Profit sharing fair?

[Sir_Flux]

Hello, I'm considering a business venture with a partner. I am the sole financial provider and my partner will be doing 100% of the labor. The partnership was completely her idea and she is the expert, I simply have the means to finance. A profit split is proposed by her, 80% 20% (She gets 80% and I get 20%). I have 0% risk in this, meaning if the business fails she will reimburse me with my full investment (break even, the only thing I would lose is time)

So based on having 0% risk and doing 0% of the labor with providing 100% of the finances - is this profit split fair? Thanks!

[SteveM]

Which came first - the chicken or the egg?

First question: if SHE doesn't have the money to invest in the business in the first place, how will she reimburse you 100% of the money YOU invest? That sounds spooky to me.

Second question: is that 80/20 split before or after her expenses?

20% to 40% equity in the company is generally what angel investors would like to see. What kind of business is this? What is the failure rate? What are the projected sales? What gives you confidence in her to let her play with your money?

The only way faster to ruin a friendship then being roommates is to lend a friend money.

[huggytree]

how can she reimburse you if she has no money????????? if she has the money why does she need you???? your statement makes no sense

i would do a 50/50 split until she has paid back your initial investment....then take 10% after that....that sounds fair....the sooner you can get your money back the better....she will have the incentive to make more profit, quicker this way too.....after your paid back id be happy with 10% forever......the business could fail after a few years....by getting paid quicker its more likely you'll break even.....by stringing it out with only 20% your taking 2.5x longer to get paid back...

there is no such thing as a sure thing in business....also things like this end friendships.....make sure to get a lawyer of your own(dont use her's)....draw things up with full legal council and look at it as a business venture, not helping a friend...friendship should have nothing to do with it

[ArcSine]

Genuinely risk-free investments (US Treasurys) are currently paying less than 0.9% for maturities of 5 years or so. So if your proposed partner was offering a truly risk-free deal she could easily borrow her capital at 2 or 3%.

If the bankers aren't lined up a mile deep outside her door beating each other with sticks for the opp'y to loan money into a risk-free deal at 3% or so, it'd suggest that your risk factor here is something north of zero, and I'm sure you were just speaking loosely to emphasize that you see it as a relatively low-risk venture.

That fine point aside, though, whether 20% represents a good deal or not is very situation-specific. How large is your investment to be, and what kind of profits / cash flow do you foresee this venture generating in the near- / mid-term? Getting 20% of $100,000 in total profits, after having ponied up for $60,000 is one thing; getting 20% of $10,000 of profits against an investment of $60,000 is a completely different matter. Even more so if the first scenario is enhanced by her pledging $50,000 of a personal stock portfolio to collateralize your investment, while in the second scenario she's backstopping your investment with the title to her '67 Rambler.

Similarly, a promise of 20% from a pretty predictable and stable cash flow stream is quite different than a promise of 20% of the bottom line from a speculative, unproven venture whose prospects are anybody's guess.

Hence, whether an 80/20 split is fair turns on several variables not mentioned in your post.

One way to approach this is to take more of a 'lender' approach; instead of some percentage of the profits you receive a fixed interest rate on your investment, which comes out to you first (i.e., ahead of any cash distributions to her, beyond perhaps a reasonable salary for her labor).

That's just one possibility, and it may well be that you see that the "piece of the pie" method (whether 20% or some other %) is the better way for you to go, based on your own forecasts and predictions for the company's likely profit-path. If so, then Steve's second question is golden advice: You'll definitely want to make sure in advance that "profits" is defined very precisely in your agreement. Make certain your understand, and approve of, every expense that's allowable as a deduction in determining "profits" for purposes of calc'g your 20% cut.

Best of luck with the deal!

[Harold Mansfield]

I agree that you are looking at your risk incorrectly. You have 100% of the finacial risk. She has 0% of finacial the risk.
If it fails, she will owe you what you've invested, but has not technically lost any money. Until that happens you have still lost 100%.

If that is 20% of the gross? Maybe.
20% after net? That doesn't sound so good.

[billbenson]

Well boys and girls, maybe she has her money tied up in a trust, 401k or something that she can actually pay back the debt in the event of a failure, but she doesn't really want to use those funds if she doesn't have to? There are a lot of possibilities here.

[huggytree]

Well boys and girls, maybe she has her money tied up in a trust, 401k or something that she can actually pay back the debt in the event of a failure, but she doesn't really want to use those funds if she doesn't have to? There are a lot of possibilities here.

anythings possible.....or this person could just be looking for a sucker to finance her venture......

[merlot105]

No such thing as zero risk ventures when it comes to business. You are saying you are making 20% of her profits for 0 risk? If it sounds too good to be true then it usually is...