Another Partnership thread!!!

[goodal]

I've been working at the firm I'm at for 9 years this May. I started as a draftsman. Worked all the way through college then tested and passed the PE last april. I’m now eligible to become a partner. We are a very small company, 3-5 people at most. We have had this in mind the whole time and are now starting to nail down details. I wanted to get yalls advice on the highlights of the first draft agreement so far. In honor of the last post on this topic I will use Moe as owner number 1 and myself as Badal of course.

All effective 2010:

1) Moe’s salary is to be at set number for 10 years (starting at 1.66 times Badal’s starting salary). Badal’s salary to start at current value and increase

4% per year for 10 years. Ownership to be transferred at 4% per year to Badal for 10 years at the end of which Badal will possess 40% and Moe

60%.

2) Should funds not be available to meet salaries as defined above, both will be reduced proportionately.

3) Badal becomes vested on Jan. 1 2020. Should Badal leave prior to this date, all shares shall be sold back to Moe at 1$ per share.

4) Life insurance policies shall be owned by both parties in the amount necessary to by surviving spouses shares upon death. Policies shall be paid for

by owner.

5) Should Moe’s son (now 8) wish to become an engineer, he shall have first right of refusal. Otherwise, Badal has first right of refusal for Moe’s

shares.

6) Value of the company shall be based on average of previous 5 years gross plus company assets.

7) Bonus’s are not guaranteed and are based on year-end net income and stock ownership.

8) All employees to be paid monthly

9) Corporation shall pay all liscence fees, liability insurance and professional priviledge taxes.

10) Badal will be given company credit card for overnight business expense.

11) Badal will be given company cell phone.

I’ve been told we need to determine a set of company Bylaws and that the company should own the life insurance policies. I’ve stated that I don’t want to be a minority owner to Moe’s son. Any ideas about this good or bad?

 

[udpolo15]

Is Moe retiring or will he be working for the next 10 years?

 

[Santiagj]

I agree about the minority owner to his son. If Moe decideds to retire in 10 years you would be a minority owner to an 18 year old who is entering college. Who says he will finish or will be even a competent engineer.

I have no experience with this stuff but the clause with the son would be a deal breaker for me.

 

[goodal]

Is Moe retiring or will he be working for the next 10 years?

He will be working for 10 years and then going into some form of retirement. I think the idea is by then i can buy a majority stake and he will hold onto enought to provide a revenue stream until he goes to meet that big engineer in the sky.

and yes I WILL NOT be a minority owner to an 18 year old.

 

[udpolo15]

I think I might be missing something. Is he just giving you 40% of the company over 10 years or do you need to contribute capital? What happens if you have a falling out and he fires you at 9 years 364 days? You probably want some type of vesting schedule. You may not want to agree to a specific valuation method but agree to industry standard methods. There should probably be some type of discount because of the the stake isn't very liquid.

Also, what are you exit options after you are vested?

 

[goodal]

I think I might be missing something. Is he just giving you 40% of the company over 10 years or do you need to contribute capital?

Yes he is giving me 40% no money is changing hands for the business transfer.

What happens if you have a falling out and he fires you at 9 years 364 days? You probably want some type of vesting schedule. You may not want to agree to a specific valuation method but agree to industry standard methods. There should probably be some type of discount because of the the stake isn't very liquid.

Thats been a sticking point for me too. I want to get something for my time if we do fall out.

Also, what are you exit options after you are vested?

the thought is that i will stick around and take over the whole kit and kaboodle. But if i want to sell and he doesnt want to buy? I dont know?

 

[EM_PS]

9) Corporation shall pay all liscence fees, liability insurance and professional priviledge taxes.

Im confused - is this an actual corporation or partnership entity?

 

[udpolo15]

I think I might be missing something. Is he just giving you 40% of the company over 10 years or do you need to contribute capital?

Yes he is giving me 40% no money is changing hands for the business transfer.

What happens if you have a falling out and he fires you at 9 years 364 days? You probably want some type of vesting schedule. You may not want to agree to a specific valuation method but agree to industry standard methods. There should probably be some type of discount because of the the stake isn't very liquid.

Thats been a sticking point for me too. I want to get something for my time if we do fall out.

Also, what are you exit options after you are vested?

the thought is that i will stick around and take over the whole kit and kaboodle. But if i want to sell and he doesn't want to buy? I dont know?

Why is he giving that away? If the business is worth something, doesn't he want to cash out the equity he built up? The fact that you are getting 40% for nothing, without knowing all the details, makes this look like a good deal on the surface. It seems to me that you don't have anything to lose by signing up. Is your salary per the agreement competitive? I guess you are giving potentially bigger raises (more than 4%) for equity, but since you have opportunity for a bonus based on ownership, it may be a wash if things go well. Worst that happens is that after a couple years you get a better offer and move on.

