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I’ve seen a lot of Shark Tank episodes, and if there’s one thing I know to be true about investors, it’s that they like to be involved. While this can be helpful for entrepreneurs seeking guidance and mentorship, some startups simply need the cash investment and aren’t looking for advice or opinions on how to run the business. That’s where a silent investor comes in.

Silent partnerships are a common business practice, and they may just be the key to your startup’s financial success. But it’s important to understand what’s involved in this type of partnership if you want it for your business. In this post, I’ll share what a silent partner is, how you can find silent investors for your business, and what to include in a silent investor agreement, according to the experts.

Table of Contents

• What is a silent partner?
• Rights of a Silent Partner
• How does a silent partner work?
• The Pros and Cons of Having a Silent Partner
• Silent Partners vs. General Partners vs Investors vs Secret Partners
• Silent Partnership Agreement
• How to Find Silent Business Partners
• How to Pitch Silent Investors
• Are silent investors worth it?

Sometimes referred to as limited partners, silent partners have a limited financial stake in your company and can only lose the amount of funding they've contributed.

How does a silent partner work?

Silent partners are brought on to contribute funds to your business without getting involved in day-to-day operations or major decisions. This type of partnership is valuable to both parties, but given its unique setup, there’s a lot of trust that needs to be involved.

Here’s how a silent partner works:

• The silent partner approaches you (or you approach them) to initiate the partnership.
• You both sign an agreement, preferably written, detailing the level of investment.
• The silent partner provides their contribution. In return, they secure equity or partial ownership of your business (reflected in a percentage, e.g., 20% of your business).
• The silent partner steps back and lets you run the business.
• Once your business turns a profit, the silent partner receives the agreed-upon percentage of the net profit. The profit is what’s left after you subtract business expenses from your total sales revenue.

Identifying and securing a silent business partner is the first step. Next, draw up a silent investor agreement with which both parties are comfortable. According to the experts I talked to, this step is non-negotiable and important to get it right. Your agreement clearly defines the roles, responsibilities, and expectations for your business and silent partner.

After you‘ve settled the legalities of your relationship, how you and your silent partner work together (or don’t work together) is up to you. Typically, silent partners simply make their investment and step back, letting you and your team manage all daily operations and business decisions.

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How much does a silent partner get paid?

Silent partners get paid depending on their contribution and their equity in your business. Let’s say that your silent partner invested $50,000, and your business is valued at $500,000. That means they have 10% ownership of the business, and they’ll receive 10% of the profits.

Whether this is paid out on a monthly, quarterly, or yearly basis is up to you. The payment terms will ideally be defined in your silent partnership agreement.

Though it might sound like a can‘t-lose situation, it’s important to fully understand this type of relationship before diving into it headfirst. Let’s go over the pros and cons.

The Pros and Cons of Having a Silent Partner

Having a silent partner comes with plenty of benefits, but it has potential downsides, too. To give you more clarity around the bigger picture, I asked some entrepreneurs with experience in these types of investments to weigh the pros and cons when considering a silent partnership.

Pro: You get to run your company on your own terms.

By far, the top benefit of having a silent partner is being able to run your business exactly the way you want to. I imagine starting your own business means you have a lot of ideas and opinions on how you want to run things. Sometimes, funding is the only thing holding you back. Receiving an investment without the added pressure of following someone else’s plan sounds pretty ideal if you ask me.

, CEO at , a wealth management firm, agrees. “Without the distraction of other viewpoints, silent partners allow the hands-on team to concentrate on development and innovation,” he says.

You probably already have a business plan, a positioning statement, and a go-to-market strategy that will successfully get your startup past its tumultuous first year. You wouldn’t want anyone to alter that vision — especially since the biggest investor in terms of time, energy, and money is you.

Con: You won’t receive advice.

On the flip side, a silent partnership means you may get money, but you won’t receive the advice and knowledge of much more experienced investors. Silent partners are typically “silent” because they may not have the business experience to sit in on meetings and suggest effective changes. Or even if they do, they might not have the time or resources to help you out.

, CEO of , has worked with silent investors to fund his business and suggests this is one of the biggest drawbacks.

