Clearing the Confusion With 50/50 Partnerships

In this video, we dive into one of the most common legally technical concerns of all multi-founder organizations - should we split equity equally?
And, while you may hear many business attorneys advise you stay away from a 50/50 (or other equitable distribution of ownership), there are places where it's appropriate as well as situations you'll want to opt for a different distribution of equity among founders.
This is the second video in Brett's Business Partnership Mastery Series, where he will be diving into both the philosophy and legal nuts and bolts of mastering business partnerships. If you are a current or future business owner, you will definitely want to stay tuned for videos in this upcoming series, so make sure to subscribe!
Inspired by the content in his book, Partner-Proofing Your Partnership, Brett will touch and expand on the primary concepts he fleshed out in that short read which you can find here:
www.businessattorneyinaustin.c...
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Have questions? Book a call, and talk to Brett today:
clarity.fm/brettcenkus
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You can reach Brett through:
clarity.fm/brettcenkus
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/ bcenkus
www.cenkuslaw.com
braatenwoods.com
merger-resources.com
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Brett A. Cenkus has 20+ years of experience in business law, finance, and entrepreneurship. Through Cenkus Law, PC, he provides advice and services for mergers & acquisitions (M&A), securities offerings, founders’ agreements, and other general business law issues.
Through Braaten Woods, LLC, Brett helps business owners in the lower middle market ($2MM - $25MM) position themselves for sale, find buyers, negotiate, and close M&A deals.
Brett also maintains merger-resources.com, a site packed with free articles, videos, checklists, deal diagrams, template contracts, and other tools to help pass M&A knowledge to others.
Brett regularly consults with entrepreneurs and invests his own capital as an angel investor.
From 2010-2013, Brett served as Chief Legal Counsel of a publicly-traded international oilfield services company. From 2001 to 2006, he and a partner founded and built Paragon Residential Mortgage. Bridge Investments acquired Paragon in 2006.
Brett holds a Juris Doctorate from Harvard Law School and a Bachelor of Arts degree in Economics from Messiah College in Grantham, Pennsylvania.
Brett lives in Austin with his wife, Cathryn, and two children. He enjoys reading, squash, classic movies, great food and wine, and the New England Patriots.
#corporatelaw #mergersandaquisitions #businesslaw #corporatelawyer

[@christina-kf3su]

Doing my due diligence on general partnerships looking for any loop holes and came to your video. I agree with you. I feel confident in a 50/50 partnership whereas this wont work without the other. We each have a significant role in our partnership and know where those lines are to trust one another to make those decisions based on our experience. Also I might add it helps that we both value the risk assessment of a job and cutting corners to save money is not an option. Thank you for sharing.

[@ruandupreez6144]

Damn you are good...

[@palmtemple]

Hi Brett Great content. I have to ask, what are the mug shots framed on your wall, is there any significance?

[@colbywatchorn721]

Thanks Brett, I started a business with a friend and felt things were going weird and made the decision to talk to him about it. He came out finally saying he didn't want to do it any longer. Thankfully finding out now instead of down the road where it would be really confusing and not working out the best maybe going into a mediation. I just watched that video btw. I'm just at the point what to do now legally. I don't know a lot about it, however am willing to learn. Do you have any videos about what to do legally to remove the other person from the business entirely? There's the portion where both of our names are on it and it's going to be me only. I can take this head on, however I could use a few pointers.

[@BrettCenkus]

Colby, you want your friend to transfer his ownership interest to you. Typically, we make it a sale, even if the purchase price is only $100 (you may be familiar with agreements that reflect a nominal purchase price of $1 - this is the same thing, just using a slightly less ridiculous figure). Usually, the exiting partner sells and assigns their equity (e.g., shares in a corporation or a membership interest in an LLC) back to the company (effectively, it ceases to exist). We might call this type of agreement a Business Separation and Release Agreement. It would cover the sale of the equity back to the company, a representation from the exiting partner that they aren't owed anything, have no claims on the business, and no claims against the business or the other partner, non-disparagement and confidentiality, etc. The key is to document your friend's relinquishment of all interests in the business. If it's clear that he owns equity, just saying he doesn't own it any longer doesn't really do the trick technically. He should actually transfer his ownership. If the situation is unclear or the exiting party didn't ever receive an equity interest, but they have some sort of ownership claim, you likely wouldn't need the sale/transfer concept.

