Imagine you put £100,000 of cash into a new joint venture and your partner puts in its software, its customer relationships and the use of an office. How much of the joint venture should each of you own? That question is usually answered early, sometimes on the back of an envelope, and it shapes everything afterwards: votes, board seats, profit share and what each of you walks away with on exit.
Why the split matters
In a joint venture company, each party's shareholding normally follows the value it contributes. The shareholding then decides who controls ordinary resolutions, who can block special resolutions (anyone with more than 25%), how dividends are shared, and how sale proceeds are divided. A partner who feels short-changed at the start rarely gets over it, so it's worth being able to explain how the numbers were reached.
Cash
Cash is the easy part. If one party puts in £100,000 and the other £50,000, and nothing else is contributed, a two-thirds and one-third split follows. The agreement should still say when the money is due, whether it is paid for shares or lent to the company, and what happens if a party fails to pay on time.
The choice between shares and loans is worth thinking about. Money lent can be repaid on the terms of the loan, and the lender ranks as a creditor ahead of shareholders if the company fails. Money subscribed for shares can only come back through dividends, a buyback, a reduction of capital or a sale, each of which has legal limits.
Intellectual property
Software, patents, designs, know-how and brands are common contributions and the hardest to value. Valuers generally use one of three approaches: what it cost to create (which often bears little relation to what it is worth), what it would cost to license something equivalent from a third party, or what income it is likely to generate for the joint venture (which depends on forecasts). None of these gives a single right answer, so the partners should agree the method, and ideally the valuer, before anyone produces a number.
Just as important is how the IP is contributed. An assignment transfers ownership to the joint venture company, and for copyright and patents it must be in writing and signed. A licence lets the company use the IP while the partner keeps ownership. The difference matters most on exit: if the joint venture only has a licence and the licensor partner leaves, the company may lose the very thing it was built around. Check whether any licence is exclusive, whether it can be terminated, and what happens to improvements made by the joint venture.
The contributing partner should also be asked to confirm, by warranty, that it owns the IP, that it is not aware of any infringement claim, and that no third party has rights that would get in the way.
Customers and contracts
A partner may bring existing customers or contracts. Committed contracts with a known value and term are worth much more than a list of prospects. Before agreeing a value, ask for a schedule of the actual contracts, their remaining term, the revenue they produce and whether the customer's consent is needed to transfer them. Many commercial contracts can't be assigned without consent, and a contract that stays with the partner and is merely performed for the joint venture's benefit is a weaker contribution than one that moves across.
Property and equipment
Physical assets are easier to value. Use market value, supported by an independent valuation for land or anything significant. Take account of the condition of used equipment, and of any mortgage, charge or finance agreement over the asset, which may need the lender's consent to transfer and will reduce what is actually being contributed.
For premises, decide whether the joint venture is getting a lease, a licence to occupy or simply informal use. Informal arrangements cause trouble when the relationship ends, and a lease has its own terms and statutory rights to think about.
Staff and time
Partners often contribute people. That can be done by secondment, where the individual stays employed by the partner and works for the joint venture under a secondment agreement, or by transferring their employment. If a group of employees moves across with a part of the business, the Transfer of Undertakings (Protection of Employment) Regulations 2006 may apply, and the employees transfer on their existing terms. Each route has different cost and liability consequences.
Time and expertise are the easiest contributions to overvalue. A promise to spend half your week on the venture is worth something only if it happens. It is usually better to pay for services under a separate agreement at a commercial rate, or to link a share of the equity to delivery, than to give a large stake up front for future effort.
Contributions made over time
Where some contributions are deferred (a second tranche of funding next year, or technology to be delivered later), the agreement needs to deal with the gap. Options include issuing shares only when each contribution is made, issuing them up front with a right for the company or the other party to buy them back at a low price if the contribution isn't made, or adjusting the shareholdings by formula at a set date. Whichever you use, the milestones need to be objective. “Successful launch” is an argument waiting to happen; “first invoice issued to a customer under the product licence” is not.
The agreement should also say what happens if a party fails to make a contribution it has committed to. Typical remedies are dilution, loss of board or veto rights, or a compulsory transfer of the defaulting party's shares. A transfer at a steep discount can be open to challenge, so the terms should reflect a genuine commercial interest rather than punishment.
Legal and tax points
A company can't issue shares at a discount to their nominal value, and the value attributed to a non-cash contribution needs to be at least that nominal value. Private companies don't need an independent valuation of non-cash consideration for shares under the Companies Act 2006 (public companies do), but a documented valuation is still sensible evidence if the split is later questioned.
Transferring assets into a joint venture can have tax consequences for the contributing partner and the company, including tax on any gain, stamp duty land tax on land, and VAT. The treatment depends on the facts, so take tax advice before the contribution is made, not after.
Write it down
The joint venture agreement should list each party's contribution, the value attributed to it, the method used and who carried out any valuation, alongside the resulting shareholdings. For example: Partner A contributes £100,000 in cash and software licensed on an exclusive basis, valued at £50,000 by an agreed independent valuer using a relief-from-royalty method; Partner B contributes £50,000 in cash and equipment valued at £30,000. On those figures Partner A would hold about 65% and Partner B about 35%. Recording it this way gives you evidence if the split is challenged, and shows which assumptions were doing the work if they later turn out to be wrong.
Getting it checked
If you're negotiating a joint venture, agree the valuation method before the numbers, document each contribution properly, and check how IP and people move across. To see how your draft deals with contributions, defaults and the resulting shareholdings, upload it for a joint venture agreement review.
Related: what the joint venture agreement review covers, and a complete sample report.