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How is a silent partner different from an investor and when should you consider one vs. an investor?
1. An Investor Helps Directly With Operations
An investor is someone who not only invests in a company but also plays a role in the daily operations and management decisions. A silent partner usually invests a large sum of money but prefers not to be involved in the daily operations. If you are looking for advice and help, you want an investor. If you need a cash infusion to grow, but already have a plan outlined, go for a silent partner.
2. A Silent Partner Adds Funding While Minimizing Feedback
Active investors want (and expect) to be helpful. Silent partners want to invest in your company but trust in existing management and active investors to make the decisions. A company should take silent partners if the goal is to add funding while minimizing feedback. Active investors should be sought after to lead funding as they provide valuable insight to help you get to the next milestone.
– Hongwei Liu, mappedin
3. The “Silent” Partner Comes With Ups and Downs
My initial investor was silent (usually pre-seed/seed). As a 22-year-old kid with a fat check, I was happy as could be. I would have done some things differently knowing what I know today, but that’s the beauty of entrepreneurship. It’s the game that never ends and there’s no rule book. My advice now would be to get an initial investor who can guide you instead of letting you think you know it all.
4. The Difference Is Trust
A silent partner trusts you because of past experiences together and provides money to grow the business. He or she is not involved in the day-to-day operations and the relationship is less formal compared to investors. Although it may be easier to find investors, if you are able to find a silent partner in the early stages of your business, you’ll be able to spend more time building the company.
5. Truly Silent Partners Are Basically Investors
Silent partners are basically investors with founder-level upside. Even investors are expected to help with advice, introductions, hiring, etc. If your partner is truly silent, the financial contribution has to be massive to make sense. Especially in today’s investing climate, it’s easy to find more traditional investors.
6. Silent Partners Have Limited Liability
Silent partners may have a say in the overall operations of the business, but generally stay out of the daily affairs. One benefit is potentially being less liable in the event of legal actions. Silent partners can take a limited-liability partnership in the company. As such, they may have more influence on the overall business than an investor, while still being protected in case of a lawsuit.
7. A Silent Partner Is Less Involved
A silent partner really isn’t a partner at all except to provide some money to fuel the startup’s growth. The silence can be nice to a certain degree, but I’ve always found it more helpful to have an investor that provides advice, counsel, contacts and more — or even, in some situations, rolls up their sleeves and pitches in. Going it alone can be scary and take even longer.
8. Their Role Depends Entirely on Your Agreements
The distinction between taking on “outside” investors and starting with or bringing on “inside” (silent) partners entirely depends on how you’ve constructed your operating agreements or equity structure. You need to consider the role of your capital providers and what role you want them to play. Do you need their networks? Just their money? Their advice?
9. Silent Partners Don’t Have as Much Control as Investors Do
Silent partners hold an equity position (just like angel investors) but do not have substantial control over the business any more than the founders do, as they hold the same class of common shares. It makes the most sense to have silent partners if you are only looking for capital infusion in exchange for equity, but do not wish to give up control of your business.
10. The Difference Is in the Return
A silent partner is taking a risk investing with you, and they’ll usually expect a bigger return on their investment. On the flip side, an investor is someone who gives you money and relies completely on you to generate the return. There are key differences in the way the SEC classifies silent partners and investors, so do your research before you decide which route to take.
11. Silent Partners Don’t Exist Unless They Are Family
Silent partners are never silent, and rightfully so — it’s their money! The closest to a silent partner are family members, who may still love you no matter what happens to the money, but even this can vary from family to family. Rather than becoming a silent partner, I would much prefer a loan.
12. A Silent Partner Is a Passive Participant
A silent partner is an appropriate alternative when you’re not looking for someone to actively contribute to your business, share responsibilities or share in the company’s profits. You may want to seek out an investor if you are looking for more involvement in your company. Legally, bringing in an investor is complicated, so you need to be clear that it’s the right source of financing for you.
13. Consider a Loan Before a Silent Partner
Investors typically bring value in addition to cash. Silent partners don’t contribute more than money — or they don’t unless they think you’re not maximizing the value of their investment. Silent partners may not stay silent. A loan gives you the cash infusion without risk of interference unless you default. Which you choose depends on your business’ needs, but talk to a lawyer regardless.