New venture, I'm absentee owner. I am offering 25% ownership to the person who runs the business. What things should be in the contract?
I am starting a new business. I have a person that will run the business for me in exchange for 25% ownership. Profits are shared after the debt is paid off (approx 2 years) and the person needs to stay on for 5 years for the ownership to vest. They will be paid a salary while debt is being paid off. What sort of things should be included in this agreement?
Do want to, or can you legally restrict what they do with the shares? Can they sell or give them away - or do you want first dibs on shares if current person wants to get out of part or all of their 25% ownership? If you retain first dibs, how will a fair share price be established at a future date?
Think of all the snags the future may create and try to solve them now or put agreed to plans in place now that will work later.
i think you have put together most of the things needed i would put a morality clause and some kind of 60 day letter if he wants to quit which should give you time to find someone else
You need to have an exit provision as part of the agreement, as well as a provision for selling shares to a third party.
It would be helpful to know the initial size of the business including sales, # employees, etc. (I just realized you did say new) My advice would be to vest 5% per year for 5 years. If you are concerned about the person leaving in three years or so, have a guaranteed buy back at $x per 1% for the first 5 years.
You must have a strongly worded covenant of non-competition and trade secret non-disclosure agreement.
You could have additional financial incentives such as: when the debt is fully paid off, if sooner than two years, a bonus of $y and for every month paid off sooner an additional bonus of $z.
Hope that is helpful.
1 - ownership shares held in trust and only given at 5 years time
2 - how do you determine profits before or after tax
3 - what happens if their are losses are they used to reduce the profit?
4 - what are milestones and targets for the 5 years
5 - exit strategy
6 - general liability
7 - expecations
8 - death of a party
9 - restriction of trade
10 - final mangement decisions
11 - fraud of any - how will it be handled
12 - bank accounts and disbursements
13 - salary - performance increases and costs
14 - debt structure plan
15 - missed tragets
The most important things to document include performance metrics, authority for corporate and financial matters (you should control all matters related to corporate obligations-loans, contracts, etc.) AND all of the issues involved in disengagement after 5 years and if things do not go well. As was suggested by others, have multiple disciplines look at any contract draft-not just the lawyer.
The devil is in the details. as stated by others.. make sure you are represented by a qualified full knowing professional team (not just an attorney as this has multifaceted consequences that can turn out both good and bad).
I agree with Dennis. But I will start with this- how well have you vetted this person? Partnerships are very challenging and many stumble for the most fundamental (and human) reasons. If you have not yet prepared your agreements (and it appears you have not), there are many things to consider BEFORE you are ready for an attorney or other guides.
The Small Business Doctor
The details are many to include for just a quick email. However I would like to spend more time talking with you about this business matter. What are 2 good dates & times we can speak on this business matter?
I highly recommend reaching out to John McNeill, his contracts saved our lives :)