ONE OF MY CLIENTS ASKED RECENTLY ABOUT HOW ARRANGING FOR SHARED PROFITS COULD BE USED TO SEED CAPITALIZE A NEW COMPANY.  HE HAS A COLLEAGUE WHO WOULD LIKE TO PARTICIPATE IN THE NEW VENTURE, AND WHO WILL BRING VALUABLE CONTENT AND CONNECTIONS.

PROFIT SHARING IS BASED ON THE NEW COMPANY’S ULTIMATE PROFITABILITY AND IS LIKELY TO ENDURE THROUGHOUT THE LIFE OF THE NEW VENTURE.

REVENUE SHARING (“REV SHARING”) IS MORE OFTEN BASED ON SPECIFIC PROJECTS THAT GENERATE REVENUE, AND POSSIBLY PROFITS, IN TO THE COMPANY.  REV SHARES TEND ENDURE FOR THE LIFE OF THE PROJECT’S REVENUE-GENERATION, AND NOT NECESSARILY FOR THE LIFE OF THE COMPANY.

THESE ALTERNATIVE FUNDING ARRANGEMENTS REQUIRE A GOOD DEAL OF THINKING-THROUGH BEFORE BEGINNING, ESPECIALLY IF YOUR FIRST DEALS MAY SET A PRECENDENT FOR OTHER CONTRIBUTORS IN THE FUTURE.

HERE ARE SOME INITIAL IDEAS TO CONSIDER:

MAKE CERTAIN THAT THE NEW PARTNER IS ACUTALLY BRINGING SOMETHING OF VALUE THAT THE NEW VENTURE NEEDS NOW, IN ITS EARLY STAGES.   IF THE CONTRIBUTION IS MORE SUITED FOR A LATER STAGE, YOU MAY BE WASTING VALUABLE TIME AND EFFORT NOW, WHEN YOU SHOULD BE RAISING THAT SEED CAPITAL.

DETERMINE IF THIS IS A PROFIT SHARE ON THE COMPANY OR A REV SHARE ON PROJECTS.  IF POSSIBLE, START WITH A REV SHARE ON PROJECTS.  IF NECESSARY, CONSIDER A REV SHARE ON PROJECTS, WHICH LATER CONVERTS INTO A PROFIT SHARE ON THE COMPANY.

SET THE ARRANGEMENT SUCH THAT THE PARTNER MUST DELIVER ON HIS OR HER PROMISES, AND THAT THE PROJECTS MUST CREATE REVENUE OR PROFIT, BEFORE THERE IS ANY REVENUE OR PROFIT TO SHARE.   ENTHUSIASM IS NOT ENOUGH.

FOR REV SHARING, TRY TO SET A FAIR VALUE, MAXIMUM CAP ON HIS OR HER COMPENSATION, AND/OR A CAP ON THE DURATION OF THE REV SHARE, FOR EACH PROJECT.

IF THE ARRANGEMENT IS FOR PROFIT SHARING AT THE COMPANY LEVEL, COMPENSATION SHOULD CONTINUE AS LONG AS THE PARTNER IS STILLL ACTIVELY INVOLVED WITH AND CONTRIBUTING TO THE COMPANY.

IF THE PARTNER NEEDS SIGNIFICANT UPFRONT FEES, CONSIDER A HIGHER REV SHARE OR PROFIT SHARE UNTIL SOME FAIR-VALUE COMPENSATION LEVEL IS REACHED, THEN REDUCE THIS SHARE TO A “STANDARD” SHARE (WHICH OTHERS MAY ALSO GET IN OTHER DEALS).

WITHIN THESE GUIDELINES LIES A GREAT DEAL OF CREATIVITY.   STRIVE FOR SIMPLICITY AND FAIRNESS.  REALIZE YOU MAY BE SETTING A PRECEDENT WITH THIS WHICH OTHERS MAY WANT TO FOLLOW, SO CONSIDER WHAT WOULD HAPPEN IF YOU MULTIPLIED THIS DEAL BY 5 OR 6 MORE SUCH DEALS.