[@jessicagill6097]

This was very helpful for me. My friend and I are starting a buisness and we have decided on a 50/50 structure. Also in the comments your reply about compensating money put in and then 50/50 profits is what we have already talked about as well as your point about how much work one partner might put in and should also be compensated.

[@sarsvfx]

Bro did it work put

[@sarsvfx]

I meant out

[@WaleedAlmoliki1]

Thank you Brett, I want ask you about if you want to be a partner with a big company to start sale them products in another country outside Canada and they said me split of business ( Is it 50/50? Is it 60/70 Etc. ) , what's your opinion about this agreement? What is my answer for them?

[@ShashankNaithani]

Thanks a lot I am backing off from 50 50 partnership. MY partner assuming there is no work and y to sit in the office. But I think as a startup, we need to make our own website, visiting cards, brochures, telling friends, making strategy for marketing goals. Few weeks ago, my old client ask me to do a make over of a website and then I told him to work on this project as a company project. He handed over the designing part to his wife, she did but did not completed the mobile responsive design. When i realise that I have been waiting for him to assist me he is occupied with family work, somewhere outside, pickup and drop facility for wife etc. I started and completed few coding modules and asked him again to please do this this way it will be more quick and good. He then replied and said "give me the client email id. I will talk to him". I said, right now this is not important as i have already told him that we are working on the makeover of the design. So as i have completed few module, please help me. He said yes, ok. The next day I asked him about the module to code, and he started blaming me for being idle for 3 months before partnership deed. I was upset,instead of getting a constructive solution reply. He is playing blame game with me now. And I am facing emotional game since the day I jumped in. Even I caught him lying to me and found him drunk beside the road talking with his another drunk friend. I begged him that day, touched his legs that i am putting my soul, invested money, travelling 8km from home daily. just because something will change all of ours lives. Also, he is too close to the office, but he has involved his friend who do nothing except keeping office keys, playing youtube and telling my partner what i m doing when he is not there. It is like if he is not present, His friend is filling his place. And my partner acting like a BOSS who owns million dollar company. I am not finding this right either. And now I am quieting this partnership. Never make partners if they don't have same work plan, thinking, respect, transparency like you. otherwise you will be used and you will feel fool like me.

[@BrettCenkus]

I wish it were a more positive one, although thank you sharing your story, Shashank.

[@ShashankNaithani]

@@BrettCenkus brett u know what happened. I talkies to him maturely and he get drunked and then abused me cursed me. Even not dissolving the company.

[@namumakwembo]

thanks awesome video ,I am building a software company ,and I plan to include my friend as a co founder my friend has not done anything for the company yet(he will be the publicist for the company ). I am the programmer and I am building everything from scratch , I am also skeptical about 50/50 , how do you suggest I share ownership we plan to finance the company by ourselves

[@georgeenriquez9115]

Hi Brett. First of all great name. Also one of my sons name. I listen to you and got approached with a partnership as I had a lot to bring to the table so I got the call and invited in and he wanted to go 75/25 as partnership. Doubled the business and income in under 60 days. Invested money and workers and a lot of time. Then he locked me out literally of our business and told me to kick rocks. So I have no clue where to go from here. Like you said in other videos vague contract with something more solid on the backside. So we did 75/25 with me covering “nominal” fees. This happened 2 weeks ago and am kinda confused about what direction to go in now.

[@BrettCenkus]

Hi, George. You need to make a call between two divergent paths - 1) the dispute approach, and 2) the move on with a lesson learned approach. Regarding path #1, if this guy won't engage with you (talk to you), your only option may be to file a lawsuit. For that, you need a litigation budget. While there are always exceptions, you can expect small business litigation (relatively simple case, state court, and not "big law" lawyers and not litigating in NY, LA, or a city where every lawyer charges $800/hour) to run at least $50,000 and more like $100,000 on average. That's simple, solo lawyer, small business litigation in state court (not small claims court), and assuming the case goes to trial. Now, most cases don't go to trial, although you can't typically count on the defendant rolling over when you sue them, and, if they file counterclaims, you cannot just walk away from your lawsuit. So, you need to prepared for more than just filing the suit if you start the fight. Regarding the merits of your case, if you do not have a contract (nothing in writing and no evidence of a valid, oral contract), you probably don't have a great case. Plaintiffs bring lawsuits that aren't great cases and sometimes get the outcomes they want, although, unless you have lots of money to burn, you should be careful about picking a fight where you're overmatched from the outset. That is all to say that, unless you have a clear contract (which can probably be an oral agreement but you'd want witnesses, email documentation, something, at least) and a litigation budget, #1 may be the only practical option. I mentioned small claims court above; another approach is to go that route and seek reimbursement of your out-of-pocket fees. Small claims court cases are limited by size (amount of damages). It's $10K in our county in Texas. That's fairly common, although there are plenty of counties around the country where the limit is $3,500. Our limit is moving (or may just have moved) up to $20,000, which is high compared to other courts. If your county's small claims court has a limit in that range (anywhere above the hard costs you contributed), this may be a practical option for you. The good thing about small claims, though, is that you can do it without an attorney (in fact, in some places, you must appear without an attorney).

