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NEED HELP- Sweat Equity Agreement

lawrence260lawrence260 subscriber Posts: 2
edited March 2015 in Business Planning
Hi all,

I am new here and glad I found this place as I am in the nearing stages of launching a exciting new startup, that I am self funding.

My question pertains to sweat equity agreements. I have sought out partners to join me in my venture, and landed a highly interested team (2 guys that are partners). They have over 30 years experience in this space with great connections, and experience working for large companies at a high level. We have had great talks, and so far are all on the same page.

Now this is where I am careful. I have a proposal in hand that I am skeptical about (only because I dont know much about these). We have a 5% equity stake that rises 5% every six months to a total of 20% at the 24 month mark. This is for both. Basically their LLC will be as the equity partner.

We do have triggers that would start negotiations to transition from equity to salaries or combo, that are not pre-determined, which is ok with me. It kicks in the negotiations after 250K is raised or 100k in revenue. At that point there would be a full time commitment.

Now the part I am wondering about. SEVERABILITY- Beginning 90 days after the formal signing of an agreement both COA and COB will have the
option to terminate the relationship at any time with 90 days written notice. In the event that either or both parties choose to pursue this option, all Deliverables outlined in this document will still be due to COB during the 90-day notice period and COA will retain all
accrued equity earned up to the end of the 90-day notice period.

So basically at 91 days a notice can be givin (90 days), and for 180+ days later they own 10% of the company.

Is there a good structure that would be better suited? Also I need to say that this venture is set to launch in mid May, so if there are any delays than it could bite me.

Any advice would be greatly appreciated.


  • bburkeconsultingbburkeconsulting subscriber Posts: 0
    Your structure seems to have the right idea, but I have a few questions

    -- what is the nature of the venture, and what's the start-up requirement? Also, how much are you bringing to the table?

    I would suggest that if the product/service is very innovative and your intellectual property, trading 40% ownership for 2 guys part time for 2 years may be overpaying somewhat.

    but this truly does depend on what they're bringing to the table. If they bring a client base and/or leads that you couldn't otherwise penetrate, it may be worth it.

    If they have some level of strategic expertise that you could not open the company without, then it may be worth it.

    If there is not something very specific and unique about the nature of their involvement, I would be careful of this structure if for no other reason than it doesn't require a long-term commitment.

    Perhaps this is ok if you only need to leverage them for 2 years and you expect the company to be profitable and practically running itself. If you expect it to take longer, you may not necessarily have the structure that aligns your partners with your interests and the interests of the company. Perhaps a 5% annual stake provided criteria/metric A, B, C would both ensure a commitment of 4 years (which may help you out) and would offer a qualitative/quantitative target so that they have to deliver something other than simply "being present" for that time to be awarded the equity.

    Just my 2 cents --

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