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Equity partners are individuals who are engaged in some type of common project that is expected to generate returns that will be shared between those partners. The term is sometimes used to identify investors who band together in some sort of venture capital scheme, or that each hold equity in a business and share the profits generated by that business. An equity partner is different from a contract partner, in that the contract partner receives some type of salary or compensation, but does not actually maintain any type of ownership in the business venture.
With equity partners, all parties involved share in not only the profits generated by the venture but also in the liability inherent in the project. The extent of that liability will vary, based on the amount of investment put into the project by each partner. This is especially true with venture partners, since the terms of the agreement between the financial partners normally limits liability based on the amount of capital contributed to the project at any given point in time. A partner who contributes a smaller amount to the project is also entitled to a smaller share of the returns, but does manage to keep the extent of his or her liability at a level that is considered equitable in relation to the projected returns.
Unlike other types of partnerships, equity partners do not receive any type of salary in exchange for their investment in the company or other venture. Returns are generated only if the project becomes profitable and is able to generate enough net income to qualify for some sort of disbursement to the partners. In some cases, equity partners may wait years before beginning to receive returns. At other times, a project may begin to generate revenue immediately, making it possible to distribute profits to the partners within the first year of the operation.
As with any type of investment strategy, equity partners do assume some risk. There is always the possibility that the venture will fail, leading to a partial or complete loss of any resources invested up to that time. There is also the potential that the anticipated return will be considerably less than anticipated even if the venture does become moderately successful and stable enough to function without further investments of cash. For this reason, equity partners tend to consider all potential outcomes as part of their financial planning, and base the level of involvement on the likelihood of each scenario and what would happen to their investments as a result.
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