Your exit options are probably limited. Once you are vested and he retires, the business is only going to be worth what you can bring in. If you leave, no revenue is coming in and the business goes to $0. Of course you can grow the business and bring in other "rainmakers" who might give you an exit strategy.

A couple of questions that I would have:

1)How much control do I have to grow the business. Do I have access to capital to hire people, marketing, etc...

2) What are the personal tax implications

3) What role do I have in managing the business? What if he wants to hire his son for a cushy internship that zaps all the profit.

4) Is the bonus structure set based on profits and % ownership?

5) Going back to his son - at the end of 10 years, he is going to want to cash out his equity. You will be in the best position to do that. Giving the shares to his son gets him $0.

6) What are provisions for taking on additional partners

Finally, I would contact a lawyer and an accountant to discuss the deal. If you go forward, a couple hundred bucks up front is probably a good investment. Also, there are a few consulting firms that focus on the A/E/C industry and have publications on ownership planning and transition which may be worth a read.

 

[goodal]

Thanks alot for taking the time to give a well thought out response.

I know this is a good deal i just wanted to get some objective opinions.

Thanks again.

 

[MonteBiker]

I think I might be missing something. Is he just giving you 40% of the company over 10 years or do you need to contribute capital?

Yes he is giving me 40% no money is changing hands for the business transfer.

Just a thought... He is not actually giving you the 40% as he is paying you less than his "partner" salary... You are slowly buying this 40% from him over the next 10 years where you are buying more at the beginning and your salary increases as you own more of the company. I would have it written that you are actually accumulating your shares as a function of time over the next 10 years according to how your salary is increasing...

Second, there is a qualifier that "3) Badal becomes vested on Jan. 1 2020. Should Badal leave prior to this date, all shares shall be sold back to Moe at 1$ per share."

I would also write this differently. Think about your code language... "Should Badal leave prior to this date, all shares shall be sold back at the lesser of 1$ per share or the current price per share."

You do not want to get screwed by leaving when the company is only worth $0.25per share... You would then be paying him back an additional $0.75/share more than they are worth. The declining value of the company would be a really good reason not to continue with it... cover your exit strategy wisely! On the bright side, this qualifier does help show that Moe is planning on transferring some number of shares to you per year for the first 10 years... Just make sure that this is documented somehow.

 

[wilheldp_PE]

Second, there is a qualifier that "3) Badal becomes vested on Jan. 1 2020. Should Badal leave prior to this date, all shares shall be sold back to Moe at 1$ per share."
I would also write this differently. Think about your code language... "Should Badal leave prior to this date, all shares shall be sold back at the lesser of 1$ per share or the current price per share."

You do not want to get screwed by leaving when the company is only worth $0.25per share... You would then be paying him back an additional $0.75/share more than they are worth. The declining value of the company would be a really good reason not to continue with it... cover your exit strategy wisely! On the bright side, this qualifier does help show that Moe is planning on transferring some number of shares to you per year for the first 10 years... Just make sure that this is documented somehow.

Uh, I think you are mis-interpreting that...or I am. I think that it means if he leaves early, Moe buys the shares back from Badal. So, if you think that the company will increase in value, you should request the GREATER of $1 per share or current price per share.

 

[goodal]

Verry good points.

Thanks

 

[MonteBiker]

Second, there is a qualifier that "3) Badal becomes vested on Jan. 1 2020. Should Badal leave prior to this date, all shares shall be sold back to Moe at 1$ per share."
I would also write this differently. Think about your code language... "Should Badal leave prior to this date, all shares shall be sold back at the lesser of 1$ per share or the current price per share."

You do not want to get screwed by leaving when the company is only worth $0.25per share... You would then be paying him back an additional $0.75/share more than they are worth. The declining value of the company would be a really good reason not to continue with it... cover your exit strategy wisely! On the bright side, this qualifier does help show that Moe is planning on transferring some number of shares to you per year for the first 10 years... Just make sure that this is documented somehow.

Uh, I think you are mis-interpreting that...or I am. I think that it means if he leaves early, Moe buys the shares back from Badal. So, if you think that the company will increase in value, you should request the GREATER of $1 per share or current price per share.

Good catch. You are right on that. I had read it wrong, but the intent is still the same... You want the best possible situation for yourself if you leave. Sorry about the confusion.

 

[Slugger926]

Has the actual value of the business been established by an accountant? How about the future cash flows, and how they will project?

You may want a copy of the business plan, and verify that you will be getting a fair deal.

