Succeeding in Your Business by Cliff Ennico

"I invented a new product and have received monies from a former boss to help the idea take form. Everything has been done in cash. The patent, trademark and design work have all been done in my name. We have not formed any sort of formal entity, nor signed any sort of agreement in writing at all. The product has now generated much interest. My former boss can't raise the money to fund the development and launch of the product. I am receiving offers from other investors now interested in fully funding the product. I would like to reimburse my former boss and move on. What are my options?"

The problem here is that you and your former boss didn't agree in writing on how the money was to be put into the business. There are two ways, and only two, that someone can put money into a business: They either loan it to the business, expecting to be repaid with interest at some point, or make a contribution to the business' capital in exchange for a percentage ownership of the business. Sadly, you will have to negotiate this now.

Since this product is now generating interest and your business is about to leave the launch pad, it is not likely your former boss will just take his money back and go away. He will want a piece of the business' future growth, which can only be achieved if he buys a percentage interest.

Think about offering your former boss a choice: Either (1) he can treat his investment as a "loan" payable in full three years from now (when you will know for certain if the product will be successful), together with interest and an "equity kicker" of 5 percent to 10 percent (no more) of the business' profits payable each year; or (2) he can receive a small percentage (again, no more than 10 percent) of the business as a nonvoting member (that way, he gets a share of your profits, but he can't boss you around if he feels like reviving his former role).

Either way, I would suggest you form a corporation or limited liability company (LLC) for this business as soon as possible, and make sure it is your company, and not you personally, that enters into the deal with your former boss.

"A friend and I are looking to set up a youth-focused, cartoon-oriented entertainment company. We anticipate creating a limited liability company (LLC) for this business, and there will be four partners having equal interests (25 percent each). Can we change percentages of membership dynamically as the company progresses? My thought is to create an incentive structure that has us equal partners to begin with, but revalues the company periodically with percentages of ownership changing as we do or do not meet performance goals.

The short answer to your question is "no." Once you've set the percentage ownership for a partnership, the only ways to change it is for the partners to make disproportionate contributions to capital, or for the partners to buy and sell pieces of their ownership to one another. Either way, it's a cumbersome process, and there's no guarantee the partners will see "eye to eye" about the amount by which each partner's share will be increased or decreased, the purchase price for each percent of the company changing hands and so forth.

A better way to do this would be to set your ownership percentages equally, but then decide on a project-by-project basis how much each partner can take out as a "guaranteed payment" (similar to the compensation an employee would receive) for his or her services on each project before the remaining profits are equally split among the partners. That way, you can all agree to accept lower "guaranteed payments" when times are bad, higher "guaranteed payments" when times are good or simply assign different "guaranteed payments" for each project (giving a higher payout to the partner who brought in the business, for example) without changing your equal ownership of the business or your voting rights.

Even then, however, it's going to be tough to get agreement on the "guaranteed payments." A four-way partnership with equal ownership is a very unstable structure. Three out of four partners will have to agree in order for the company to do anything, and it is likely to be a "shifting" majority (for example, A, B and C agreeing to do the first project; B, C and D agreeing on the next project; and so forth). If two of you decide to go one way, and the other two another, the company will be "deadlocked" and you may have to dissolve the business.

To avoid that, you can have one partner — a different one each calendar year, perhaps in alphabetical order — act as a "tie breaker" with the power to cast an additional vote if the partners are split 50/50. Just make sure he or she carries lots of insurance ...

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.

COPYRIGHT 2010 CLIFFORD R. ENNICO.

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