Imagine a business partner. Now imagine the same thing, but silent.
Traditional business partners provide funding and typically influence your startup’s day-to-day operations. Silent business partners do the same thing — without the “influencing your day-to-day” part.
For small business startups, enlisting the help of a silent partner may feel like a win-win proposition. The notion of a partner who will contribute money without demanding control likely feels too good to be true.
It’s not. Silent partnerships are a common business practice, and they may just be the key to your startup’s financial success. In this post, we’ll go over what a silent partner is and how you can find silent investors for your business.
What is a silent partner?
Silent partners — also known as silent investors — invest in companies without being involved in daily operations. They invest their money in your business, but they don't attend meetings or make decisions. They don't oversee finances or review strategies. They leave the daily work to the active partners in your business, and they trust that you will manage the business well.
Sometimes referred to as limited partners, silent partners have a limited financial stake in your company and can only lose the amount of funding they've contributed.
How does a silent partner work?
Silent partners are brought on to contribute funds to your business without getting involved in day-to-day operations or major decisions. Because this type of partnership is uniquely valuable to both parties, it's important to choose an investor that your team trusts — and who trusts you.
Here’s how a silent partner works:
- The silent partner approaches you (or you approach them) to initiate the partnership.
- You both sign an agreement, preferably written, detailing the level of investment.
- The silent partner provides their contribution. In return, they secure equity or partial ownership of your business (reflected in a percentage, e.g. 20% of your business).
- The silent partner steps back and lets you run the business.
- Once your business turns a profit, the silent partner receives 20% of the net profit. The profit is what’s left after you subtract business expenses from your total sales revenue.
Finding a silent business partner is the first step. Next, draw up a partnership agreement with which both parties are comfortable. This is non-negotiable, as this document clearly defines the roles, responsibilities, and expectations for your business and silent partner.
After you've settled the legalities of your relationship, how you and your silent partner work together (or don't work together) is up to you. Typically, silent partners simply make their investment and step back, letting you and your team manage all operations and decisions.
How much does a silent partner get paid?
Silent partners get paid depending on their contribution and their equity in your business. Let’s say that your silent partner invested $50,000, and your business is valued at $500,000. That means they have 10% ownership of the business, and they’ll receive 10% of the profits.
Whether this is paid out on a monthly, quarterly, or yearly basis is up to you. The payment terms will ideally be delineated in your partnership agreement.
Though it might sound like a can't-lose situation, it's important to fully understand this type of relationship before diving into it headfirst. Let’s go over the pros and cons.
The Pros and Cons of Having a Silent Partner
Having a silent partner comes with plenty of benefits, but it has downsides, too. You’ll want to weigh these pros and cons carefully when considering a silent partnership.
Pro: You get to run your company on your own terms.
By far the top benefit of having a silent partner is being able to run your business exactly the way you want to.
You probably already have a business plan, a positioning statement, and a go-to-market strategy that will successfully get your startup past its tumultuous first year. You wouldn’t want anyone to alter that vision — especially since the biggest investor in terms of time, energy, and money is you.
Con: You won’t have the advice of experienced investors.
On the flipside, a silent partnership will deprive you of the advice and knowledge of much more experienced investors. Silent partners are typically “silent” because they likely don’t have the business experience to sit in on meetings and suggest effective changes.
A normal business partner or investor wants to have a say because they feel they could help you be more profitable. After all, their contribution is on the line. A silent partner won’t offer much in the way of suggestions or guidance on how to make more money.
Pro: A silent partnership is a low-stress way to get funding for your business.
Because of the low level of involvement from silent partners, it’s generally less stressful to secure funding from them as opposed to securing funding from an angel investor or venture capitalist. Traditional business partners or investors will want to have a say from the get-go, potentially resulting in strife.
Con: Silent partnerships can turn sour.
This is true for any business partnership or investor relationship, but silent partnerships are especially susceptible. Why? If your company hits a rough spot, the silent partner will blame you only because they didn’t have a say in your business’ daily operations.
In contrast, a traditional business partner would be partially to blame for business failures and will be much more collaborative in the remediation or recovery process. A silent partner might berate you or, worse, pull out of the partnership at the first sign of hardship.
Still not sure whether a silent partner is right for you, especially compared to other types of partners? Let’s compare silent partners with other types of investors.
Silent Partners vs General Partners vs Investors vs Secret Partners
Silent Partners vs. General Partners
Silent partners provide financial support and partnership to help fund and grow a company, but general partners are individuals or groups of people who have control over the management, function, and spending of a company.
Silent partners aren't involved in day-to-day company operations like general partners are. Because general partners can make decisions on behalf of the company, they are less financially protected and may be personally responsible for your company’s debts and liabilities.
Silent Partners vs. Investors
A silent partner contributes money to your startup but doesn’t influence day-to-day operations. Investors contribute to your startup and expect to have influence over your business’s operations with the goal of helping you be more profitable. They may sit in on meetings, expect quarterly or yearly reports, and suggest initiatives to increase the profitability of your business.
Silent Partners vs. Secret Partners
Unlike silent partners, secret partners may have a say in the business' daily operations without public awareness of the relationship. Secret partners may, for example, worry that previous business failures will tarnish the reputation of the new venture. As a result, they may choose to keep their involvement private.
People often use the terms interchangeably, and it's possible that a silent partner can also be a secret partner. To protect all parties involved, make sure to clarify exactly how your partnership will be defined.
