By Fernando Berrocal

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You must be aware, as a prospective startup entrepreneur, that it is extremely difficult (nearly impossible) to create a successful business completely by yourself. Simply put, it is unrealistic to solely possess all the business knowledge and resources needed for a flourishing business. Even if you start by yourself, you'll eventually need to rely on talent and business skill sets that go beyond your expertise.

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However, as the founder of a startup, it's very unlikely that you'll have the cash flow required to offer competitive compensation to outstanding potential employees. In addition, you could require funding to spend on equipment or other necessities for your organization. Even if you lack the essential business resources, you do have "business equity".  You may use this to get what you require concerning resources.

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Risks are involved when transferring equity for skills, abilities, and income. Before you contemplate taking on a partner, you need to have a fundamental understanding of two main concepts: partnerships and equity. In this post, we will go over both of those business concepts in detail.

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So, what is an equity partnership? You must know that there are different types of business partnerships. Some common types are the following:

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• General Partnership (GP): This is a business structure when two or more persons concur to split a jointly held firm's assets, earnings, and financial and legal responsibilities.

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• Limited Partnership (LP): This is an organization with two or more partners. Limited partners are not involved in business management; instead, the general partner manages and controls the business.

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• Limited Liability Partnership (LLP): By cooperating, partners can take advantage of economies of scale while also lowering their liability for the conduct of other partners. This is a flexible legal and tax organization.

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An equity partnership is one in which the equity partners have ownership stakes in the business and share in its earnings. Each party's rights and obligations will be set down in a partnership agreement, along with information on how decisions will be made, how losses will be divided, and how the partnership may be terminated by any party at any time.

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Depending on what the parties discuss, the agreement's terms may change. Profits may be distributed in line with the relative ownership percentages. or according to other criteria.  This might be the number of new businesses each partner generates, the volume of effort each partner puts into the firm, or a combination of these concepts.

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The Advantages and Disadvantages of Equity Partnership

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Like any other sort of business structure, partnerships have benefits and drawbacks.  You should carefully weigh the benefits and drawbacks of equity partnerships before deciding on one. 

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Equity Partnership Benefits

• Combining resources. Partnerships are beneficial.  They bring people together to share knowledge, expertise, contacts in the business world, and/or financial resources for the benefit of the firm. In many cases, a founder wouldn't have another method to obtain these resources.

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• Better operational organization. It might be tempting to make decisions on the spot when you're the only one with that authority. The partnership's legal agreement describes the procedures that must be followed, which will make it easier for you to be more productive.

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Equity Partnership Drawbacks

• Potential for conflict.  Conflicts may arise if you haven't discussed what will happen in each event that your partnership could experience over the operation time. Consider all circumstances that might arise–even improbable ones. What transpires if one partner leaves the company or even passes away? How will each partner maintain their motivation to carry out that duty left by the missing partner? What happens if one partner wants to put in more time or money?

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• Liability. Without a Limited Liability Partnership’s (LLP) legal framework, partners are legally liable for the obligations of the business. Make sure your partnership is set up as an LLP to safeguard each partner's assets in the event of litigation or bankruptcy of the business.

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Equity Partnership Alternatives

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In addition to forming equity partnerships, there are additional avenues for startup entrepreneurs to obtain the financial resources they require to expand their businesses.  In 2022, you have a wide range of inventive finance possibilities on their options. In the following list we will go over the main ones:

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• Crowdfunding: Crowdfunding might be a fantastic choice if you need business finance. You provide funders with benefits such as first access, a VIP experience, or goodies like merchandise in return for cash donations.

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• Family and friends: Another easy source of funding for businesses is through personal loans from friends and family. Other resources may be available from friends and family, such as access to their business networks of professional contacts.

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• Barter: You may propose an exchange: of their time and skills for free goods or services if your business creates something that your ideal partners would appreciate.

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Startup owners may benefit greatly from partnerships.  They frequently propel businesses to far greater success than they otherwise would have by working alone. However, entering into any partnership shouldn't be done carelessly, as there are potential drawbacks involved. Make sure you carefully choose and trust your business partners. Consider every potential issue in detail that might occur, and prepare a strategy to handle it.  If you do decide on a partnership, consulting a legal expert will provide you with a great deal of peace of mind.

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Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.