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Question added to topic Legal Basics For StartupsJune 23, 2011

What Ownership Stake Should a Departing Partner Keep?

I co-invented a line of products with a friend. We own 100 percent of the company, in equal parts, so I own 50 percent. I need to leave the company due to personal reasons and my partner needs to bring on another partner. My business partner believes I need to give up 40 percent of my share of the company in order to bring on another partner. Is this standard practice? Is 10 percent too low for a co-inventor?
There is nothing in this realm even remotely as simple as standard practice. There are no simple formulas. This will be a matter of what you and your partner can negotiate.

Your question is a great example of why so many experts recommend planning for the break-up of a partnership before you actually start the partnership. These plans are called buy-sell agreements, which can help preserve the continuity of business ownership and to ensure that the partners are treated fairly, as well as any new partners.

These agreements work only when you agree on a formula before there are problems, before somebody needs to go.

Now, however, you're stuck with negotiation. Find a good attorney, or perhaps a mediator who works with an attorney you both trust. You're going to have to work it out. Look for expertise and experience in small business and your type of industry.

Related: Exit Strategies for Your Business
Related: A Guide to Building an Exit Strategy
Tim Berry is the president of Palo Alto Software Inc., based in Eugene, Ore., which produces business planning software. He is also the author of 3 Weeks to Startup and The Plan-As-You-Go Business Plan, published by Entrepreneur Press.

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