I'm running a LLC that is a spin off of another LLC. I was working for the original LLC for a year when the 2 partners decided to start the spin off LLC. I let the partners know I wanted to be involved and they decided to let me run the spin off LLC by myself, which I've been doing for the last 2 years.
We are now in equity talks for this spin off LLC and one of the partners is under the impression that I deserve NO equity because I never invested money into the LLC (the other partner seems more flexible, but only for a very small percentage). However, I've run the entire business since inception! We're talking about 12-14 hour days here (Sweat Equity). That includes all sales, customer communications, marketing, creative vision, business development, website development and design (online business), and managing the teams I hire to execute upon development tasks and marketing work (The partners do participate in self promotion to bring attention to the original LLC; which brings attention to the spin off LLC. So, there is valuable marketing being done by them that has an impact on the sales of the spin off business). The partners spend their time focusing on the original LLC and self promotion while letting me run the spin off LLC; however, now that the spin off business is becoming more lucrative the partners are starting to get more involved.
A couple of extra facts:
the 2 partners started the original LLC 3 years before the spin off LLC
The spin off LLC would not exist without the credibility of the original LLC, but the spin off now makes more money than the original and has paid off the debt of the original so the original could stay in business over the last 2 years (partners agree with this).
I was not their at the start of the original LLC. I came in 2 years after it's inception. But, I was there at the beginning of the spin off LLC.
One of the main products being sold by the spin off LLC is a training program that was originally created by the partners for employees of the original LLC. I have made large improvements to the program over the last 2 years, which has had many positive effects on both the original LLC and the spin off LLC. I also facilitate the entire training and customer experience with the users in the spin off LLC, along with running the business.
I wasn't what you would consider an "experienced CEO" coming into this position. I have experience running my own small, unrelated business and managing another business, but not in being a CEO. My current title is actually Director, because "CEO" seemed like overkill when first starting out 2 years ago. It might be more appropriate now.
I've never invested capital in either the original or spin off LLC. However, the bulk of the investing by the original 2 partners occurred in the original LLC. Very little money was needed by the partners to start the spin off LLC (the spin off is an online business). If I wanted, and they agreed (which I'm not sure they would), I could match the money invested into the spin off LLC (which at best is as high as 5-10k), but I cannot match the money invested into the original LLC (250k+).
Because the spin off business pays off much of the debt from the original business, there is little money left to pay me or invest back into the business. I take 5 percent of sales and only on select products with no long term commitments. There has been a verbal agreement with the partners for the last 2 years that I will not take a larger percentage of sales, or a percentage of sales off certain products, because the original LLC needed the money. I've been barely scrapping by for the last 2 years, but working night and day to run this company. Isn't this what a partner does?
So, since I never invested capital, but ran the entire spin off LLC since inception for deliberately very little money, do I deserve partnership (of the spin off, not original LLC)? What amount of the spin off LLC do you believe I deserve (assuming the 2 partners are split 50/50)?
Thank you for your time on this.
Thanks to everyone willing to share their thoughts. This really helps. I understand completely that anything I write will be biased. I did my best to present a balanced depiction of the situation without going into too much detail. Here's some extra info based off the comments below to help define the situation better:
I do not make a salary in the spin off LLC. Even in the original LLC I wasn't making a salary. I was making over 2x more in my prior job actually. The original LLC was an "eat what you kill" environment. When the idea of the spin off LLC was presented to me I didn't even discuss money. The idea was so new that we discussed commission after the very first sale. I've been in sales in the past and knew 5 percent was very low, but I agreed under the vague agreement that I would be "taken care of later".
I'm treated like an equal partner at the firm, even for the original LLC. I'm the only non-partner with an office and the partners approach me for advice on a variety of important business decisions. In 3 years they have never questioned my work ethic. The partners leave the office at 6pm. I stay till at least 8:30pm every single night. No exaggeration here. I believe one of the partners started grooming me for partner 6 months ago by pushing me to do more self-promotion. I just don't want to be the 1% partner!
My reasons for not negotiating up front are 1) My past business and management experiences did not make me feel confident that I could negotiate a good deal in writing. I (naively?) thought I would have more leverage after i proved myself (the partners really pushed this too). 2) I was passionate about the product and had "big" ideas that motivated me to work without pay; which has paid off in past (smaller) endeavors. 3) I saw the opportunity to advance my career considerably if the LLC worked out; which it has. 4) I had a lot of hurdles starting out and struggled to build teams, so in the mess of it all I focused on educating myself, goals, and building the business, and not on what I was going to get out of it. Now that there is a stable and growing business I'm worried about what I'm "going to get out of it."
I signed a non-compete for the original LLC 2 years ago, which might have lapsed because of a 2 year work agreement clause, but I never signed a contract for the spin off LLC. Not sure if that means anything though. Frankly, there is a lot of intellectual property that I'm bringing to the table, and I'm starting to hold back the development of ideas, because of this seemingly irrational position by the partners. Friends and employees are a little perplexed by their position; which brings me up here to get more opinions.
I was approached by one of the partners today. He said they were willing to give me equity, but they are struggling with giving me anything significant; that is, over 10%. Here's their reasoning:
- The partner claims that both partners have lost a considerable amount of money in the original LLC (I'm assuming an initial investment of 250K and losses under 1mil). In their head, the partners consider both LLCs the same thing because the main product being sold in the spin off LLC originated from the original LLC. So, when they argue repeatedly that they have invested and lost a considerable amount of money in the "business," they really mean both businesses, even though they only made large investments in the original LLC and the original LLC is the only one that losses money.
I find this to be their strongest point; and really the only point they are making consistently. Nevertheless, the money I've lost in not making a salary for two years has been considerable. And their losses have been minimized by the profits coming in on the spin off LLC I'm running. I made enough money from commissions to pay bills only, but I do not consider that as them paying me since I'm running the entire business. Am I correct in thinking this way?
Nevertheless, to properly object to their line of thinking I believe I'll need a strong argument about my loss of income, sweat equity, and the partners making money from my work (or at least limiting losses from my work).