The Nuts and Bolts of Silent Partners and Investors: What’s the difference?

Investors or Silent Partners - how do startups choose and what sets them apart? Check out all the necessary information in this in-depth piece from Angels Partners.

What is a silent partner in business?

Raising capital is no easy feat, but choosing the right investor pathway could certainly help or hinder your business. Most of us have heard of an angel investor and probably have a good understanding of their role. So what then is a silent partner? And more intriguingly, what is the difference between an angel investor and a silent partner? Generally speaking, the difference between silent partners and angel investors boils down to several points:

1. Money over management

Typically, a silent partner invests capital without having much involvement in the day-to-day operations. On the other hand, angel investors are far more active with their role, providing hands-on guidance and mentorship.

2. Slow and Steady

Silent Partners are usually seeking long-term stability, with a preference for regular, steady profit shares. Conversely, angel investors tend to have a larger goal in mind: achieving high returns via an eventual exit.

3. Low Risk

As the saying goes, ‘high risk, high reward’, angel investors are not shy of investing large amounts into the early, riskier startup-sphere. Whereas, one’s typical silent partner tends to gravitate to the more established businesses, pumping in a smaller cash-flow, taking less risky moves.

4. Vast Network

Despite their reduced involvement, silent partners usually have a large network of influential people at their fingertips that provide a useful platform of connections, especially helpful for fundraising.

5. Less control

With less active duty in the business, it’s no surprise that silent partners have less control compared to angel investors, who’s position, priorities and ambition put control and growth at the forefront. 

How do I choose between a silent partner and an angel investor? 

Based on our experience at Angels Partners, we can say that choosing between a silent partner or an angel investor really depends on the type of business you run. If you’re simply looking for an injection of capital to support an already solid business strategy and management team, then a silent partner might be the best choice.

Conversely, engaging with angel investors positions the business to receive expertise and council, which will not only provide the cash flow, but a flow of guidance, supporting the growth and development of the business. Additionally, the decision between angel investor or silent partner should also align with the long-term business goal; if you are seeking an explosive scale up, in a relatively short time period, with a potential exit, then an angel investor might be the right fit.

For the more marathon type businesses, with steady growth and longer lifespan, stick to a silent partner. Finally, understanding your financial targets can also help with deciding the best option; if your business model projects regular profit shares, then going with a silent partner could be adequate. However, if your financial projections incorporate lump sum money, further down the line, partnering with an angel investor would be the better option.

To sum up, seek out a silent partner if you:

· Only need an injection of funding without the debt

· Need networking connections

· Want to reduce the amount of ownership given away

· Want to keep the vast majority of control

· Expect to provide regular profit shares

Alternatively, choose an angel investor for your business if you:

· Need more than just capital

· Want an active partner

· Seek expertise and guidance

· Are able to relinquish some control

· Are willing to take on more risk

· Envisage a big pay off further down the line

What is a silent partnership agreement?

Outlining the working relationship between the different partnerships contributing to a business is crucial – that’s where the silent partnership agreement comes in. So, what is a silent partnership agreement? Typically, a silent partnership agreement is a legally binding document that describes the terms of a partnership, in which one member, the silent partner, invests funding but is not in charge of the day-to-day activities of the business.

The agreement underscores the role of the silent partner as a solely financial support, without involvement in the operational aspects. Having a clearly defined silent partnership agreement is vital for setting clear responsibilities within the partnership and making sure all members comprehend their role and expected involvement.

A clearly defined silent partnership agreement should:

· Distinguish individual parties – who are the active investors vs the silent partners

· Outline amount of funding – clearly state the amount of capital a silent partner has invested and how any further investments will be managed

· Describe voting power – silent partners usually have few or zero operational responsibilities, limiting their voting rights to the same level

· Detail the liability – outline how the profits and losses will be divided between the partners

· State the length of partnership – indicate the duration of each partnership and the conditions for early termination

· Define under which law – to mitigate any legal disparities, it is wise to indicate under which law the agreement is bound.

What percentage should a silent partner get?

Unlike angel investors, silent partners can be viewed as a creditor or a lender in which they receive a fixed rate of return. Usually, silent partners are accountable for earnings and losses equivalent to their share in ownership, meaning that if they own 10% of the firm, they will pocket 10% of profits. In contrast, angel investors are often gunning for the big bucks down the line: the exit.

There are alternative methods for raising funds that have not been discussed here, including family offices, venture capitalists or crowdfunding. You can check out our previous blog articles here for more information on these routes. Happy fundraising folks!