“The downside is [the investor’s] silence,” he says. “When problems come up, you might feel alone without their input or advice.”

An active business partner or investor wants to have a say because they feel they could help you be more profitable. After all, their investment is on the line.

If you’re seeking guidance from your investors, a silent partner won’t offer much in the way of suggestions or advice on .

Pro: A silent partnership is a low-stress way to get funding for your business.

Because of the low level of involvement from silent partners, it’s generally less stressful to secure funding from them as opposed to securing funding from an angel investor or venture capitalist. Traditional business partners or investors will want to have a say from the get-go, potentially resulting in strife.

Con: Silent partnerships can cause conflict.

This is true for any business partnership or investor relationship, but silent partnerships are especially susceptible. Why? If your company hits a rough spot, the silent partner can potentially blame you only because they didn’t have a say in your business’s daily operations.

In contrast, a traditional business partner would be partially to blame for business failures and would be much more collaborative in the remediation or recovery process. A silent partner could lose trust in their investment and pull out of the partnership at the first sign of hardship.

Villeroy suggests that expectations must be clearly outlined from the beginning to avoid drawbacks.

“If goals are unclear, miscommunications may occur even when a silent partner is not actively engaging in processes,” he says. “In my opinion, the secret to preventing issues later on is ensuring mutual trust and a common goal from the beginning.”

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Silent Partners vs. General Partners vs Investors vs Secret Partners

Still not sure whether a silent partner is right for you? Wondering if you’re better off working with another type of investment partner? I’ll help you decide by breaking down the differences between silent partners and other types of investors.

Silent Partners vs. General Partners

Silent partners provide financial support and partnership to help fund and grow a company, but general partners are individuals or groups of people who have control over the management, function, and spending of a company.

Silent partners aren't involved in day-to-day company operations like general partners are. Because general partners can make decisions on behalf of the company, they are less financially protected and may be personally responsible for your company’s debts and liabilities.

Silent Partners vs. Investors

A silent partner contributes money to your startup but doesn’t influence day-to-day operations. Investors contribute to your and expect to influence your business’s operations to help you be more profitable. They may sit in on meetings, expect quarterly or yearly reports, and suggest initiatives to increase the profitability of your business.

Silent Partners vs. Secret Partners

Unlike silent partners, secret partners may have a say in the business's daily operations without public awareness of the relationship. Secret partners may, for example, worry that previous business failures will tarnish the reputation of the new venture. As a result, they may choose to keep their involvement private.

People often use the terms interchangeably, and it's possible that a silent partner can also be a secret partner. To protect all parties involved, make sure to clarify exactly how your partnership will be defined.

Silent Partnership Agreement

It should come as no surprise that the experts I talked to agree that the silent investor agreement is one of the most critical parts of this partnership. Understanding and agreeing to the roles, responsibilities, and risks of each party sets the tone for the rest of the relationship.

Most states require partnerships to be formalized by legal documents that outline the exact role of each partner in the organization. These agreements should clearly define the responsibilities and liabilities of each partner.

I suggest getting on the same page with your potential silent partner before drafting an agreement. Having these conversations can save you both time spent on drafting an agreement that leads to confusion or miscommunication.

Pro tip: Enlist legal help to protect the interests and rights of your silent partners. Consulting with an attorney is the safest way to ensure you’re creating a legally sound agreement that considers all parties’ rights and liabilities. Although spoken agreements can be binding, I always believe it’s best to document everything in writing so there is no room for dispute or confusion about what each party is entitled to.

What to Include in A Silent Investor Agreement

While I’m not an attorney, I know how important terms and agreements are to any business relationship. And a silent partnership is no exception. In fact, it might be even more crucial than other investment structures so that it’s clearly defined.

I asked the experts what some must-have elements of a silent investor agreement are, and here’s what they said:

Defined Financial Ferms

Clearly defining the financial terms is the first element of a strong silent investor agreement. Everyone involved needs to agree on how much capital the silent partner is investing, their equity share, and how profits will be distributed.

