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Enterprising Employee Presses to Be Partner

I have a successful, small, nutritional-marketing company. My sales manager has located and researched a new product manufactured in the Pacific Rim that he thinks we could import and repackage for sale in the U.S. He wants either to form a separate company and become my partner in this new venture or receive an ongoing percentage of the net profits. How should I handle his requests? —P.M., Pacifica, Calif.

Your enterprising employee has put you in a tricky situation. It is not standard for an employee who locates a new product to become a partner in the company or get a cut of the profits. Traditionally in such a situation, the employee might get a promotion and a bonus based on the performance of the new product, says Eli Kantor, a labor and employment attorney based in Beverly Hills, Calif.

"Employers should have all their employees sign trade-secrets agreements," Kantor says. If your sales manager has signed such an agreement, it should prevent him from leaving your company and taking with him the information he has developed while working for your company.

However, you may not have had your employees sign such an agreement. Even if you have, you may want to maintain a good relationship with your ambitious sales manager, rather than risk having him resent you. If you get along well, you may consider him as a candidate for an executive position and even as a potential successor someday.

So what are your options?

test the waters before committing

First, research the new product for yourself and get a good idea as to how viable it is, how dependable its supplier is, and how realistic its market potential is. "Confirm that import and sale of this foreign product will not violate any FDA regulations and that you can get proper insurance in the event someone becomes ill or claims illness from this product," says Jay Zweig, a business attorney with Bryan Cave in Phoenix.

If you're persuaded that your employee's idea is sound, start small and test the waters before you form a new company based around the product. "Consider paying a royalty or commission [to your employee] and once you see how things play out, you can expand the relationship," says Scott Edward Walker, founder of Walker Corporate Law Group, a Beverly Hills firm that specializes in representing entrepreneurs.

Zweig concurs: "To maintain control of your business and to avoid a later dispute with a minority shareholder, the best advice is to compensate your sales manager through a profit-sharing or bonus agreement and do not become his partner. In addition to problems inherent in any partnership, it is especially challenging to maintain a partnership relationship for one line of business and an employer-employee relationship on other lines of business."

keep the businesses separate

If you eventually decide to spin off a new company, put your sales manager in charge of business development rather than making him a partner. Give him a salary plus a percentage of profits, says Ruben Ferziger, a longtime New York business attorney. "You don't want your employee mucking around in the books of your other business—so if you set up a separate company, have it focus exclusively on this product," he says.

The advantage to you would be that if the product doesn't pan out after a few years, your original company won't be dragged down by its losses. And your sales manager will be especially motivated to make the new product pay off.

Whatever you decide, make sure you draw up a written agreement with your sales manager that documents the deal. And have him and all your employees sign trade-secrets, noncompete, and nonsolicitation agreements. That way, you won't risk having them solicit new business for themselves in the future—and cut you out.

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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