In your opinion Is the below agreement fair?

[Mike12345]

So two guys named Jeff and Steve are going into business together to start a plumbing company. Jeff is a master plumber and his been doing plumbing work for 10 years and he has ALL of the knowledge and experience doing actual plumbing work. Steve has started a business before which after 5 years had revenue of a million dollars annually and Steve knows nothing about plumbing work. The idea is that Jeff does all of the plumbing work and Steve does everything else which includes office work, answering the phones, scheduling, marketing, bookkeeping etc.

Also, Steve will put up $50k to start the business and Jeff will put up no money.

Jeff is going to get a guaranteed salary of $60k the first year (guaranteed meaning even if the company does 0 dollars in sales Steve will personally pay Jeff 60k that first year out of his own pocket. If the company does do enough business in that first year then the company will pay Jeff and Steve will not pay Jeff's salary out of pocket) Then for each additional year Jeff will get a salary of $60k contingent on the company actually making enough money to pay him.

Steve will get no fixed salary ever but the ownership breakdown of the company will be 75% for Steve and 25% for Jeff. These percentages are for ownership of the company, the share of the profits and ultimate authority on all decisions (meaning in the end Steve has final say on any disagreements).

Does anyone think either party is getting screwed? Is it fair?

 

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[Mike TG]

Hell no it isn't fair. Here is why.

I don't know if you are Steve or Jeff in this situation but here is what I would ask Steve...

How much is a really good plumber? Is he 60k a year plus 25% of your asset? Or is he somewhere in the range of $20-$25 an hour? Big difference.

Unless you are inventing something new (think Steve Jobs and Steve Wozniak) then a technician can be an employee. And should only be an employee. Guaranteeing a partner a salary on a new business is a recipe for disaster. I know it probably feels better to have someone that knows the industry, but the truth is, Jeff doesn't know the industry. He knows how to fix toilets.

I was in a similar position once. Let me save you tens of thousands of dollars. The hard part of the plumbing business is managing costs, reaching new customers and selling the service. The easy part is fixing the toilet.

 

[MJ DeMarco]

Fair is somewhat subjective to each owner's needs.

I'd be more concerned about management issues than fair. Expectations and multiple scenarios should be ironed-out.

Is he 60k a year plus 25% of your asset? Or is he somewhere in the range of $20-$25 an hour? Big difference.

On the flipside, what's to prevent Steve from working 6 hours a week while Jeff works 80 hours a week? 75% of that work will belong to Steve.

 

[Kak]

Steve should put money up and hire The plumber as an employee

 

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[wadza]

Doesn't sound like a recipe for success to me. Partnerships rarely work out well as different expectations often emerge after time. If Steve wants to own a plumbing business then he should set it up himself and hire a plumber.

If Jeff wants to own a plumbing business then he should hire an office administrator / manager. If Jeff just wants to be a plumber he should go and work for a plumbing company.

 

[Mike TG]

@MJ DeMarco, this is true. Steve could be super lazy which would make it a bad deal for Jeff.

I guess I look at it through a "skin-in-the-game" filter. Steve has 50k in the beginning and no matter what happens, 60k salary for Jeff in the 1st year. So he is in it for 110k in just the first year, assuming no other money is put in. Jeff gets a job, a salary and 25% equity.

But I digress. You are right about management issues. It really is a subjective deal depending on how Steve and Jeff work it out.

Question for the OP... Are you currently in this situation? Can we get a few more details?

 

[SteveO]

I don't know if Steve could start this company without a dedicated person to manage the plumbing side. He could hire a plumber but that is what he is going to get.

Of course Steve could really dig in and learn the plumbing side of the business with an employee but that is going to take time and dedication.

I used to be a plumber many years ago. It is very difficult to estimate jobs and get the work done correctly and on time.

I think this is going to be tough for each person. To get Jeff on board and motivated, I think that he should take 1/3 salary with bonuses to help get him to the 60K number. I also think that there should be goals that need to be met that allow Jeff to buy his 25%. If those goals are not met, Steve should have the option to let Jeff go with only what he has earned.

 

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[Mike12345]

@MJ DeMarco, this is true. Steve could be super lazy which would make it a bad deal for Jeff.