Defined Roles and Responsibilities

This part of your agreement is possibly one of the most important to spend time on. Consider exactly what the silent investor’s role and responsibilities are in this business. Silent partners are “silent” for a reason. Unless you explicitly state in the agreement that you want them involved in strategic decisions, then you won’t hear from them.

“Establishing roles is also critical,” says Villeroy. “The agreement should state that the silent partner would only participate in day-to-day activities if agreed upon.”

Confidentiality

Like most business agreements, including a confidentiality clause is always a good idea. In the case of a silent investor agreement, I’d assume the partner would uphold the “silent” part even when it comes to company information or sensitive business data, but it’s best to have this in writing to be safe and protect your business.

Termination or Exit Strategy

While it’s nice to imagine the investment partnership going smoothly until the end of time, businesses don’t often work that way. Your silent partnership agreement must include a section about how to terminate the partnership if necessary.

“Including an exit strategy is crucial,” says Villeroy. “Your agreement should outline the partner's options for selling their stake or withdrawing their investment.”

Conflict Resolution

Even with a solid agreement in place, partnerships can create conflict. To mitigate this, Villeroy suggests including a section for conflict resolution in your agreement.

“A clear method for resolving conflicts, such as mediation or arbitration, can help prevent prolonged judicial proceedings,” he says. “Once these components are in place, the relationship can promote success and progress without problems.”

Cristian-Ovidiu adds that including a section for unexpected problems is wise, as businesses rarely go as planned.

“Having a silent partner is like playing a team game,” he says. “You need clear rules, or things fall apart fast!”

Whether you’re a startup entrepreneur or you’re interested in being a silent investor, here are some other things to consider when creating your silent investor agreement.

Looking for more guidance? You can find silent partner agreement templates and .

Financial Stakes of Silent Business Partners

In return for their initial investment, silent partners often receive stock in your company as well as a percentage of revenue or profit. The amount of passive income they earn will depend on how well your company does and the agreement you put in place. In most cases, your silent partner will earn a smaller share of the profits than the active partners.

As for debts and losses, all partners in a business venture are responsible for the business's finances. Thanks to limited liability, however, silent businesses are generally only liable for the percentage they initially invested in the business. A partner who has a 15% stake in the business, for example, is only responsible for 15% of its losses and debts.

Both owner and partner must acknowledge the investment for tax purposes, with the silent partner responsible for any profits they make on the investment.

Risks for Silent Partners

Because silent partners aren't involved in the daily operations of your business, trust is vital to the success of the endeavor.

Silent partners have no official input in the profitability of your company or its strategic choices. They have no control over issues like legal compliance, environmental issues, or accounting standards, nor will they have control over how assets are managed. This means the investment could be negatively impacted if incorrect or unethical practices happened to occur within your business.

Not only do silent partners have less responsibility to your business, they also have less liability. With the right legal documents in place, a silent partner will be only minimally involved in any losses the company incurs, making it a safer investment than a direct or general partnership.

But, because silent partners are protected from unlimited liability, they generally have no claim on company assets in the case of dissolution until all other obligations are paid.

Bottom line: Always create a silent partnership agreement.

The particulars of the partnership should always be decided at the beginning of the relationship to avoid legal disputes and misunderstandings.

The internet is full of cautionary tales about silent partnerships gone wrong, and many of the problems stem from people who failed to legally protect their own interests. Even if you‘re certain that you’d never find yourself in a legal dispute, consider the stories of those before you who believed the same way.

Now that you know the basics of silent partnerships and the basics of crafting an agreement, I want to share how you can find silent partners for your new business.

How to Find Silent Business Partners

You don’t need to have an investing background to be a silent investor. Silent business partners can be anyone — a friend, a family member, a colleague, a stranger, or even a business that would benefit from partnering up with you.

To kickstart your search, here are some methods for finding investors.

1. Ask friends and family.

If I were looking for a silent investor, I’d start with friends and family. Not only do they know me well and trust my efforts, but I know I can trust them, too.

Think of your initial funding efforts as a friends-and-family round in which you tap those closest to you for varying amounts of investment.

