Something Old, Something New

Deal Me In

Don't move forward with a partner without a letter of agreement specifying how each person will participate in ownership of the business. A written agreement protects you if disagreements arise later on when the company starts making money.

Making a deal can be difficult. The inventor won't want to give away ownership of the idea to someone who hasn't yet done anything to help it; you won't want to invest time or energy in the project unless you're guaranteed significant ownership of the invention.

The fairest way to proceed is to strike an "earn your way" agreement with a buyout clause. With this type of agreement, you get no ownership of the company unless you meet certain performance criteria. For example, you might receive a certain amount of stock, or a percentage of ownership, for every $50,000 in sales, up to a certain maximum percentage of the company. You might be able to earn up to 40 percent of the company if the inventor is involved in day-to-day business operations, or up to 60 or 70 percent of a company if the inventor isn't actively involved. With an agreement like this, the inventor doesn't have to give up any ownership unless you produce results, and you know you'll be rewarded if you do your job.

Include a buyout clause that lets either partner buy out the other if the two partners prove to be incompatible. A buyout clause dictates in advance how much one partner has to pay to buy out the other. I recommend a clause that allows a buyout after three years at fair market value, which can be a number agreed to by the partners at the time of the buyout, or the average of the appraisals given by two or three appraisers.

Be sure to have your partnership agreement reviewed by a lawyer.

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This article was originally published in the January 2000 print edition of Entrepreneur with the headline: Something Old, Something New.

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