Who do you sell to if it is determine you would be better invested in other stocks than have all your eggs in one basket?

 

[goodal]

Has the actual value of the business been established by an accountant? How about the future cash flows, and how they will project?
You may want a copy of the business plan, and verify that you will be getting a fair deal.

Who do you sell to if it is determine you would be better invested in other stocks than have all your eggs in one basket?

Value of the business has been determined to be the average of the previous 5 years gross receipts plus assets (which are minimal). The only way i would sell is i was leaving the company and then probably only to my partner. I dont forsee selling to someone outside the company.

 

[EnvEngineer]

Ten years for 100% vesting is pretty long, I have 5 years to 100% with 20% per year (after 1st year).

All vested shares in the company will go to your heirs, typically the company will co-insure so that if your heirs wanted to sell their shares the company would have money to buy them out.

Compensation outside of salery is always distributed out of year end funds and in porportion to ownership. make sure you have enough salery to make it through the year. (losses are distributed the same way!!)

You are cutting yourself short on the future valuation of the company, looking back 5 years on a growing company will short you 2 1/2 years in valuation. There are typical valuations for engineering service companies that look at current value, backlog and annual growth. You also need a fixed value to apply.. 150 x (projected annual revenue + 50% of expected backlog). Remember if you die this is what you are leaving to your family.

Also will current owners hold 100%, typically there are shares held by the company to issue later to new employees or mgt.

This is confusing, right of refusal of what. If Moe dies his family owns the shares, no discussion unless you buy him out.

5) Should Moe’s son (now 8) wish to become an engineer, he shall have first right of refusal. Otherwise, Badal has first right of refusal for Moe’s

shares.

Lastly you need a working clause, what if moe decides things are going well and he is going to retire? Do you want to keep working to support his 60%. target billable hours to be similar for each working year, ie. you bille 1500 hours he needs to bill 1500 otherwise compensation is reduced and ownership can be adjusted.

You really need a lawyer for this

 

[goodal]

Like it or not, I have no leverage. I can always leave, start up my own company, take 4 years to find clients, pay my own liability, eat rice the whole time while we live in a cardboard box but im not going to do that. I like where i work, the people i work for and what i do, so leaving just is not very appealing. Yes there are some small details to work out and yes it could be better for me, BUT if in the end he doesnt want to change any of this Im just going to have to accept it.

 

[Fluvial]

badal, I just wanted to pass something along to you.

I was talking to a good friend of mine, a professional surveyor, who owns a business with another friend of mine who is a P.E. They have a life insurance setup in their partnership agreement where, if one of them dies, half of the insurance $ goes to the man's spouse and the other half buys him out of the partnership - leaving the surviving partner with 100% ownership.

 

[Dean Agnostic]

I've been working at the firm I'm at for 9 years this May. I started as a draftsman. Worked all the way through college then tested and passed the PE last april. I’m now eligible to become a partner. We are a very small company, 3-5 people at most. We have had this in mind the whole time and are now starting to nail down details. I wanted to get yalls advice on the highlights of the first draft agreement so far. In honor of the last post on this topic I will use Moe as owner number 1 and myself as Badal of course.

All effective 2010:

1) Moe’s salary is to be at set number for 10 years (starting at 1.66 times Badal’s starting salary). Badal’s salary to start at current value and increase

4% per year for 10 years. Ownership to be transferred at 4% per year to Badal for 10 years at the end of which Badal will possess 40% and Moe

60%.

2) Should funds not be available to meet salaries as defined above, both will be reduced proportionately.

3) Badal becomes vested on Jan. 1 2020. Should Badal leave prior to this date, all shares shall be sold back to Moe at 1$ per share.

4) Life insurance policies shall be owned by both parties in the amount necessary to by surviving spouses shares upon death. Policies shall be paid for

by owner.

5) Should Moe’s son (now wish to become an engineer, he shall have first right of refusal. Otherwise, Badal has first right of refusal for Moe’s

shares.

6) Value of the company shall be based on average of previous 5 years gross plus company assets.

7) Bonus’s are not guaranteed and are based on year-end net income and stock ownership.

All employees to be paid monthly

9) Corporation shall pay all liscence fees, liability insurance and professional priviledge taxes.

10) Badal will be given company credit card for overnight business expense.

11) Badal will be given company cell phone.

I’ve been told we need to determine a set of company Bylaws and that the company should own the life insurance policies. I’ve stated that I don’t want to be a minority owner to Moe’s son. Any ideas about this good or bad?

This was 12/1/2009. Were you able to get the deal  ?????

 

[knight1fox3]

Nice almost 10 yr thread resurrection.