[@georgeenriquez9115]

Brett Cenkus Thank you so much for the reply. I’m in CA. We have a contract written up by his attorney. It’s pretty cut and dry. When he started being shady as in not showing me the numbers or giving me access to help improve the business I quickly switches from phone conversations to emails only. I even told him from the get go for clarity and a better understanding and so I have everything in writing I prefer email as a great source of communication. And honesty the only one that I would do. Unless of course we both happened to be at our business. Everybody and their brother warned me about him and a close personal friend and a coach I used to coach high school football with that’s a lawyer even told me even if he has a bag of cash and asked me to go into business with him id expect it to end in court and I’m a lawyer!

[@btnytprem28]

Hi Brett, i am planning to do a partnership with my blinds business to my friend. I just want to ask what share percentage should i offer to him because what i can contribute is the skills and marketing and my partners only contribution is only to finance it meaning he will shoulder financing the shop to built and the rent for 6 months and after that our agreement is expenses willbe taken out of the profit. Now he demands 50/50 is it reasonable that i will be the one to run the business? Thanks!🙏

[@zori8697]

You really help me to out... Wow you are damn good.

[@BrettCenkus]

you're welcome. Thank you for the praise!

[@jackjackson2659]

Hey Brett! I’m in the ATM business and I feel things should be 50/50. I have a verbal agreement from my partner that we are 50/50. To ensure I am 50/50 in the company, what do I need to do? I just want to protect myself on the backend

[@BrettCenkus]

Jack, you should document your agreement in writing. In an LLC, you would do that in an operating agreement (sometimes called a company agreement). In a general partnership, it'd be called a partnership agreement. Depending on your state's laws, a lot of things may default to 50%/50% already, both issues of ownership and issues of control, although that depends (on the state and the type of organization/partnership you formed) and, even if that is the case, creating a clear, custom agreement that reflects your deal is the best protection and also a great way to ensure that both of you are on the same page (it helps with protection on the downside and increases the changes of success to the upside).

[@sravyavivek6268]

Hi Brett , one of angel investor liked my idea and agreed to be a partner for 50/50 he wants to lead marketing and get the business deals. We have spent 3 months in preparing pitches and also he has let me get one client. Also pushing me everyday. He is 10 yrs old than me and also looks stable in life. I am more on tech side and he accepted me as ceo. We also agreed on vesting schedule , should we go ahead what are risks involved . What factors should I consider

[@BrettCenkus]

Sravya, 50/50 partnerships are tough to pull off, especially if you haven't known your partner for a long time and worked together before beginning your partnership. There is a lot of risk around stalemates and misalignments. The vesting schedule means you may not ultimately earn (keep) your full 50%, so be careful that there is not some way that you could be pushed out without your okay (that would not be consistent with a true 50/50 partnership, although carefully read the language around what triggers vesting to stop). Be sure that all votes are 50/50. Sometimes even in a 50/50 partnership, the partnership agreements give one or the other partner more decision-making authority, e.g., to cast the tie-breaking vote, authority as the CEO, etc.

[@iantwitchen4453]

Hi I am in a crappy situation I am the rain maker in the business unfortunately went into a 50/50 to start the business we both have different goals / work ethics the problem now is I have a ball and chain around my legs but the business is very successful not sure what to do this is becoming toxic

[@rob7049]

Hey brother I have a business partner we opened a recording studio together llc we both are 50/50 I’m never around but my partner is always there and he is the engineer there since we didn’t want to hire anybody , so now he is a business owner and he is a a worker at the same time he is getting pay 10$ a hour for recording sessions as a worker and 40$ a hour is what the recording sessions are going for . So he is making 10$ a hour and than we are splitting the other 30$ left ... what do you think I should do as a business owner .. and plus I’m never there I’m getting pay by not bieng there

[@BrettCenkus]

Rob, are you saying that the market rate for his work is $40/hour and he gets paid $10? And, is that the extent of the business (just the hours your partner does recording sessions)?

