Opening a Sister Company - Partnership Agreement

[WallaceStevens]

Hi,

I am looking for advice on an important business venture I am about to embark on. I am 32 years old and I've been working at a small studio for 9 years. I started as a designer when the studio only had 8 employees and have moved up to become Art Director and Project Manager. The studio now employs about 20 workers. The studio is owned by 2 brothers, with almost equal share between them. I have become the 3rd most important person in the company. Throughout the years we have had an excellent work relationship and my bosses have always been fair to me - giving me more responsibility and being compensated for it. About a year and a half ago I was offered to be a partner of the company - there was talk of giving me a small percentage (1-3%).

When I recently married, my wife and I began thinking of relocating to the US. My bosses always dreamed of opening a second branch of the studio in the US but the right opportunity never presented itself. When I told them about my plans to relocate we immediately started talking about me opening the studio in the US. My main role would be to bring in new business and as well as manage the US projects - while most of technical work will still be done in the main studio. It is assumed by all partied that at first I will be the only one working at the US studio and only once it becomes necessary to hire employees (because of work load and other factors). I will soon begin negotiations in more detail. This is the first time I go through something like this. The advise I am looking for is in regards to partnership structure, salary, percentage split, and relocation package. Of course I will eventually consult with a lawyer who will look at the contract, but I wanted to get preliminary information for the negotiations. Some information to consider:

It has already been agreed that I will become a partner in the new "sister" company
I will not be putting any capital myself, my bosses will be funding this new venture entirely
It has already been agreed in principal that I will be receiving a salary along with partner dividends
I am assuming that I am the active partner because I will be the most involved in the daily operations. My bosses (partners) will offer advice, guidance, and will help with the decision making but I don't think they will be as involved with the daily operations. Does that make them limited partners?


QUESTIONS

What is a fair percentage split in this situation? My bosses have mentioned an even 33.33% split. Is this fair to me? Should I have a higher percentage because of the relocation, amount of time and effort I will be putting in? (40-30-30?) Do I have more of a liability because I will be the only one at the US company?
Should I invest my own capital in order to have more leverage, even if I don't have to put in any money?
Is it fair to ask for a 25% raise from my current salary considering my new responsibilities, status as a partner, a higher cost of living at the new location?
Is it reasonable to ask for standard social benefits (health insurance, pension, etc) in addition to the salary raise? I assume yes, it shouldn't matter that I am relocating to a new country
Is a salary raise in store if the company meets or exceeds it's target goals each year? Should the raise be a percentage of the profits?
Besides the initial capital for overhead costs (office, computer, accountant), should I also request emergency capital in case of emergency? If so, what is a reasonable amount?
Is it reasonable to ask for a relocation package (moving costs+cash stipend) to help with the move? This seems common, no? Is a $5k stipend reasonable? (remember it's a small studio with no experience in relocating workers)
Assuming the worse, lets say the new venture doesn't take off, should there be a set limit to how long my bosses are willing to support this new business venture? If so, what is a common time frame?
Lastly, going back to the small percentage I was offered in the main studio before any of this relocation came up - let's say I continue to assist in the production of the work in the main studio, is it fair to ask for that small percentage I was offered?
Another general question, do any of these things change if the new sister company is doing well? Meaning, in the beginning they are putting all the capital and it might take some time for the new company to make a profit. If the new company is at a point where it is sustaining itself, plus employees, plus still has profits - do any of these percentages or agreements change?



Thank you for taking the time to answer. If you could please advice according to the numbered list of questions, it will help me keep the advice organized.

Much appreciated!

[Business Attorney]

WallaceStevens:

Here are my quick thoughts:

QUESTIONS
1. What is a fair percentage split in this situation? My bosses have mentioned an even 33.33% split. Is this fair to me? Should I have a higher percentage because of the relocation, amount of time and effort I will be putting in? (40-30-30?) There is no real answer to what is "fair". Given that you are investing no capital and are getting a salary during the start up period when there is probably not enough income to pay your salary from the new US operations, one-third seems pretty fair to me. But fairness is really up to the parties to agree upon. Do I have more of a liability because I will be the only one at the US company? Yes and no. Assuming that you use a limited liability entity such as a corporation or LLC, then structurally, the fact that you are the only one in the US really has no effect on your liability as a member. However, liability is not completely limited and while you have no liability for the debts of the entity, it is possible that you can personally take action that creates a direct liability. As the person operating in the US, it is more likely that you would do that than one of the other owners.
2. Should I invest my own capital in order to have more leverage, even if I don't have to put in any money? No
3. Is it fair to ask for a 25% raise from my current salary considering my new responsibilities, status as a partner, a higher cost of living at the new location? Fair is whatever you agree upon. If you were just an employee, it seems like a raise would be in order. Given that you are being made a partner with no capital investment, that might be considered the sweetener instead of a raise.
4. Is it reasonable to ask for standard social benefits (health insurance, pension, etc) in addition to the salary raise? I assume yes, it shouldn't matter that I am relocating to a new country. I think so.
5. Is a salary raise in store if the company meets or exceeds it's target goals each year? Should the raise be a percentage of the profits? That depends. In many cases, I would say that the ownership interest is how you participate in growth and profits. But again it is up to the parties to agree what is fair.
6. Besides the initial capital for overhead costs (office, computer, accountant), should I also request emergency capital in case of emergency? If so, what is a reasonable amount? There should definitely be some arrangement for emergency needs for funds, whether for capital or operational needs of the business. That does not necessarily mean extra cash in the bank account but should at least be a commitment to provide the funds when needed.
7. Is it reasonable to ask for a relocation package (moving costs+cash stipend) to help with the move? This seems common, no? Is a $5k stipend reasonable? (remember it's a small studio with no experience in relocating workers) If they were asking you to move, I would definitely say yes. However, since you indicated a plan to move to the US before you started the discussion on the new venture, the other owners may feel that they don't need to fund your move. It is certainly worth asking, though.
8. Assuming the worse, lets say the new venture doesn't take off, should there be a set limit to how long my bosses are willing to support this new business venture? If so, what is a common time frame? Yes. This goes hand in hand with your question 6. You should not commit to starting the new operation unless you know you have sufficient funding for a reasonable period of time. The time really depends on your own business plan.
9. Lastly, going back to the small percentage I was offered in the main studio before any of this relocation came up - let's say I continue to assist in the production of the work in the main studio, is it fair to ask for that small percentage I was offered? I think so. You have said that the new operation will generate work for the main studio.
10. Another general question, do any of these things change if the new sister company is doing well? Meaning, in the beginning they are putting all the capital and it might take some time for the new company to make a profit. If the new company is at a point where it is sustaining itself, plus employees, plus still has profits - do any of these percentages or agreements change? The economics can vary based on the success of the business, if that is what is agreed upon. Remember, though, that the initial launch will have been based upon their capital and support from the main studio. They are entitled to be rewarded for the risk they are taking.

[Paul]

I have to agree with David on almost all points. Except perhaps the small percentage of the parent company, but that's not a major point.
In general I would say that is a very nice opportunity for. Especially since you were planning to move anyway. I'm not sure if you had other employment available upon your move.

But here, you are sliding right into a similar position, with salary and a significant equity position. Risk free for you until, and if, the money runs out. For the bits of negotiating, that is very dependent on your relationship with them. Obviously they have great faith in your abilities. I think one important negotiating point would be the year end profit share. Is it reinvested in the company or distributed among the owners (including you)? That essentially is your "raise".

Overall it sounds like a great opportunity! Congratulations and good luck. It's not often employers show so much faith and are willing to invest and share with an employee. You must do good work!