Speaking of, let's talk about how to navigate a partnership agreement.
Silent Partnership Agreement
In order to keep your entire operation running smoothly and without surprises, you must clearly define the terms of your silent partnership.
Most states require partnerships to be formalized by legal documents that exactly outline the role of each partner in the organization. These agreements should clearly define the responsibilities and liabilities of each partner.
No matter what, be aware of a silent partner’s rights, financial stakes, and risks before drafting an agreement.
Rights of a Silent Partner
A silent partner has the right to earn investment returns (proportionate to his or her initial investment) with limited involvement and liability. Silent partners also have the right to review company financial statements and provide input on changes made to the partnership agreement.
Consider enlisting the help of a securities attorney to help you create the partnership option that accurately addresses all of the silent partners’ rights. Although spoken agreements can be binding, it’s best to document everything in writing so there is no room for dispute or confusion about what each party is entitled to.
Enlist legal help to protect the interests and rights of your silent partners — they’ll thank you for it.
Financial Stakes of Silent Business Partners
In return for their initial investment, silent partners often receive stock in your company as well as a percentage of revenue or profit. The amount of passive income they earn will depend on how well your company does and the agreement you put in place. In most cases, your silent partner will earn a smaller share of the profits than the active partners.
As for debts and losses, all partners in a business venture are responsible for the business' finances. Thanks to limited liability, however, silent businesses are generally only liable for the percentage they initially invested in the business. A partner who has a 15% stake in the business, for example, is only responsible for 15% of its losses and debts.
Both owner and partner must acknowledge the investment for tax purposes, with the silent partner responsible for any profits they make on the investment.
Risks for Silent Partners
Because silent partners aren't involved in the daily operations of your business, trust is vital to the success of the endeavor.
Silent partners have no official input in the profitability of your company or its strategic choices. They have no control over issues like legal compliance, environmental issues, or accounting standards, nor will they have control over how assets are managed. This means the investment could be negatively impacted if incorrect or unethical practices happened to occur within your business.
Not only do silent partners have less responsibility to your business, they also have less liability in it. With the right legal documents in place, a silent partner will be only minimally involved for any losses the company incurs, making it a safer investment than direct, or general, partnership.
But because silent partners are protected from unlimited liability, they generally have no claim on company assets in the case of dissolution until all other obligations are paid.
Bottom Line: Always Create a Silent Partnership Agreement
The particulars of the partnership should always be decided at the beginning of the relationship to avoid legal disputes and misunderstandings.
The internet is full of cautionary tales about silent-partnerships-gone-wrong, and many of the problems stem from people who failed to legally protect their own interests. Even if you're certain that you'd never find yourself in a legal dispute, consider the stories of those before you who believed the same way.
Now that you know the basics of silent partnerships and the basics of crafting an agreement, let’s go over how you can find silent partners for your new business.
How to Find Silent Business Partners
Silent business partners can be anyone — a friend, a family member, a colleague, a stranger, or a business that would benefit from partnering up with you.
Here are some methods for finding silent partners.
1. Ask friends and family.
Start with friends and family who know you well and trust your efforts. Think of your initial efforts as a friends-and-family round in which you tap those closest to you for varying amounts of investment.
Friends and family may be more likely to delay payments if your revenues don't initially meet expectations, and they are less likely to take legal action against you in the face of catastrophic failure. This initial effort may also help you build experience and confidence to engage with those outside of your inner circle.
2. Look for angel investors online.
Next, look to angel investors who typically fund projects during the early development stages. These are often wealthy people who are open to silent partnerships. Venture capitalists, likewise, seek to invest in businesses that have the potential to provide a large return on their investment.
There are also entire online directories designed to help you identify possible investors.
3. Partner up with other businesses.
Finally, consider complementary businesses whose operations might benefit from your efforts. If you launch an event space, for example, consider whether local wedding planners or caterers might be interested in investing in your effort. Their investment can help them diversify their finances and invest in a venture that could boost their own business.
Now, finding silent partners is one thing — getting them to invest is another. Below, we’ll quickly cover a few methods to attract and keep investors.
How to Attract Investors
Investors want to find businesses with promising futures and plenty of room for positive growth. Because they’re focused on the return for their investment, you must develop a business plan that addresses revenue projections to enlist their involvement.
You must also effectively demonstrate how your company will create positive cash flow within a reasonable amount of time.
To effectively pitch your business to investors, be sure to do the following:
- Have a business plan ready. You can improve your odds of securing investors if you establish realistic, quantifiable figures that spell out your business plan and answer any questions your potential investors might have.
- Draft a succinct and effective pitch. Develop a pitch that includes your concept, product or service samples, and information about your existing competition. Check out some pitch examples here.
- Make sure your pitch deck is comprehensive. Include survey results, marketing plans, bios of your key personnel, budget information, and whatever else you feel will make your pitch more convincing.
- Be clear about the funds you need. Clearly outline how much money you're seeking and how you intend to spend it. Detail what you're offering to your investors in exchange for their help.
- Show off your successes. Highlight any media coverage your business has earned as well as major investments you've secured, where appropriate.
Over to You
Effective partnerships can bring together people with complementary skills and varied experience to the benefit of a growing business. Once you understand the risks and rewards of a silent business partnership, you can safely enter an agreement that benefits everyone involved and secures your startup’s financial wellbeing.
Editor's note: This post was originally published in January 2019 and has been updated for comprehensiveness.