[@veronicacruz1222]

How bout if the partner is only an investor I’m doing all the job can we still do 50/50??

[@BrettCenkus]

You need to be careful with that one, Veronica. Check out this video - kzbin.info/www/bejne/a4ScdmhvZbprr8U. I talk about the risk of setting up a 50/50 between an active founder and passive outside investor.

[@Dan-bl3tc]

Do a 50/50 and then if theres a stalemate then play chess or sorry and whoever wins that game then get to make the final decision.

[@slugabunny5138]

Two partners own a van They are going to split it 50/50 There are moderate costs in getting it sold. One partner does all the work and spends money to sell the van Van 580$ Advertising 60 Battery 20 Change tires 70 The van sells and the Partner with nothing invested wants half.. Fair?

[@BrettCenkus]

Nope, that doesn't strike me as fair. The partner who didn't spend any money should always be willing to reimburse the other partner who has documented, reasonable expenses that were necessary to sell the van. If the partners had no conversations prior to selling the van, that still should be the case. The partner who spent nothing may question the need for certain expenses, there is room to reasonably disagree about those things, especially if the expenses seem like they could have an ulterior motive (some personal use and possibly not necessary to sell the van). But not be willing to reimburse any expenses, i.e., wanting half of the sale price? That's entirely unreasonable. As for compensating the partner who did the work, that is a tougher issue. Frankly, in this scenario, I'd put the responsibility on the working partner to discuss their expectations for something other than a 50%/50% split before doing the work for which they will later expect to be compensated. Ideally, we all have partners who would have an open and fair discussion post-sale about a reasonable allocation of some of the profit from the non-working partner to the working partner to reflect the imbalance of effort. That's ideal. That's also rare. The working partner should expect the non-working partner not to see this issue from the working partner's perspective. That conversation should have happened before the sale (before the work was done). After the sale (after the work is completed), the expenses should be readily reimbursed, but the working partner should be prepared to accept a 50%/50% split of the remaining profits. The reason I say this is because that is what happens. The non-working partner is certain to convince themselves that they did some work, too. They will also underestimate the amount of work the working partner did. And they will (not unfairly) think to themselves that the working partner should have discussed this expectation of something other than a 50%/50% split before there was no more time to negotiate (rather than jamming the non-working partner at the last minute). Those first two ways of thinking are what you should expect from the typical individual. Again, we should all be looking for partners who spend as much time thinking about our needs and perspectives as we think about our needs and perspectives (and we should reciprocate). But to assume that's what our partner will do in this context if it's a new partner, that is naive. So, the working partner should have done just a tiny bit more work, i.e., had the conversation about what is fair while both sides can make a decision to accept or not accept the other's terms. If the partners have history together, expectations may differ justifiably, I'm assuming that these two partners are new partners.

[@slugabunny5138]

@@BrettCenkus // thank you so much for your reply.. In the end I put out all work and expenses.. & was not compensated.. the non worker made 290 And I made 150 Hindsight 2020 I assumed my expenses in selling the van would be accepted and understood as fair and reasonable.. You really are good ❤ Subbed

[@BrettCenkus]

@@slugabunny5138 you're welcome. I understood why you don't feel like that was fair.

[@slugabunny5138]

@@BrettCenkus // 🌹❤ you're awesome

[@badassz2828]

Hi i have a issue with me and my partner he wants to go 50-50 in a business but I don't have money but I do have the knowledge to run and get the business going I will be putting that from my side he will be putting money which way would be the best way to go about this. Well wondering if you can help thanks

[@BrettCenkus]

Redline, I recommend checking out this video - kzbin.info/www/bejne/a4ScdmhvZbprr8U. Your situation is a fairly common one -- one partner putting in capital for 50%, the other putting in sweat. While I'm not always against 50%/50% partnerships (as explained in the video above), the capital vs. sweat equity issue is a unique one. I encourage you to think it through carefully as lots of people in your shoes later regret the even split. There are ways to make it work with go-forward salary and future equity and things like that, although it's definitely worth thinking all that through carefully. Best success!

