The silent partnership works on the concept of non-interference in company affairs.
When it comes to raising funds for the business, bootstrapping, venture capitalists and angel investors are the standard choices in every entrepreneur’s mind. However, with each investment option, there is a fear of losing control due to outside influence.
If you are not ready to give up control and ownership of your startup, then a silent partner can be your go-to investment source. However, before coming up with a decision, you should understand the role of silent partnership.
What is the difference between an investor and a silent partner?
A traditional investor invests in a startup and gets involved in daily operations. They can also hold an “advisory” position in the companies they are investing in.
On the other hand, silent partners—or limited partners—are investors who invest capital in a startup but have no say in the management decisions and day-to-day operations—hence, they are “silent.” In return, they hold equity control and expect a substantial share in the startup’s profits and losses.
If your only goal is getting funds without interference from external investors, then a silent partnership is your go-to option. What’s more, you get to be your boss and lead your startup journey on your terms.
How does a silent partner get paid?
Though silent partners don’t get involved in business operations, they are liable for profits and losses up to their ownership percentage. In a partnership agreement, the share of profit and loss of each partner is clearly documented. Generally, profit and loss share is divided according to the ownership interest of the partner. For example, if a partner has a 10 percent stake in the company, they will receive a 10 percent share of the profits and losses.
The message here is simple for budding entrepreneurs: If you are interested in making an entrepreneurial debut, go for a silent partner. Still, with all factors considered, set clear boundaries prior to entering into a silent partnership.
Pros and Cons of having a silent partner
Apart from being able to retain complete control over your startup, finding a silent partner can also be much easier than finding a traditional investor or venture capitalist. For instance, your friend circle or family members can be your silent partners. These are the people we trust the most (and vice versa), and hence, there is not much convincing or negotiation to be done as in a traditional partnership. Furthermore, a silent partner can bring with them a great network of other potential investors or customers and thus, help your business grow.
An example of a silent partnership is Cascade Investment, which is funded by co-founder of Microsoft Bill Gates, becoming a silent partner of Water Street Tampa in 2014, a wellness community developed by Strategic Property Partners. The partnership helped expand the project to a much larger scale.
Nevertheless, there are also disadvantages of bringing in a silent partner as opposed to a traditional investor. For instance, some silent partners choose to be “silent” because they are not experienced in the sector your business is in. Besides, they might only want to earn passive income or invest in your startup as a show of support (such as in the case of friends or family being your silent partners). Hence, they might not offer you insightful advice to help your business expand.
If you get a silent partner during the initial stages of your startup journey—consider yourself fortunate; it saves time and effort. In the case of traditional investors, entrepreneurs have to worry about addressing their concerns regularly. Instead, they can use that time to grow their startup.
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