Basic Training: Too Late to Protect Ownership Rights?

Entrepreneurs often get so excited (and involved in) getting the business off the ground, that's it's not until much later that they look back and realize they may not have protected themselves adequately when it comes to ownership rights. Is it ever too late to revisit history?

Q: I have been the sole creator, brand manager, operations manager, production manager, marketing manager, sales director, web designer, photographer, journalist, admin asst., advertising manager, customer service, development director, and shipping department for a company I helped start for a client. I have been paid a monthly fee for this work with the understanding that eventually a co-founder, partnership would be put in writing and we'd begin to build the business and seek investors. So far, my client has seen growth in the company and is eager to find outside backing.

Do I present a sweat equity partnership agreement, giving me credit for work already performed and future work, or a deferred compensation agreement? I really need to increase my earnings at this point and want to negotiate that as well - should all of this be in one agreement? If we are approached by investors soon, I'd like compensation to be coming to me that's equal to what I've brought to the company.

A: One of the problems with "eventually" putting something in writing is that "eventually" may never come. It's always astounding how people may praise you to the heavens, but when it comes to actually parting with a molecule of business ownership, they hem and haw and hedge.

The compensation arrangements in partnership agreements are as varied as the companies that formed them. Legally, you may be on slightly shaky ground trying to boost your ownership percentage based on the work you have already done and have already been paid for. Generally, if you got paid for the work as an independent contractor to a client, that is deemed the fair compensation you negotiated and are entitled to--unless you already had an agreement in writing saying otherwise. However, going forward, you will want to carefully evaluate this business opportunity and your ownership percentages by looking at the amount of time, money, skills, and connections each owner is bringing or providing to the business.

You'll also want to look carefully at your present needs and future goals. If you "really need to increase earnings" so that you can pay your bills, suddenly giving up your fee to become a sweat equity partner may not be the wisest financial move for you. You also need to give thought to "Plan B": that is, what if you did start to raise ownership discussions and your client balks? Are you prepared to continue to provide the services you been providing at your current rate? Are you prepared to walk away from this current arrangement to find other clients? That may be a necessary negotiating tactic to show that you won't get pushed around.

I suggest that you speak with a local attorney about your options. There may be leverage you can bring to the situation depending on the nature and wording of the agreement you have with your client for your current services. In fact, you may be worth more to him now as a Jane-of-all-trades then as a business partner. Once you become an actual owner of this business, it will be more difficult for you to get out of it if the situation turns sour or the investment capital you're seeking doesn't come through. Are you passionate enough about this business for its own merits? And is your working relationship with the current owner strong enough? These are issues you want to ask yourself and discuss with your attorney.