I guess I look at it through a "skin-in-the-game" filter. Steve has 50k in the beginning and no matter what happens, 60k salary for Jeff in the 1st year. So he is in it for 110k in just the first year, assuming no other money is put in. Jeff gets a job, a salary and 25% equity.

But I digress. You are right about management issues. It really is a subjective deal depending on how Steve and Jeff work it out.

Question for the OP... Are you currently in this situation? Can we get a few more details?

Thanks for all of the replies. And the short of it is that no, I am not in this situation... yet! Basically I know a guy that is a plumber (steve) and I am Jeff in this situation. About 5 years ago I started a general contracting business with my brother (he had all of the construction experience and knowledge and I would do everything else) The start up money was only 10k (I put up all of it) and we are 50/50 partners and neither one of us get a salary but now we have revenue of about a million a year.

I posted this same exact question on a yahoo answers forum and basically everyone said that Steve would be doing all of the work. One guy even said that "Jeff" was worthless since all he would basically be doing is answering the phones and scheduling (which he said Steve could do on his own with a cell phone plan and a schedule book... so why does he need Jeff?). Obviously these people had no idea what it takes to start a business AND make it as successful as possible.

My logic is I would have to give Steve some incentive to continue to do a good job which is why he gets an ownership percantage. Also, the gaurenteed salary for a year is just to alleviate any fears he has about not getting paid a salary. He has a steady plumbing job right now and if I were just hiring him as an employee then he would have no inventive to leave. And also, if he decided to quit at anytime I would be completely screwed... which could still happen but there is much less of a chance with him getting a salary of 60k and an ownership percentage. In the end I think the risk (potentially 110k) is worth the reward which is being 75% owner of a company with a seven figure revenue in a few years.

 

[MJ DeMarco]

The relationship could work but you HAVE TO have every contingency covered. Partnerships burn because there's always someone slacking, or someone feels the other is getting a bigger benefit for less work. This is the type of stuff that needs to be ironed out ahead of time so when it comes up, there's specific resolutions and outcomes, including liquidation of partner shares in the case of disagreement.

 

[SteveO]

I was looking for an "out" for you if Steve did not work out. You could find another business partner/plumber but he could not replace you. There is NO WAY that I would give someone a guaranteed salary without incentives plus 25% of your company. If you send him away, he still owns 25%. Even if he did not do his part.

 

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[3things]

Steve should put money up and hire The plumber as an employee

This, but maybe give the plumber a performance-based favourable % bonus of annual profits, rather than any physical ownership of the company.

 

[Kak]

This, but maybe give the plumber a performance-based favourable % bonus of annual profits, rather than any physical ownership of the company.

Why? There is a plumber somewhere who will work for market value. Considering he has no tools, a truck, no advertising. He would be screwed on his own.

 

[3things]

Why? There is a plumber somewhere who will work for market value. Considering he has no tools, a truck, no advertising. He would be screwed on his own.

Idk, maybe he's the best plumber in the world I was just assuming he was Steve's plumber of choice and trying to think of a way of getting plumber fully invested/incentivized in the business succeeding, without him actually owning any of the company.

Maybe another way is to offer him a carrot of working his way towards XX% share after 1 year if certain goals are met.

 

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[SteveO]

Maybe another way is to offer him a carrot of working his way towards XX% share after 1 year if certain goals are met.

Sounds like what I said...

 

[m_e]

Honestly... I would say this whole setup is Bad.

Imagine these situations:

1. He quits in The first year. -> You would not only lose your plumper (which is what you are afraid of), you would also lose 25% oft your company. -> You are screwed.

2. He does not work as hard as expected and you cant fullfill your contracts. -> you cant replace him because you are paying him AND gave him equity. -> You are screwed!

3. Lets imagine this actually works out and you make tons of money. What happens in like 5 years? Dont you think he will complain about how he startet it all with you, worked as hard as you and yet you take all the money and he only gets a quarter? You can ignore this for a while or tell him that this was the deal, but if you are unlucky he will eventually destroy the company since he is so unmotivated or is super pissed about the situation. -> You are screwed!

IMO you are taking all the risks. I mean you even pay him with your money. There is absolutely no reason why he should geht equity as well. If he does not want to do it like that, geht someone else. I cant imagine that it is super hard to hire plumpers. Hell you could even work out a deal with one of your competitors if things run bad and outsource the work as long as you are looking for a new guy to hire.