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Entrepreneurs often look to relatives or acquaintances to help finance start-up costs, with the expectation that they will be “silent partners” in the business. Understandably, the investors are anxious to protect their investment. This can lead to conflict between the “silent partner” and the “sweat equity partner”, who is contributing his or her time and efforts.

To minimize such conflict, the parties should enter into a written agreement ahead of time specifying their respective roles in the business.

The agreement should address the following issues concerning the silent partner’s role:

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How much capital must be contributed to the business? Are any of the capital contribution obligations conditioned on the achievement of milestones? Are any payments for the benefit of the business to be treated as loans or reimbursable expenses?

What types of expenditures or operating decisions require consultation with or concurrence by the silent partner? Similarly, certain questions should be addressed regarding the role of the managing partner; what commitment of time and effort is required?

Will the managing partner receive a salary, commissions or other compensation for his or her services in addition to his shares in the company? What intellectual property created by the managing partner must be assigned to the business? The agreement should also specify mechanisms for resolving disputes and governing withdrawal of the participants in the event those disputes cannot be resolved.

by Lisa Renee Pomerantz | Attorney at Law