There’s some confusion about just what a “silent partner” in a business is. Sometimes people assume it’s someone whose involvement in a business is secret, either out of concern for their or the company’s reputation. Others assume it’s someone who just provides money and never asks questions or gives advice.
A silent partner can be whatever you and they agree to and codify in your partnership agreement. Typically, however, a silent partner invests capital in the business and shares in the profits but largely stays out of the decision-making and operational aspects of the business. They leave that to the general partners while they enjoy their retirement in Sedona or otherwise go about their lives.
Silent partners are also often “limited partners.” That means their liability for any losses extends only to their investment. This allows people who believe in the owners’ vision and strategies enough to help them get the company off the ground or invest needed capital, but don’t want to take too much of a financial hit if it doesn’t succeed.
Silent partners vs. venture capitalists
You might think a silent partner is basically a venture capitalist (VC). While both provide necessary capital, VCs usually expect (or require) more of a say in how the business is run. That’s often to everyone’s advantage because VCs generally invest in fields where they have experience, contacts and knowledge.
A silent partner may want to provide advice and guidance. They may only want to commit to doing things like getting ahold of the right people to help a company grow or branch out into a new area. They may be called in to mediate partner disputes.
Codifying the silent partner’s role
The role of the silent partner should be codified in their partnership agreement along with how they’ll share in profits or losses and steps for ending the silent partnership if the parties choose.
If you are considering bringing in a silent partner, it’s essential to make sure you have the same expectations for their role in the business. Having a clear, detailed agreement is crucial to a successful partnership.