Can You Be A Partner Without Putting Up Money?

I'm running a LLC that is a spin off of another LLC. I was working for the original LLC for a year when the 2 partners decided to start the spin off LLC. I let the partners know I wanted to be involved and they decided to let me run the spin off LLC by myself, which I've been doing for the last 2 years.

We are now in equity talks for this spin off LLC and one of the partners is under the impression that I deserve NO equity because I never invested money into the LLC (the other partner seems more flexible, but only for a very small percentage). However, I've run the entire business since inception! We're talking about 12-14 hour days here (Sweat Equity). That includes all sales, customer communications, marketing, creative vision, business development, website development and design (online business), and managing the teams I hire to execute upon development tasks and marketing work (The partners do participate in self promotion to bring attention to the original LLC; which brings attention to the spin off LLC. So, there is valuable marketing being done by them that has an impact on the sales of the spin off business). The partners spend their time focusing on the original LLC and self promotion while letting me run the spin off LLC; however, now that the spin off business is becoming more lucrative the partners are starting to get more involved.

A couple of extra facts:

• the 2 partners started the original LLC 3 years before the spin off LLC
• The spin off LLC would not exist without the credibility of the original LLC, but the spin off now makes more money than the original and has paid off the debt of the original so the original could stay in business over the last 2 years (partners agree with this).
• I was not their at the start of the original LLC. I came in 2 years after it's inception. But, I was there at the beginning of the spin off LLC.
• One of the main products being sold by the spin off LLC is a training program that was originally created by the partners for employees of the original LLC. I have made large improvements to the program over the last 2 years, which has had many positive effects on both the original LLC and the spin off LLC. I also facilitate the entire training and customer experience with the users in the spin off LLC, along with running the business.
• I wasn't what you would consider an "experienced CEO" coming into this position. I have experience running my own small, unrelated business and managing another business, but not in being a CEO. My current title is actually Director, because "CEO" seemed like overkill when first starting out 2 years ago. It might be more appropriate now.
• I've never invested capital in either the original or spin off LLC. However, the bulk of the investing by the original 2 partners occurred in the original LLC. Very little money was needed by the partners to start the spin off LLC (the spin off is an online business). If I wanted, and they agreed (which I'm not sure they would), I could match the money invested into the spin off LLC (which at best is as high as 5-10k), but I cannot match the money invested into the original LLC (250k+).
• Because the spin off business pays off much of the debt from the original business, there is little money left to pay me or invest back into the business. I take 5 percent of sales and only on select products with no long term commitments. There has been a verbal agreement with the partners for the last 2 years that I will not take a larger percentage of sales, or a percentage of sales off certain products, because the original LLC needed the money. I've been barely scrapping by for the last 2 years, but working night and day to run this company. Isn't this what a partner does?

So, since I never invested capital, but ran the entire spin off LLC since inception for deliberately very little money, do I deserve partnership (of the spin off, not original LLC)? What amount of the spin off LLC do you believe I deserve (assuming the 2 partners are split 50/50)?

Thank you for your time on this.

AnthonyO

7/22/10

Thanks to everyone willing to share their thoughts. This really helps. I understand completely that anything I write will be biased. I did my best to present a balanced depiction of the situation without going into too much detail. Here's some extra info based off the comments below to help define the situation better:

• I do not make a salary in the spin off LLC. Even in the original LLC I wasn't making a salary. I was making over 2x more in my prior job actually. The original LLC was an "eat what you kill" environment. When the idea of the spin off LLC was presented to me I didn't even discuss money. The idea was so new that we discussed commission after the very first sale. I've been in sales in the past and knew 5 percent was very low, but I agreed under the vague agreement that I would be "taken care of later".
• I'm treated like an equal partner at the firm, even for the original LLC. I'm the only non-partner with an office and the partners approach me for advice on a variety of important business decisions. In 3 years they have never questioned my work ethic. The partners leave the office at 6pm. I stay till at least 8:30pm every single night. No exaggeration here. I believe one of the partners started grooming me for partner 6 months ago by pushing me to do more self-promotion. I just don't want to be the 1% partner!
• My reasons for not negotiating up front are 1) My past business and management experiences did not make me feel confident that I could negotiate a good deal in writing. I (naively?) thought I would have more leverage after i proved myself (the partners really pushed this too). 2) I was passionate about the product and had "big" ideas that motivated me to work without pay; which has paid off in past (smaller) endeavors. 3) I saw the opportunity to advance my career considerably if the LLC worked out; which it has. 4) I had a lot of hurdles starting out and struggled to build teams, so in the mess of it all I focused on educating myself, goals, and building the business, and not on what I was going to get out of it. Now that there is a stable and growing business I'm worried about what I'm "going to get out of it."
• I signed a non-compete for the original LLC 2 years ago, which might have lapsed because of a 2 year work agreement clause, but I never signed a contract for the spin off LLC. Not sure if that means anything though. Frankly, there is a lot of intellectual property that I'm bringing to the table, and I'm starting to hold back the development of ideas, because of this seemingly irrational position by the partners. Friends and employees are a little perplexed by their position; which brings me up here to get more opinions.

Thanks everyone.

