Partners and Equity (Part 2): The Basic Principles of a Comprehensive Approach to Dividing Ownership

Posting by Ed Kopf, Ph.D.

In the first blog in this series, I described the many risks and opportunities that arise when partners discuss the division of equity among them. I noted that my colleagues at BMC Associates and I have developed a unique Comprehensive Contributions-based Equity Process (CCEP) that can minimize the risks and maximize the benefits of that critical discussion.

The CCEP is designed to provide a reasoned, fact-based method for discussing a highly sensitive subject among prospective or existing business partners. It is based on four key premises:

• The equity allocated to each partner in a business should be proportionate to the expected impact on the success of the venture of the assets, tangible and intangible, contributed by that partner.
• Partners should have a comprehensive, explicit discussion of their individual perspectives on the assets each is contributing and the respective importance of those assets to success.
• A quantitative tool for evaluating assets and their importance can provide a focus for decision-making that minimizes arbitrariness and maximizes systematic, collaborative consideration.
• The equity discussion must account for unexpected developments, change in the facts or perceptions of partner contributions and other future contingencies.

The CCEP process addresses these premises through five main steps:

1. Thorough discussion by all partners of the tangible and intangible contributions of each partner to the venture.
2. Agreement by the partners on a select set of key areas of contribution which are most important to the success of the venture.
3. Assessment by each partner individually of 1) the relative importance of each of the key areas of contribution and 2) the relative contribution of each partner in each of these areas. This is followed by an analysis by each partner, based on these assessments, which results in a provisional suggestion for division of equity.
4. After thorough discussion by all partners of their respective individual assessments and the provisional equity splits these suggested, agreement by the partners on mutually acceptable ownership percentages.
5. Discussion and agreement on critical non-quantitative conditions of ownership – current and future.

In subsequent blog posts, we will explore each of these steps in detail. In order to convey a concrete sense of how CCEP works, each post will start with a hypothetical (and simplified) account of the equity discussions between the two founding partners of “In-sight Coaching and Consulting LLC.” So, let’s get started with an introduction to the partners.

In-sight Coaching and Consulting LLC

Ellen Birch and Phillip Rivera had known and respected one another for many years. Each was a respected, and successful, coach for senior executives in Southern California. They had jointly done training for aspiring coaches on several occasions and informally discussed working more closely together. Each felt that being a solo practitioner imposed severe limits on his or her ability to innovate and grow their respective practices. About six months ago, they agreed to devote serious time and energy to trying to merge the practices.

The two coaches looked for resources that would help them design their prospective combined venture. Given their experiences with business partners as clients, they were clear that their shared vision and agreement had to go well beyond the legal issues addressed by a conventional partnership agreement. The coaches knew they needed a coach for this once in a lifetime process. Phillip found a consultant who could assist them in developing a Partnership Charter – a structured process for producing a document that would help them reach thoughtful agreements about issues ranging from business vision, operating roles and responsibilities, distribution of profits and equity shares to the interplay of their respective personal styles and values as well as conflict management and exit strategies. (The Partnership Charter process is based on an approach developed by my partner, Dr. David Gage, in his book, The Partnership Charter: How to Start Out Right With Your New Business Partnership {or Fix the One You’re In}, Basic Books, 2004.)

Ellen and Phillip’s Charter discussions increased their enthusiasm. They discovered that they could work and make decisions together quite well and that they shared philosophies about being coaches and partners. They were particularly excited by the way in which their respective assets could contribute to making one and one equal three – or five or ten! Ellen had developed a sophisticated approach to using web-based video and social media to enhance the coaching process (the “In-sight” method) that could really differentiate the new practice from the growing crowd of executive coaches. It would also allow for more effective use of junior associates in a practice. She had never implemented her well-developed ideas for lack of time, technical sophistication and money. As she became aware that Phillip was quite sophisticated technically and was prepared to put capital into their new venture, Ellen began to believe that this was her opportunity to realize her dream. Phillip shared her excitement about this possibility. In fact, they agreed that the new venture would be called “In-sight Coaching and Consulting.”

Things were moving forward at a rapid pace until the prospective partners reached the issue of how to divide equity. This was an unfamiliar subject for the two solo practitioners. Their first reaction was to just divide equity 50/50. But on consideration, that seemed questionable. Ellen began to feel she might really deserve more than an equal share in a practice built around her ideas. Phillip had a similar instinct: he was planning to contribute most of the capital required to develop technologies and expand. Didn’t he deserve more than an equal share? Both prospective partners began to worry about the possibility that, as equal partners, they might deadlock on critical decisions. Didn’t someone have to be the Decider?

As their anxiety grew over how to resolve this critical and increasingly sensitive subject, they were relieved to see that the Partnership Charter process included a recommended approach to reaching a mutually-acceptable decision about equity shares. The Comprehensive Contribution-based Equity Process turned a brewing conflict into an opportunity to deepen their mutual understanding and trust.

We will see how this happened in the remaining blogs in this series.