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  1. #1
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    Aug 2019
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    Question How to Create a Profit-Sharing Agreement for Potential Employee and for an Investor

    My question involves business law in the state of: Business is based in Florida


    My partner and I have a startup we are trying to get off the ground and 1) we have someone willing to work for free for a piece of the future profits once we get investors, so does anyone have advice on how to set up an agreement like this, and how do we decide what % to offer them? And 2) our app/web developer loves the idea and also would like a piece of the pie and is considering investing a bit in order to get some future profits. How would we set that up- any advice? He is not an employee but a contractor, and we now realize we should have had him sign an employee agreement in the beginning- oops! So we are backing up to do that, but we feel he has ultra-priveledged information as he has been involved in the development of the app/website, and coming up with ideas for us from the beginning, so maybe a profit-sharing agreement keeps us a bit more safe than just an NDA he signed or the employee agreement we are working on?

  2. #2
    Join Date
    Oct 2014
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    7,312

    Default Re: How to Create a Profit-Sharing Agreement for Potential Employee and for an Invest

    Quote Quoting Msturge
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    My question involves business law in the state of: Business is based in Florida
    How would we set that up- any advice? He is not an employee but a contractor, and we now realize we should have had him sign an employee agreement in the beginning- oops!
    Yes. My advice is to consult both a business attorney and a tax attorney about this. Your options depend a bit on how the business is organized (corporation, LLC, partnership, etc), how it is treated for federal tax purposes, what kind of product or service your company does, the time frame you think it is likely that the company may be profitable, what your goals are, and what the employee and contractor are willing to accept. In other words, this is not something for which I can give you a stock or canned answer. How you do it will also have significant tax implications. Some of the more tax favorable methods result in some significant non tax limitations, for example. So there are a lot of potential trade offs here that you and your partner will need to consider. Startups need to consult experts if they want to do things right. Sure, it costs you some fees up front now to get that advice. But it could save you many time more than the cost of the fees over the long run, especially if the company does become very successful. So don't be penny-wise and dollar foolish here. You need more than an internet forum can provide on this.

  3. #3
    Join Date
    Oct 2006
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    15,435

    Default Re: How to Create a Profit-Sharing Agreement for Potential Employee and for an Invest

    Quote Quoting Msturge
    View Post
    My question involves business law in the state of: Business is based in Florida


    My partner and I have a startup we are trying to get off the ground and 1) we have someone willing to work for free for a piece of the future profits once we get investors, so does anyone have advice on how to set up an agreement like this, and how do we decide what % to offer them? And 2) our app/web developer loves the idea and also would like a piece of the pie and is considering investing a bit in order to get some future profits. How would we set that up- any advice? He is not an employee but a contractor, and we now realize we should have had him sign an employee agreement in the beginning- oops! So we are backing up to do that, but we feel he has ultra-priveledged information as he has been involved in the development of the app/website, and coming up with ideas for us from the beginning, so maybe a profit-sharing agreement keeps us a bit more safe than just an NDA he signed or the employee agreement we are working on?
    I agree with what Taxing Matters said, but I also would like to add that the bolded sentence is a serious problem. You CANNOT have a contractor sign an employment agreement. You can have them sign a contract but not an employment agreement.

    You don't get to choose whether someone is an employee or a contractor. They are one or the other based on what they do for you and how they do it. It is a huge no-no to treat someone as a contractor if what they do and how they do it defines them as an employee. Therefore, having a contractor sign an employment agreement is basically proof that you are not following the law.

  4. #4
    Join Date
    Aug 2019
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    2

    Default Re: How to Create a Profit-Sharing Agreement for Potential Employee and for an Invest

    Great advice, both of you. We are setup as an LLC. We have a business attorney but we haven't paid him anything yet which I guess is why he is slow to get things done! A friend who has a business says she uses Rocket Lawyer to write her contracts then just had her lawyer glance over them and he didn't have to make any changes, so I was going to try doing the same.

    Also I called our web designer a contractor only because he is helping us with a one-off project, I also see him as a consultant. But I suppose we need to speak with our lawyer and figure out what our association with him is legally and get the verbiage right before I start trying to create a contract.

    And a tax attorney- ok that is good to know!

    Thanks for taking the time to help us!

  5. #5
    Join Date
    Oct 2014
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    Default Re: How to Create a Profit-Sharing Agreement for Potential Employee and for an Invest

    Quote Quoting llworking
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    You don't get to choose whether someone is an employee or a contractor. They are one or the other based on what they do for you and how they do it.
    Not quite correct. One may always treat an independent contractor as an employee. But it does not work the other way around. If a person meets the criteria of being an employee under the law you don't get the choice to treat him/her as an independent contractor.

  6. #6
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    Oct 2006
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    15,435

    Default Re: How to Create a Profit-Sharing Agreement for Potential Employee and for an Invest

    Quote Quoting Taxing Matters
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    Not quite correct. One may always treat an independent contractor as an employee. But it does not work the other way around. If a person meets the criteria of being an employee under the law you don't get the choice to treat him/her as an independent contractor.
    Yes, I am well aware of that. I am sorry if my wording does not meet your expectations. I would also like to point out, that with the changes in the tax law, a contractor who has considerable expenses in doing the work and who has multiple clients, might not want to be treated as an employee, and therefore might reject the work.

  7. #7
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    Oct 2014
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    Default Re: How to Create a Profit-Sharing Agreement for Potential Employee and for an Invest

    Quote Quoting llworking
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    I would also like to point out, that with the changes in the tax law, a contractor who has considerable expenses in doing the work and who has multiple clients, might not want to be treated as an employee, and therefore might reject the work.
    Of course. The contractor offered a job as an employee never has to take it.

  8. #8
    Join Date
    Jul 2018
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    Default Re: How to Create a Profit-Sharing Agreement for Potential Employee and for an Invest

    Quote Quoting Msturge
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    we have someone willing to work for free for a piece of the future profits once we get investors, so does anyone have advice on how to set up an agreement like this
    Yes. Hire an attorney.


    Quote Quoting Msturge
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    and how do we decide what % to offer them?
    Not a legal issue, and if you don't know how to answer this question yourself, then it's something you ought not do.


    Quote Quoting Msturge
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    He is not an employee but a contractor, and we now realize we should have had him sign an employee agreement in the beginning- oops!
    Ummm...why would you have an independent contractor "sign an employee agreement"?

    You seem to be very ill-informed about what you're doing, so I strongly encourage that you obtain legal counsel ASAP.

    Quote Quoting llworking
    View Post
    You don't get to choose whether someone is an employee or a contractor. They are one or the other based on what they do for you and how they do it.
    And, since what the employee does and how he/she does it are within the employer's control, it is not entirely accurate to say the employer doesn't get to choose whether someone is an IC or an employee.

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