7/24/10

I was approached by one of the partners today. He said they were willing to give me equity, but they are struggling with giving me anything significant; that is, over 10%. Here's their reasoning:

• The partner claims that both partners have lost a considerable amount of money in the original LLC (I'm assuming an initial investment of 250K and losses under 1mil). In their head, the partners consider both LLCs the same thing because the main product being sold in the spin off LLC originated from the original LLC. So, when they argue repeatedly that they have invested and lost a considerable amount of money in the "business," they really mean both businesses, even though they only made large investments in the original LLC and the original LLC is the only one that losses money.

I find this to be their strongest point; and really the only point they are making consistently. Nevertheless, the money I've lost in not making a salary for two years has been considerable. And their losses have been minimized by the profits coming in on the spin off LLC I'm running. I made enough money from commissions to pay bills only, but I do not consider that as them paying me since I'm running the entire business. Am I correct in thinking this way?

Nevertheless, to properly object to their line of thinking I believe I'll need a strong argument about my loss of income, sweat equity, and the partners making money from my work (or at least limiting losses from my work).

thx

Update After reading OPs updates, I think my initial assessment seems right, and moreover the situation seems broken beyond repair. The two partners are stuck on the losses of the past, and emotionally unwilling/unable to let go of their sunk costs.

The 'new' LLC that OP runs is making money, the 'old' LLC that the two partners run is loosing money, yet the two partners think they "deserve" the overwhelming majority of the pie. Ideas are cheap, execution is what matters. Even if the idea was germinated in the 'old' LLC that doesn't make them deserve of 90% of the venture.

OP is additionally not getting any regular salary. My take would be to go see a really good lawyer, and learn exactly how far those non-compete clauses extend. Then consider leaving the company, and set up shop on your own.

Mandatory disclaimer: The decision to go solo and leave is yours and yours alone, you must own it yourself. Don't act just because someone on a board tells you to; act if it feels right for you, and only if a clear-headed market analysis shows true potential.

/update It's really hard to come in and offer impartial advice in your situation, for better and worse you've been 'married' to those two other partners for years. It is hard to tell who is right and wrong now.

I've been barely scrapping by for the last 2 years, but working night and day to run this company

This isn't entirely clear, but I understand it to mean that you're getting a below-market salary and putting an above-market work week.

I'm sorry to bring bad news here, but I don't think there is any chance of you getting equity now. As I understand, you have been working for 2 years already, and the company formation was 2 years ago. The time to negotiate equity is generally before the company is formed.

Now the 2 partners are used to giving you a bad deal; and they have undoubtedly rationalized a number of reasons why this is "fair" (by which I mean it is not fair, but the two partners are telling themselves that it is in order to maintain their positive self-image). To give you substantial equity now would require the two partners to internalize that they where wrong all along. Worse yet, they'd have to face that you are a better businessman than they are. That's a very tough sell.

To answer the question in your title: Yes, you can absolutely become an equal partner on sweat equity alone. Had I been negotiating with you when the company was first spun off, and had I been somewhat impressed by you, then I would have offered you 1/3 ownership (so that it's an equal partnership, 3 people * 1/3) with an earn-in period (vesting).

You could try to negotiate for equity now. But be wary of them offering you a tiny percentage (3-5%) just to appease you, and then continue to operate as if they're the only owners.

Maybe you should start out on your own; and take your good name and personal connections with you?

Jesper is correct that this needed to be negotiated up front. Obviously, that comment is more to help someone in the future. Your current reality is that since the past is done, the more important you are to the future of the LLC the more likely you are to be able to negotiate a serious ownership position (20%-33%).

If you have not already signed a non-compete then do not sign one without a serious equity position. Then decide how marketable your skills, relationships, etc. are and make the tough call if these are the kind of people you want to keep working for. Might be time to start something else.

I can understand your wanting to be compensated for what you have done, but I can't understand why you want to stay. These two jokers don't appreciate you (At least one doesn't seem to.). Their main business isn't profitable. You're going to be a part owner of a spin-off LLC with the two main owners (they'll never treat you as an equal) siphoning off most of the revenue. I question whether or not they'll ever invest any more money into the company. They'll resent you not putting in amy capital.

Determine what the business is worth. Decide what you're worth and turn down any offer that falls short. Since they are struggling, maybe you can work some of the other stock/vesting suggestions in stages over time.

Unfortunately, they're going to kill the goose laying the golden eggs.

I would probably give you around 30% without further negotiation, though on a vesting / option plan that keeps you in for a lot longer and requires you to get substantial revenue growth to actually get the 30% (so that at the end I only spend money you still earn).

Unless the truth is different as you put it (and the truth is always a three bladed knife, as the klingons say) you deserve it.

Some of this depends on the risk you had initially. If you were getting fair market salary the whole time you were working on this then perhaps it is fair to say you really have no skin in the game and that you need to either prove your value or to put in money. If you took a lower salary and went above and beyond normal business practices then there is a claim on your side, but, most employees at software companies work lots of extra hours for no equity. Try to be objective and try to see this from their perspective - that will help you in getting what you want/need/deserve.

You need to show the value that you bring and that you deserve the equity stake.

Good luck! Let us know how it goes.

EDIT
Based on the new content

I would definitely hash this out with them. It appears you deserve a significant stake. Ask them what it would take. If you don't get what you want be prepared to walk away.

10% is generous. Entering into a business with no equity nor a written contract does not entitle one to a "share" of a company. With this line of thinking, a person working at an entry level position could argue his "sweat & equity" made the company porfitable.