Beware of "Wolves In Partner's Clothing
Cliff Ennico
www.creators.com
"I have spent the last two years of my life building a specialty publishing business. I'm a pretty creative person, and have developed some ideas for a line of e-books on various types of hobbies. I've interested a number of large corporations in providing marketing support for these projects, and am in the process of negotiating some big-figure 'strategic alliances' with these companies.
Despite what I've accomplished so far, I feel the need to partner with someone who really understands the business of publishing to help me make this company the success it should be. For the past couple of months, I've been in discussions with an ex-publishing executive. He seems to be a lovely person, and he really knows his stuff. I've invited him to a couple of 'pitch meetings' with some big companies to discuss sponsor deals. I've paid his expenses, and he reviews and critiques the PowerPoint presentations I prepare before each meeting. His suggestions are very helpful, and I usually end up following his advice. But during the actual sessions he doesn't contribute much. When I ask him to contribute more to the effort, he says he will do more as soon as we 'work out a suitable arrangement' for him to come on board.
Last week he finally sent me a written offer to join my management team. He says he can't put any money into my company right now, but is willing to provide 'sweat equity' as the Chief Operating Officer and Chief Financial Officer of my company, with 50% of the stock in my company, a seat on my board of directors, and the right to purchase my 50% of the company he is not happy with my performance in running the company. To be fair, I would also have the right to buy out his 50% stake if I am not happy with him down the road. Also, he insists his attorney, who is also his brother-in-law, draft the documents to make this deal happen. I'm not wild about this, of course, but I am worried that I need somebody like them on board to attract the type of investors and partners I will need to make this business a success. What should I do?"
First of all, I agree with your conclusion that as the "creative genius" of this company you need to balance your management team with some "business types" who can communicate well with the corporate "suits" who will be making the big sponsorship decisions. That shows real maturity on your part, as investors - particularly venture capital types - will look at your management team very closely to make sure you've got someone who "worships the numbers" on board before they will part with their money. Also, investors are very reluctant to put money behind "one man bands", because if something bad should happen to that one man, the music stops playing. You will definitely need to bring on one or more partners to make this business realize its full potential.
The gentleman you describe in your e-mail is not, however, the right person, and you should not make him your business partner on the terms he has recommended. Make no mistake: this guy is out to steal your company.
People like this gentleman are a bit like Wimpy in the old "Popeye" cartoons - they will "gladly pay you Tuesday for the price of a hamburger today." That is, they promise you everything, but they won't agree to do anything until you give them a significant chunk of your business up front. Right now, this person has given you only a few hours of his time that he can easily write off. He is refusing to put money into your company, and you have reimbursed his expenses so far, so he has no "skin in the game" - he has taken no risks, he has nothing to lose, and he hasn't really shown any real commitment to your business.
What recourse will you have if you bring him on as your 50% partner and he doesn't deliver what he promises? Once you make someone your partner, there is only one way you can get rid of him - you must buy him out at whatever price he considers fair. Once this company takes off and becomes successful, that will be a significant chunk of change. I especially don't like his asking for the right to boot you out if he's not happy with your performance - you could end up working like a dog building this business only to have him pull the trigger and force you out in the cold for a pittance just as you're becoming successful. And with his brother-in-law drafting the documents, you just KNOW the terms will not be favorable to you.
If you really feel this person is worth serious consideration as a partner, here's my advice: don't make him your partner until he proves himself. Offer him a "finder's fee", where he gives you his time and gets a percentage (5% to 10% is customary) of any cash you receive from any sponsorship, strategic alliance, or other deal he helps to make happen for your company. That keeps you in control of the business, compensates him generously for his time, and gives him a stake in your success. It also gives you a chance to look at him very closely and determine if he's worth "bringing on board" as a partner down the road.
If he freaks out at this offer, and accuses you of acting in "bad faith", don't let it get to you - he has shown you his true colors, and you don't want him in your life under any circumstances. Tell him (professionally) to enjoy the rest of his life, and start looking for other candidates. As your Mom told you back when you had your heart broken in high school, there's plenty of fish in the sea.
Cliff Ennico (
cennico@legalcareer.com
) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. His latest book is 'Small Business Survival Guide' (Adams Media, $12.95). This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at
www.creators.com
. COPYRIGHT 2006 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com.
