A silent investor, also known as an angel investor or limited partner, invests money in your business and leaves the rest up to you. As the name indicates, silent investors stay silent as you build and expand the business. They are not expected to actively take part in the day-to-day management of the business.
Now the question is, what does a silent investor bring to the table? The answer is quite simple. He brings:
- Capital (Mandatory)
- Reputation (Optional)
- Connections (Optional)
- Experience (Optional)
- Expertise (Optional)
And what does a silent investor gain from the partnership? An angel investor invests a certain amount of money in a business and expects his share or percentage of profit when the business starts turning in a profit. In simple words, the silent investor gets the return on his investment by only investing the money and not having to shoulder the burden of handling a business.
Does Your Business Need a Silent Investor?
Your business needs a silent investor only if you need the financial help of an investor who will just invest his money in your business and would want no part in the daily operations of your business.
How Silent Partnerships Work
- First, a silent investor/business is chosen.
- Plans and expectations are discussed.
- Then both the groups sign the silent partnership agreement, which is a written form of expectations both of you had already discussed and agreed upon.
- The silent partner follows the SPA and lets the other group work on the business without any interference.
- As per the mutual agreement, the other group pays the silent/angel investor his share of the profit according to the terms discussed and written in the Silent Partner Agreement.
How to Choose a Silent Partner Investor
If you’re looking for a silent partner investor for your business, there are a few things you need to know beforehand.
- Your precise requirements and expectations.
- Your business plans and goals.
- The profit ratio and payment plan.
Silent Partnership Agreement
Silent Partnership Agreement is a written agreement in which two groups legally declare their rights and responsibilities in the partnership. A Silent Partnership agreement is important as it provides legal protection to both groups against any kind of fraud, along with clarifying the limitations and responsibilities of each group. Ensure that you discuss every little detail about the investment, profit, and, payments beforehand and include it in the agreement with utmost precision. Some terms that are typically mentioned in the agreement are:
- The amount contributed by the angel investor
- Terms of how the silent partnership can be revoked
- The additional amount that might be needed in the future
- The profit-and-loss ratio
- Liabilities of the silent partner
- The terms and conditions of the nature of the partnership
- Payment details
- The extent of access and limitations of the silent investor
How much does a Silent Investor get Paid?
The amount of profit a silent partner investor gets paid varies vastly. The profit ratio depends entirely upon the silent investor’s contribution and equity in your business. Usually, each partner gets the percentage of profits and losses according to the percentage of the business they own. For example, if someone owns 80% but the remaining 20% was invested by a silent partner investor, then the profits and losses will be divided in the same percentages. But as said previously, the ratio can vary vastly. The ratio can be increased or decreased, but whatever ratio is finalized, it should be written in the Silent Partnership Agreement.
The Advantages and Disadvantages of the Partnership
Advantages (For a Silent Investor)
- As a silent investor, you get to share the profits of the business without having to manage the business yourself.
- Unlike other investments, you do not need to have a plethora of knowledge, experience, or expertise in the field to invest.
- With new businesses comes a lot of work, but as an angel investor, you get to enjoy the perks without having to spend your nights working hard to stabilize the business.
Disadvantages (For the Investor)
- You do not get to participate actively in business dealings.
- The risk of the partnership turning sour.
- The risk of business failure.
Advantages (For the Business)
- You get the capital you need for your business without having investors actively meddling with your ways of running the business.
- In addition, the silent investor might be happy to use his connections or reputation to help your business grow.
Disadvantages (For the Business)
- The silent investor might just only bring his money to the table, effectively taking away any chance of experience or expertise in helping your business grow.
- The risk of misunderstandings could result in legal troubles.
- Your business will not only be yours. The silent investor will own a percentage of it.
Silent Partnerships have their advantages and disadvantages. A Silent Partner Investor brings in the funds needed for the business, then lets the other group work to expand the business. And when the business starts turning a profit, the silent investor gets the decided percentage of it. There’s a risk of misunderstandings and failure, so choosing a trustworthy partner is a must along with signing the silent partnership agreement which should write out the terms and conditions of the partnership in a clear and precise manner leaving no room for misunderstandings.