Question: I've got a great idea for a business, but I don't have the money to start it. I'd be willing to put in the sweat equity to run the company if I could just find a financial partner to back my idea. Any advice?
Answer: Do it! Just like a real estate developer who teams up with an investor to build homes, an entrepreneur and an investor can be a match made in heaven. The key is to make sure you both go into the deal with your eyes open and feel adequately rewarded when it comes time to cash out.
According to Joseph Fulvio, a management consultant who works with startups and emerging businesses, there are three key elements to making deals like these work: 1) a clear relationship between the operating and investing partners, 2) definable objectives for measuring and achieving success, and 3) a well-thought-out compensation plan that rewards the sweat equity partner for meeting his goals while delivering the targeted return on investment to the investor. Though each deal is different, the amount of compensation (in the form of equity and salary) that the operating partner can expect to receive depends on the amount of time he or she is willing to put in, how quickly the business is likely to turn a profit and how soon both parties think they can take money off the table. "A decade spent managing manufacturing operations and hundreds of employees around the world is different from a 10-person tech shop with a new application positioned for acquisition by Google," Fulvio says. "Conversely, drawing a six-figure salary for a decade after the startup is successful is a payout in its own right that is unavailable to most bare-bones tech startups with 18-month exit strategies."
Rosalind Resnick is the founder and CEO of Axxess Business Consulting, a New York City consulting firm that advises startups and small businesses. She can be reached by e-mail at firstname.lastname@example.org or through her website, abcbizhelp.com.