The idea of wanting to know how silent partners get paid underscores the fact that you’re considering taking on silent partners, otherwise known as silent investors. Understanding the models for paying silent partners is crucial to getting them to invest in your company, but it is best to understand the roles of silent partners so as to appreciate their compensation needs.
A silent partner or investor is an individual or organization that invests in a startup to derive a percentage of generated profits. To that end, the ultimate objective of any silent partner is not to get involved with the daily operations of the business, but to obtain financial rewards when profits are declared. So a silent partner only invests in a business and then steps back to watch how the business is run and when to get paid.
So how does a silent partner get paid?
Share Of Profits
A silent partner or limited partner gets paid through equity or partial ownership. That means that during the initial contractual agreement, the parties agree that the silent partner would be paid a fixed percentage of the profits. If a partner is to have 20% stake in a business, it means that he is entitled to 20% of the profit when it is declared.
To this end, if a silent partner contributes $100,000 to a business and agrees to be paid 20% equity, it means that the partner will be paid $200,000 if the company declares one million dollars in profit at the end of the year. A partner may also be paid quarterly or twice a year depending on when profits are declared. Profits are generated from total sales revenue after operational expenses and payroll have been taken care of.
Equity Or Partial Ownership
A silent investor can also choose to be paid by having a limited stake in the organization. So if a partner agrees to 20% equity, he is a partial owner of the business and his investment and ownership are limited to 20%. To this end, the partner owns $2 million worth of the company if it is eventually valued at $10 million.
The partner may be paid his dues annually after profits are called, and he may also sell his 20% stake if he plans to exit the company. The partner may also obtain more profits if the company is listed to sell shares on the stock exchange since this will bring a bigger volume of investment into the business. The bigger the business gets, the larger his 20% stake becomes in terms of company assets.
This is not common, but some silent partners may choose to be paid monthly salaries for their financial contribution to the business. The partner will be paid every month the way hired employees are paid – but the partner cannot be sacked even if employees can be sacked – meaning that the partner gets paid for life so long the business is in existence. But the partner will be paid according to the level of an executive or director.
Managing A Silent Partner’s Reward And Liability
While a silent partnership is a great way to secure funding for your business, it is best to put everything in writing before the silent investor commits his funds. Putting everything in written form helps to manage expectations and outlines potential risks that may impact profitability and viability. Having a legal contract – or silent partnership agreement – in place is best for managing crisis since partnerships can turn sour sometimes.
It must be pointed out that a silent partner is also responsible for the losses and debts incurred by the business. His liability is limited to his investment – meaning that if his agreed remuneration or compensation is 20%, then his liability will be limited to 20% of the total losses incurred. This is very crucial because no partner would want to be more responsible for losses beyond their contractual compensations. This should have been delineated in the partnership agreement.
If you are a business owner and not sure how to proceed with silent partners, it is best to consult a business attorney for help. The lawyer will draw up the necessary agreements and ensure they are enforceable when needed in law courts. The lawyer will also be able to provide direction based on the contract and what is applicable within the business organization.
Photo by Karolina Grabowska