Partnerships are a popular business structure for many entrepreneurs looking to start a company or grow their existing one. One of the critical aspects of any partnership is the agreement.
This document outlines the roles and responsibilities of each partner, how profits and losses will be shared, and other essential details. The equity partnership agreement sample in this guide will help you draft a proper equity agreement.
This post will discuss the basics of an equity partnership agreement and provide a sample to get you started.
What is an Equity Partnership Agreement?
An equity partnership agreement details the terms and conditions of a partnership where partners own an equity stake in the business. In this type of partnership, partners own part of the business and are entitled to a percentage of the partnership’s profits.
Equity partnership agreements are common in businesses that require significant capital investment, such as real estate development or technology startups.
In an equity partnership agreement, partners share in the profits and losses of the business based on their percentage of ownership. If one partner owns 60% of the business and the other owns 40%, the profits and losses will be split accordingly.
The equity partnership agreement also outlines the rights and responsibilities of each partner, including their roles in the management and decision-making process.
Basics of an Equity Partnership Agreement
Equity partnership agreements can be complex legal documents, but they generally include the following basic elements:
Partners’ Information: The agreement should identify all partners, their contact information, and the percentage of equity ownership each partner holds.
Capital Contributions: The agreement should specify the amount of capital each partner contributes to the business and the timeline for these contributions. It may also outline the consequences if a partner fails to contribute the agreed-upon amount.
Profits and Losses: The agreement should outline how profits and losses will be shared among partners, including any special arrangements or exceptions.
Management and Decision-Making: The agreement should detail how the business will be managed and how decisions will be made. This includes identifying who has the authority to make decisions and what decisions require unanimous agreement.
Buy-Sell Provisions. The agreement should include provisions that address what happens if a partner wants to sell their equity stake. Or if one partner becomes incapacitated or dies. This ensures a plan is in place to prevent conflicts and ensure business continuity.
Dispute Resolution. The agreement should include a dispute resolution clause that outlines how disagreements between partners will be resolved.
Term and Termination. The agreement should specify the term of the partnership and how it can be terminated. Including what happens to the business’s assets and liabilities.
Equity Partnership Agreement Sample
Here is a sample equity partnership agreement to illustrate how the above elements can be included in a legal document:
This Equity Partnership Agreement (the “Agreement”) is entered into on [DATE] by and between [PARTNER 1], with an address of [ADDRESS] (“Partner 1”) and [PARTNER 2], with an address of [ADDRESS] (“Partner 2”).
The purpose of this partnership is to [BUSINESS PURPOSE].
Partner 1 agrees to contribute [AMOUNT] to the partnership, payable as follows: [DETAILS OF PAYMENT].
Partner 2 agrees to contribute [AMOUNT] to the partnership, payable as follows: [DETAILS OF PAYMENT].
Profits and Losses
The partners will share in the profits and losses of the business in proportion to their percentage of ownership. Partner 1 will own 60% of the equity, and Partner 2 will own 40%.
Management and Decision-Making
The management of the business will be shared equally between the partners. Each partner will have the right to make decisions based on their respective areas of expertise. Major decisions, like taking debts, entering into contracts, or selling assets, will require unanimous agreement between the partners.
If one partner wants to sell their equity stake, the other partner has the right of first refusal to purchase it at fair value. If both partners agree to sell the business, the proceeds will be split according to their percentage of ownership.
Any disputes arising from this agreement will be resolved through mediation. If mediation is unsuccessful, the partners agree to submit to binding arbitration.
Term and Termination
The term of this partnership will be [DURATION]. If either partner wishes to terminate the partnership before the end of the term, they must provide a notice at least [PERIOD] in advance. Upon termination, the partners will equally split the assets and liabilities of the business.
This agreement will be governed by and construed in accordance with the laws of the State of [STATE]. Without giving effect to any choice of law or conflict of law provisions.
This agreement represents the entirety of the understanding between the partners and supersedes any prior negotiations or agreements.
This agreement may be executed in counterparts and by electronic signature. Each of which will be deemed original, but all of which together will constitute one and the same instrument.
Partner 1: _________________________
Partner 2: _________________________
An equity partnership agreement states the terms and conditions of a partnership where partners own an equity stake in the business. It ensures that each partner’s rights and responsibilities are clearly defined, helping to prevent disputes and conflicts arising from misunderstandings or disagreements.
While equity partnership agreements can be complex, the basic elements outlined above can provide a framework for creating a comprehensive and effective agreement. You can also utilize the equity partnership agreement sample in this guide to draft a perfect document.
However, it is best to consult with an experienced attorney when drafting an equity partnership agreement. This is to ensure it complies with state and federal laws and adequately protects your interests as a partner.
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