I'm the commercial manager of a small start up grain company here in the Texas Panhandle where we are in our second year of operation. Last year we lost some money as expected because we weren't able to get licensed until right before corn harvest and most of the larger farmers already had contracts with the other grain companies. The sell side was rough too because those customers also had contracts with the other companies as well. We got through it though with minimal losses and did a little bit better than expected.

This year, we are set to breakeven if not make a small profit since I was able to put on some good contracts on both the buy and sell side with all of our commodities. Next year should be even better as we gain the producer's and consumer's trust which will open up more opportunities.

Yesterday, the main owner of the company offered me two options. He said I could either have 10% equity in the company and become a partner or 10% of all profits each year. I'm leaning more towards the 10% equity in the company because I don't plan on leaving anytime soon and I think there's more upside potential. There's more risk involved but that doesn't bother me. I think the profit share would be better if I needed the cash but, I'm fine where I'm at right now when it comes to that.

I'm looking for opinions/advice on what you all would do in this case.

That all makes sense, I didn't think about if we do grow that the 10% profit could exclude new growth. Not that I think the partners would do that but you never know. The Us vs Them also is helpful because that is also something I haven't thought about.

I trust all of the partners because they have been good to me so far and when they hired me, they told me that eventually I will have the opportunity to become a partner. This is just new to me and I was never taught in school on what a good contract on becoming a partner looks like.

Generally, 10% commission structures are for sales guys bringing in new growth to young companies. Its paid out basically once even if the customer becomes a repeat customer. If you're lucky you'll see a year 2 and year 3 reduced commission payout for having a return customer spend that same money again the next year. Being an equity partner captures that customer's revenue in your pocket every year.

Any capital contribution/buy in required to get equity?

Okay, that's also very helpful.

Get a CPA involved. There are very different tax answers depending on the structure. For example, you won't be able to get any tax equity without buying it (from the company or the other partners) if it's taxed as a partnership. If you don't, you'll be taxed on the value you receive. Corps have some flexibility with phantom shares and RSUs.

Take the equity...period.

I was in a similar situation a few years ago. I took the equity.

Oh happy day.

Of you want to move on is there something specifying how you liquidate your 10%?

I agree with taking the equity.

You also now have a vested stake in the company. Here are some random thoughts.

Did the company start with investors contributing funds? If so, you should consider D&O insurance (as a company) to protect the officers.

In an effort to build the company, I highly recommend the book "24 Assets" by Daniel Priestly.

StockHorseAg said:

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No, the way they look at is that my labor has been the buy in. We have 180 customer accounts and I manage all of them since I'm the only merchandiser. .

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Based on what you have said, I would likely take the ownership interest. As someone else pointed out, it is my understanding that if you receive the ownership interest in exchange for services, you will be taxed on the value of that interest. I have not looked into that sort of thing though in probably 20 years, so there may be things you can do to mitigate that.

As others mentioned, you need to get a CPA (that does a lot of partnership work) and an attorney involved in this matter.

Best of luck to you!

Thank you everybody for the advice. I'm for sure going to go the equity route. Corn and milo harvest is just now starting up so that's going to be what I'm working on for a little while.

I have some friends through Church who own or are partners in various businesses so I'll ask them on who they recommend in the area as far as CPAs and attorneys.

It appears you have significant leverage in your current situation. Mine was just the opposite.

I was approached by my boss in late December one year, handed a 30 plus page document (full of legal jargon), and told to sign it by 12/31 of that year. In my case, it took five years to vest, 20% per year. A couple of years later, they doubled my equity, and that started a second, 5 year cycle.

There was ZERO opportunity to negotiate...take it or leave it. I signed it. You may be in a much different situation.

Ours was an LLC...and the company took the profits and re-invested them in the company. As such, I never saw a dime of the profits. However, each calendar quarter, I received a deposit into my checking account for the amount of taxes I'd have to pay based on my share of the profits. This always occurred a few days before the IRS quarterly payment deadline. I'd then send the money off to the IRS. The only downside to this arrangement...the financial audit for the fiscal year wasn't completed until late July/early August...so I had to file an extension each year. Of course, the profits from the business were added to my yearly income, but since the company paid the taxes, it was a win/win for me, i.e., no out of pocket taxes to pay.

The equity did not affect my bonus...I still was on a company program where I got my bonus based on a number we needed to achieve.

Over time, those quarterly deposits got bigger and bigger, which was my indication the company was doing as well as they stated.

Here's where it got interesting. There are a TON of Private Equity firms that are always on the hunt for great small companies. Out of nowhere, my boss calls me one night around 7 p.m. and tells me we've been sold to a P.E. firm. I had not fully vested on the second equity offering...but because the business sold I became fully vested (that was part of the contract I'd signed).

The neat thing about P.E. is they buy a majority of the stock and offer equity in the new company to management. Check out What-a-burger and Weber Grill. Both privately held family operations that sold to the same P.E. firm in Chicago. In both instances the families still own a portion of the business, which means they continue to share in the profits.

Not saying that's the route you'll go...but just an example where taking the equity was the right call.

Good luck.

Devil is in the details but if both are good options, I would go equity if young or not close to retirement.

Just make sure you have the $$$ if cash call happens b/c unforeseen things happen.