[@rememberthomas]

Now, how many percentages should the other partner putting in capital, get?

[@BrettCenkus]

@@rememberthomas there is no simple answer to that question. Generally, we see investors take 10%-30% of a company in a financing round and if there is just one investor, that qualifies as a round. That's a broad range and it isn't the entire range, although it's a fair place to start. The key is for both sides to understand that the relationship needs to work long-term. The sweat equity partner needs to have sufficient ongoing incentive to work and not to regret the deal. You can handle that with salary/draws, too (let the sweat equity partner receive compensation separate from their equity ownership), although in my experience a 50%/50% partnership between a sweat equity partner and a partner who puts in the capital is too rich a deal for the investor. It's exceedingly common for the sweat equity partner to rethink that deal after it's done (and they have the money!).

[@thaime6132]

Nice video. If I work on a project and spending my ow money to build it and my time for years until I make it and suddenly I can’t complete it because of cashflow issues then I get a partner who can help on the development side that I am not Develper why should I give him 50% of the project? Can you explain that please?

[@BrettCenkus]

I don't necessarily think you should give him 50%. That seems like a super high percentage and 50/50 deals have all the risks that I've discussed, so you need to be careful of them. If you have no other money and no other options and believe in and trust this developer implicitly, you might be inclined to give him/her a large percentage of the company, although those are a lot of IFs, 50% would likely still be too much, and you'd want to build in some protections in case he/she did not perform.

[@thaime6132]

Brett Cenkus thank you so much Brett I appreciate your response.

[@BrettCenkus]

@@thaime6132 You're welcome, Dev.

[@aswyers8816]

I am a 80% patron and my partner that has 20% has missed over 200 hours of work this year. He doesn't contribute anything . All the operation are paid by me. He dropped $20,000 last year, this year I have put in another $30,000. I feel his ownership should be %5 because he's costed me more money than he has put in this season . I own a farm, farms need workers. I just want him out he doesn't like anything i do . But I am the one making $6,000 in sales a month And putting it right back into the operation. By next april sales should be $15,000 -$25,000 a month.I have to build up my breeding stock. in 8 weeks my inventory will triple where i will have $18,000 new inventory every month. We have no business agreement Should I make one out requiring him to work 40 hours a month as he agreed? I think it's better to get a loan than have a partner ..Thanks Angie

[@BrettCenkus]

It sounds like you need to work something out for sure, although getting your partner to sign a business (partnership) agreement at this point may be tough. It's unlikely he'll sign something that obligates him to do things / perform at a level that he can't or doesn't want to meet (much easier to get a commitment before the partnership begins than during). If you go down that path, I'd sit down and talk things through with him and try to reach an agreement to commit to a certain amount of work/performance or break up the partnership. Partners can be great, although it's tough to get them right, so I appreciate your comment that you'd rather have a loan! One thing to think about going forward is separating ownership and effort. You generally give out ownership based on contributing property and capital to the business and pay salaries/bonuses for working in the business. It doesn't mean you never give out ownership (equity) for someone committed to working hard in the business (even public companies use equity incentives in that way and most startups divvy up equity), although by separating ownership from effort in this way, you can flesh out what someone brings to the partnership vs. what they contribute on an ongoing basis. And it can be a tool, perhaps even here, for you to take out some additional salary/bonus out of the company before your 80%/20% splits. As with the business agreement, it may be tough to make adjustments now (you need your partner to buy-in), although it's worth hitting your concerns head-on and working through them out or breaking up the partnership.

[@aswyers8816]

@@BrettCenkus I think I have it worked out filing corporate this next week and just giving him his investment back and done with him. I dismissed him a few days ago with a letter on the 16th telling him he's no longer a partner. He's welcome to come get his things . Now at least I know where I stand and what we can accomplish with out counting on anyone else . Thanks Angie

[@BrettCenkus]

@@aswyers8816 I suggest you document that some sort of settlement agreement. Can't imagine how you'd have the right to unilaterally dismiss him as a partner, although it'd be easy to tie it all together with returning his investment. Best success!

[@aswyers8816]

@@BrettCenkus Well one he agreed to work two days a week 40 hours a month and was gone and never showed up. So He's gone. I waited 11 month for him to show up and help me make this this company work! at this point I don;t care if he gets a dime. to day I incorporated the business and I am the only owner.

[@sharkiel896]

There is no way to kick you 50% partner of the corporate