Situation: We are negotiating a partnership venture. We would fund the entity, and the partner will earn ownership through sweat equity. How do we draft a fair partnership agreement?

Advice from the CEOs:

• The most important factor is the ability of the two partners to drive a successful venture: proof of ability to contribute needs to be a prerequisite to allocating ownership.
• How does the sweat equity partner prove their capability?
  • Create a schedule of milestones for the partner to earn ownership, based on mutually agreed objectives or revenue generation.
    • The beauty here is that you retain control until the partner has proven their value by delivering results.
    • The potential downside is long-term liability of the venture.
      • The longer that you retain majority ownership, the longer you retain majority liability.
      • Insure yourself against this liability.
  • Buyout clauses are important to retain your interest if the partner fails to deliver.
  • Include a liquidation clause in case the venture fails.
• Negotiating the agreement:
  • Draw up a 6-month letter of intent. Specify what each side brings to the table and what each commits to deliver. Set clear, measurable, time-bound objectives.
  • Negotiate fair protections desired by each party.
  • Consider a consultant to facilitate settlement of areas of contention.
  • Theoretically, each party needs their own legal counsel. This adds expense but provides protections for each in the final agreement.
  • Factor the cost of legal advice as well as consultant facilitation into your planning model.

Key Words: Partnership, Joint-Venture, Sweat Equity, Agreement, Negotiation, Buy-Out Clause, Liquidation Clause, Letter of Intent (LOI)  [like]