a fair way to profit share when not an equal partner

Hi all--

A friend of mine and I started a record label 4 months ago. Well actually, she started it a year and a half ago, and but then I joined in recently because a) I am in a band of hers that wants to get a record out b) she needed $15K to get initial gear / setup a studio in her garage. I lent her $7.5K in a secured loan ( to be paid back regardless of how the label does ), and then spent $7.5K to purchase gear ( losing about $4K in depreciation ). That is the full extent of my monetary involvment so far.

She has spent much more than $7.5K on the whole, probably more like $15K in actual "losses"/depreciation if you count time before I joined the label. Since I joined the label, she has probably "lost" about $10-$15K; whereas, I have lost $4K, and risked another $7.5K in the loan.

The problem is, we never agreed on how to split profits. We both know however that I am not looking to put any additional money into the project. Luckily, there are no profits yet to worry about, so I'd like some advice on how to handle profit-sharing if/when they do arise. I assume there will be more money that needs to be spent, and that it will be by her.

Some factors:

- she has very bad credit, and could not have gotten a loan at the bank (so the $7.5K i lent her would be considered a high risk loan, though it was secured by collateral; we did paperwork between the two of us using NOLO.com's books to formalize the deal ). The loan is at

7% interest.

- The business is, on paper, just a sole proprietorship at this point.

- I have spent a lot of my spare time on the label, and there is a "start-up feel" to it; she has spent several times more time than I have however.

It seems that profit-sharing would probably either be based on a "return-of-investment model", where we agree on how much return I get back from a fixed amount ( this is suitable esp. if I don't want to put more money into it ); or, on a percentage share model ( I would then have to contribute to some percentage of future expenses up to the ratio of my share in the stake of the company ). What I'd prefer to see for myself is something similar to that of a start-up stock: I outlaid a fixed amount, and then if profits take off, I get some proportion of the profits back. Or at least, the more the profit, the more I get back---at no additional risk. This especially since I am pouring in many hours of time into the project/setting things up. I want something that is fair to both sides--I agree in principle that reward and risk should be proportional, but have a tough time quantifying it, and breaking down future vs. sunk risks.

Thanks for any advice you have to offer, I really appreciate it!

Isaac

Since this isn't a legal partnership, I'd suggest you stop thinking of it in those terms. Rather, think of it as her business, and you were brought in as a hired gun to solve a few problems. I'd look at each of those problems, and put a value on it. Then she should pay you for the value of the work that you did.

For example, let say you got her a $10K loan that she would not have gotten on her own. If you just shopped a few banks, then maybe that is worth a $1250 fee. If you had to co-sign and were at risk for the whole $10K, then maybe $3500 is a better number.

You also have the option of figuring out how to move forward. You could walk away right now, you could remain as a consultant, you could join as an employee, or you two could reorganize as a formal partnership. The latter would allow you draw up a partnership agreement and hash out profit sharing for the future.

In general, partnerships are a disaster. Avoid them if possible. Any other relationship is preferable, in my opinion.

-john-