to setup some sort of "fake salary" that you build up and use for determining the profits once you start making money.
You should also have some sort of "divorce agreement" written into the contract. Who gets the domain and other assests if one or both partners decide to leave. What about the leftover money? etc.
Off topic, but I need to throw this out: you talk about the partner's time, enthusiasm and passion. In my experience, those things wane when you get to the daily grind required to achieve anything great. What I do not see you saying is that the other person has any commitment or skin in the game.
That might or might not be a problem, but I think LIA's comments about fake salary and divorce become all the more important in light of that.
The only relationship better than those built on love are those based on cash. So you need to make sure that your parter is well compensated. And you both have a well defined exit strategy.
I've always found that partnerships work best if there's a clearly defined ownership of duties. You do this, they do that, and you aren't the boss 'o them in their job. In other words, partners are 50-50 in terms of sharing tasks; they're 50-50 in terms of assigning indivual tasks, then you own 100% of your half of the tasks. If they do marketing, they do marketing and keep your beak out of it :).
The initial problem is that you are starting with 100% of nothing and they're going to build it so that you both have 50-50 of something. I don't know that there's a best way to build someone's ownership from 0 to something. In fact, I've run into this before.
I was offered a substantial portion of ownership for doing SEO on a project. I didn't have time for a maybe, so I declined. They built the traffic, then called me back to ask about the SEO again. At that point I said 'sure, but how bout a cut', and at that point they declined - because now they had a gtd. traffic base.
THanks for your interesting responses.
LifeInAsia, can you explain more about what you mean by a "fake salary".
Do you mean that you note down on a spreadsheet what each party WOULD have earned, had we be paying salaries, and if (when) the business does start generating money, then the real salaries can start being paid out as well as the fake (backed up) salaries?
Just wanting to clarify that as it sounds important!
Sort of, but it doesn't have to mean paying the salaries retroactively. What I originally meant was a way for the non-investing partner to create equity in the partnership.
For example, let's say partner A invests $100K, while partner B invests $0. All the investment money goes to equipment, rent, etc., so there is no money left over for salaries. Partner A is just an investor (no involvement in the day to day operations), while partner B does all the work. The partnership agreement states that partner B gets a "fake" salary of $100K/year, which is paid in equity in the company. So after 1 year, each partner has "invested" $100K each into the partnership, making each a 50% owner. (Tax-wise there's a bit more involved than that, but you get the idea.)