There are a couple of reasons people in your personal network can be solid silent investors. For starters, friends and family may be more likely to delay payments if your revenues don't initially meet expectations. They are also less likely to take legal action against you in the face of catastrophic failure. Plus, this initial effort may also help you build experience and confidence to engage with those outside of your inner circle.

2. Look for angel investors online.

Next, look to angel investors who typically fund projects during the early development stages. These are often wealthy people who are open to silent partnerships. Venture capitalists, likewise, seek to invest in businesses that have the potential to provide a large return on their investment.

Not sure where to find these types of investors? There are entire online directories designed to help you identify possible investors. , for example, helps connect startup founders with investors who simply commit to an investment and send the funds online.

Keep in mind that angel investors aren’t necessarily always silent partners. If you’re looking for a silent partner, you have to make that clear when reaching out to angel investors.

3. Partner with other businesses.

Finally, consider complementary businesses whose operations might benefit from your efforts. In my opinion, this is a lesser-used approach that you can get really creative with.

For example, let’s say you launch an event space in your community. You could turn to those in the local event industry, like wedding planners, caterers, and florists, to see if they’d be interested in investing in your business. Their investment can help them diversify their finances and invest in a venture that could potentially boost their own business.

The key to partnering with other businesses for investments is to focus on mutually beneficial relationships. The event space example I shared above works because all of those businesses work in the same industry but aren’t competitors. If you want to take this approach to finding a silent investor, your goal should be to find businesses that have similar audiences but offer different products or services.

4. Join a startup accelerator.

Joining a startup accelerator or community is another way to connect with potential investors. An accelerator is a place for established startups to grow (or accelerate) their business by tapping into the program’s resources. These programs allow startups to connect with other entrepreneurs, build their networks, and refine their businesses.

Connecting with a local community of businesses is a great way to get in front of potential investors. While the investors you meet in an accelerator likely have a lot of opinions and business experience, you never know — you could meet someone who’s open to a silent partnership.

Now, finding silent partners is one thing — getting them to invest is another. Below, I’ll quickly cover a few methods to attract and keep investors.

How to Pitch Silent Investors

Investors want to find businesses with promising futures and plenty of room for positive growth. Because they’re focused on the return on their investment, you must develop a business plan that addresses revenue projections to enlist their involvement.

You must also effectively demonstrate how your company will create positive cash flow within a reasonable amount of time.

To effectively pitch your business to investors, be sure to do the following:

• Have a business plan ready. You can improve your odds of securing investors if you establish realistic, quantifiable figures that spell out your business plan and answer any questions your potential investors might have.
• Draft a succinct and effective pitch. Develop a pitch that includes your concept, product or service samples, and information about your existing competition. Check out some pitch examples here.
• Make sure your pitch deck is comprehensive. Break down your business model, financial forecast, the competitive landscape, and whatever else you feel will make your pitch more convincing.
• Be clear about the funds you need. Clearly outline how much money you‘re seeking and how you intend to spend it. Detail what you’re offering to your investors in exchange for their help.
• Communicate the role. Make sure you’re upfront about wanting a silent investor and what you expect their role to be. This helps filter out the people who aren’t interested in this type of partnership.
• Show off your successes. Highlight any big wins or media coverage your business has earned, as well as major investments you've secured, where appropriate. This shows potential investors that there’s a market for your business, and it has growth opportunities.

Are silent investors worth it?

Short answer: yes. From what I’ve seen and heard from people who have worked with silent investors, they can be worth it. If you’re seeking funding but have a solid startup team to do the day-to-day hands-on work, you likely don’t need the guidance of an investor. This makes a silent investor the perfect type of partnership.

However, if you’re at a point in your business where you want outside opinions and advice, then a silent investor may not be right for you. When there’s an emphasis on “silence,” then you can’t expect to hear from them during good times or bad. This can be a scary situation if you’re inexperienced or new to entrepreneurship, in my opinion.

No matter what type of investor or financial partnership you pursue, effective partnerships start with clear communication. Once you understand the risks and rewards of a silent business partnership, you can safely enter an agreement that benefits everyone involved and secures your startup’s financial well-being.

Editor's note: This post was originally published in January 2019 and has been updated for comprehensiveness.

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