How to Negotiate an Equity Partnership
Launching a successful product or business takes intelligence, tenacity, and serious financial backing. Few people have all the skills and capital to put together the motivated and capable team on their own. To hit the trifecta for success, most businesses need to learn how to negotiate an equity partnership.
What is an Equity Partner?
An equity partner ties themselves to your business or product. Unlike other partnerships, their income is sourced directly from the profit your company makes, incentivizing them to be heavily involved in your growth and success.
Teaming up with an equity partner does not necessarily mean a 50/50 partnership. Instead, the amount of equity the partner receives depends on their contributions to your company or product. Generally, the biggest contribution considered is capital. However, modern partners may supply other essential services like software development and technology audits.
With the high costs of product development and technological expertise, these types of assets can be even more valuable than cash contributions.
The different types of partnerships vary in the levels of involvement and equity for partners. Three of the most common partnership structures include general, limited, and limited liability.
In a general partnership, interest is equally divided with shared responsibility in decision-making and managing day-to-day operations. Although this is a simple partnership structure, it requires equal and consistent contributions from all parties to function smoothly.
Establishing clear individual roles and contributions is important for a successful general partnership.
In a limited partnership, there is not an equal split of responsibilities. Limited partners may contribute less, and less frequently than the primary owner(s). As a result, these partners do not receive equal equity—the smaller their contribution, the less equity they receive.
For business owners, limited partnerships mean less support, but more control. For investors, they offer less revenue but also reduce the amount of money, time, and effort they must put into the partnership.
Limited Liability Partnerships
Limited liability partnerships go a step beyond limited partnerships in removing partners from decision-making. It can protect partners from business decisions made by others. This partnership allows for silent partners who are not involved in day-to-day operations or handling problems the business faces.
Limited liability partners do not typically receive equal equity, instead, getting a return based on the value of their contributions as per their partnership agreement.
A major concern for business and product owners is how equity is divided. Figuring out how to divide properly is important, and relies on a fair exchange of equity-to-contributions. Most often the equity partner receives shares in the business or a percentage of revenue in exchange for their contributions.
As addressed above, contributions are not limited to funding. They can include any value-added support or services such as infrastructure, expertise, development, and partnerships. The value of these contributions can vary depending on the specific needs and capabilities of partners.
Now that you are familiar with the different types of partnership structures and ways of dividing equity, it’s time to look at negotiating. Negotiations with equity investors are one part selling yourself and your product, and one part gauging the investor’s value to you—all while ensuring the deal results in a fair exchange for all parties.
Here are a few key negotiating tips to help make the right deal for your business.
You want to present your business in the best light, but not to the extent of inflating facts or data. Stay honest about experiences, projections, and potential struggles. Your awareness of potential problems can even be a positive, as they demonstrate foresight and knowledge in your industry. Attempting to dance around or shy away from questions can make it harder for investors to trust you, thus making them less likely to join a partnership.
Focus on Finding the Right Partner
It’s easy to get stuck on getting the right share. That, however, can have long term ramifications. Put more emphasis on finding the right partner, rather than your ideal equity division. The right partner can have a dramatic impact on your business, making it well worth giving up a little more at the outset.
While focusing on finding the right equity partner, don’t go too far. You are still shooting for a mutually beneficial agreement. It’s best to aim for equality as much as possible.
To avoid getting caught up in a bad deal in the pressure and excitement of the negotiation, define a clear exit point with your team beforehand.
Negotiation is a conversation, not a lecture.
As important as it is for you to communicate the potential and mission of your business, you must also listen to your potential partners. Negotiations can be slow, and to make that time investment worthwhile you need to listen carefully. This helps you understand what they can do for you, what they expect from you, and where both parties can find value.
When you come to an agreement, layout clear contract terms for both parties. Everyone should understand what they are expected to contribute and what they will receive in return. This ensures a fair deal for both parties.
Equity Partner Services
Torinit works closely with businesses as well as private equity firms and investors. Our technology audits and growth tech assessments are part of our private equity consulting services, helping investors screen targets for potential and reduce risks.
In working with businesses seeking partnerships, Torinit provides invaluable development and technology services as well as boasting a large portfolio of partnerships and proven success models.