What’s the Difference Between a Low-Equity and a Non-Equity Partner?

Firms ask me this question all the time.  Here’s my response:

Short answer
Non-equity partners don’t usually have the same “rights” that equity partners have:  a vote, capital buy-in, goodwill-based retirement benefits, obligation to pay retirement benefits to others, legal liability and a share in the profits.

Short answer REFUTED
Most firms never take a formal vote; capital buy-in is nominal these days and is usually paid via salary reduction over several years. A   growing number of non-equity partners are being included in the partner retirement plan, albeit at a lower participation rate. Further, although in theory non-equity partners don’t receive a share of the firm’s profits, most firms compensate all partners – both equity and non-equity – based on the value of their contributions to the firm, not on an arbitrary profit-splitting percentage, and legally, though non-equity partners don’t have any legal liability, as a practical matter, the vast majority of partners never have to deal with serious liability issues throughout their entire careers.

Initial conclusion
Some firms tell me: “The differences between the two positions are minimal, so why bother with the non-equity partner position? Just make them a low- equity partner.”  Invariably, I hear this from firms struggling to “sell” the non-equity partner concept to others in the firm.  The main problem is that non-equity partners feel like second-class citizens.  Everyone in the firm “knows” the non-equity partners are not equity partners.  In these cases, I have often found that equity partners go out of their way (not maliciously) to treat them like employees.  No wonder they don’t feel like partners.

Four excellent reasons to have non-equity partners

• The position is a great partner-in-training slot; a chance for both the individual and the firm to live together as partners for a while before the “wedding”
• It’s a way to keep the bar high on becoming an equity partner
• If the non-equity partner lacks the requirements to be an equity partner (usually business-getting), the firm avoids paying out excessive compensation and retirement benefits
• The non-equity partner position is a great staff retention stratagem.  There is a lot of value, prestige and cache in having “partner” appear on your business card.  And remarkably, it has been known to trigger latent selling abilities in non-business-getters.

The final word. 
Over 50% of all firms today have non-equity partners, so it must be working.