What is a silent partner, and should you get one?
Traditionally, a partner is someone who will share the risk and responsibilities of a company. You sign an agreement that specifies your role and profit percentage.
As for why people seek business partners in the first place, the reasons are many.
By far the most popular is: “I have a great idea but I don’t have enough money. Banks don’t lend and I can’t find investors. So I need a partner to fund my business model.”
If that’s you, you’re not seeking a general partner, but a silent partner.
What Is a Silent Partner?
For the Security Exchange Commission (SEC), a silent partner is no different than an investor. It’s a person who will provide capital to your company and hope that it generates returns.
That’s the short answer. The long one is more complicated. Because depending on how you treat your silent partner, it may behave like a general partner, investor, or lender.
The point is, you’re getting money from someone who trusts you, and nothing else. If money is your issue, you might want to consider traditional lending, investing, or fundraising.
Why would you want a silent partner?
Pros And Cons
PRO: They Give You Control
It’s the perfect fit if you already have a business plan outlined. Silent partners can fund your company without you having to give away control.
By contrast, general lenders will want to actively involve. They’ll also want their profits to be proportional to the total company revenue. But with silent partners, you can cap how much they’ll profit from their investment.
Why is it the best funding option? You could get investors, but there’s a lot of legal work in making your company public. And investors want to know how you make money (and they can withdraw anytime).
Silent partners care less about the how, and they keep the investment for as long as it appears on the contract.
Compare it to banks/lenders. Partners don’t charge simple interest (even though they expect returns) and don’t care about your credit score. Their capital is available for at least 12 months.
CON: No Active Involvement
While it’s good to have control, it’s better to have as many people helping you as possible. Without a capable team, you’ll eventually miss some hints others wouldn’t.
If you invest in a company, wouldn’t you want to make everything possible to guarantee a good return? That’s why general partners also help with their knowledge, experience, and contacts.
Is getting more money only a benefit? How daunting is it to work with someone’s money, potentially losing it? A silent partner isn’t going to tell you how to grow that money; that’s your job.
And if you do it wrong, they may go after you legally. Because silent partners aren’t liable for your company.
If you want to fund and have never started a business before, silent partners are too much of a risk.
PRO: Loyalty & Trust
It’s not easy to find silent partners. Because the safest way to profit from investments is to control the asset. If you give away control, your financial future depends on someone else.
As hard as it is to create this relationship, it’s just as hard to break it down. So if you do find one, your silent partner will likely trust you for years, especially when staying making good yearly returns.
Even though they don’t involve themselves, these partners may sometimes become evangelists. They promote and encourage investors to trust you because they make more money when you do.
CON: Biased Advice
Even though silent partners don’t have a say in your company, you could treat them like actual partners to increase their loyalty.
The problem is the definition of a silent partner. They’re giving you money because they expect to make a return.
What kind of advice do you expect to get from someone with such motivations? Do you think a silent partner actually cares about your company vision?
Of course, this depends on the person more than the role. But as a rule, silent partners suggest doing whatever gives them the biggest immediate profit.
And while they can walk away anytime, you can’t do that as the company founder.
While silent partners have their pros and cons, you may wonder what makes them special from other entities. Shouldn’t you just get investors yourself, find a lender, or a general partner?
Silent Partners And General Partners
Any partner generally brings some money to the table. On top, general partners may offer you advice, exclusive information, and networking opportunities.
So what makes one kind better than the other?
#1 Legal Liability
A general partner is equally responsible for the company. A silent partner is not.
Say your firm owes money or goes out of business. If your capital can’t repay those liabilities, you need to compensate with personal assets.
If it’s general, both people are involved, which might be good or bad.
The good? If you can’t pay and the other can, they will rescue the business.
The bad? You carry everyone’s weight. While you may own 20% as a general partner, you may be responsible for 100% of the company, IF no-one else can face the debt.
That’s by the way the pro and con of silent partners. You’re NOT liable while your general partners are. If things don’t work out, you withdraw your sum and walk away.
While control is rarely a bad thing, there’s more risk in managing more money than you can handle.
These happen all the time.
Should we stop giving money? Better: we give AND make sure they use it the best possible way.
That’s why general partners are more involved in the company. They could just set and forget an investment as silent partners do, but that reduces their chance of getting returns.
Let’s say you’re a seasoned partner who worked on many organizations. Wouldn’t it be helpful to share your insights with those who control your money?
Silent partners can do it too, although it’s not their responsibility.
Both partners can give advice, but only with a silent partner, you have full control (and liability) of your business.
Silent Partners And Lenders
Why would you want a silent partner for other reasons than money?
There’s nothing wrong if that benefits both parties. After all, you’re making it easier for your partner to invest (less paperwork required from you). And you get interest-free money.
Of course, your silent partner wants a return within a year. But you wouldn’t be in business if you weren’t planning to profit by that time, would you?
You both get to a win-win scenario. And if your business fails for whatever reason, that doesn’t affect your finances. It simply means:
- Your partner accepts the loss and chooses to either withdraw or keep the amount until you make it
- The longer you spend without returns, the less likely your partner is to stick around
- The partner is responsible for his investment return, not you
While all that is bad, it’s not the same as getting penalties from an overdue loan. There’s less risk.
But the biggest distinction by far is control.
As long as the silent partner trusts you, it’s up to you to decide how to spend that money to grow the company’s profits. While the partner may advise, nobody can force you to use it a certain way.
Lenders are different, banks particularly. Besides credit score, they need to know how exactly you’re going to use and return it. If the lender considers your strategy risky, they don’t approve the loan.
It’s far easier to get a consumer loan (e.g., a mortgage) than borrowing for your first business. However, your silent partner may only get a fixed return when registering as a lender.
Now, if silent partners are better overall for raising capital, what makes them better than general investors?
Silent Partners And Investors
Each person has different reasons to invest in you. Generally, it’s because they’ve studied your history and believe in your future trajectory.
Or maybe they’re investing because everyone is doing it. Or they’re just testing for a few weeks. Or have overly high expectations about the company.
Whatever the reason is, that doesn’t guarantee investors will always be around to finance you.
For an investor, you’re one of the many companies out there. All they know about you is your price history, your website, and whatever is on the news. Most investors will sell just as fast as they bought:
- Prices go down: Sell to avoid losing money
- Prices go up: Sell before they fall back
- Prices stay the same: Sell to invest in companies with more potential
Silent partners may seem to think the same way. Except that they have insider information. They know the fundamental analysis and, if they want to, they can share insights with the team.
This person is more likely to keep the money in the company.
An exception to this comparison is activist investors. They buy a significant number of shares to increase their influence to the point where their decisions matter as much as if they were from the team. By owning most of the company, they even have more control than silent partners.
The Bottom Line
Silent and general partners aren’t the same. Whether you choose one or another will depend on your goals:
- Do you need real help to run a business? It may be worth working with a general partner.
- Do you have a clear plan and only need money to make money? That’s why silent partners are better.
Maybe you don’t need partnerships at all. If your need is money, have you tried all the options, including lenders, investors, or fundraising?
Whatever you choose, you must find a way to manage your business. While it’s not easy to find a silent partner, they’re FAR more likely to invest once they see you can keep the business running on your own. Not just your business plan, but your results.