What is an equity joint venture?

While equity joint ventures are common in practice—with a 2018 survey showing 73% of executives expect their companies to increase the number of large partnerships—there are many stipulations that all parties must abide by to ensure the equity joint venture definition stands true.

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Example of an equity joint venture

So, what does an equity joint venture look like in practice? Here's a clear example.

Company A and Company B have entered into an equity joint venture where they're partnering as equal shareholders to establish a new entity called "TechHardware Innovations Ltd." Company A brings its software development expertise, while Company B contributes its hardware manufacturing capabilities.

While a joint venture's ownership can be evenly divided with each company holding a 50% equity stake, it's often uneven. For instance, one real estate joint venture agreement defined the Capital Proportion as 85% for one partner and 15% for the other. They share responsibilities, risks, and profits, leveraging each other's strengths to explore new market opportunities and drive innovation.

How is a joint venture different from an equity alliance?

The terms "joint venture" and "equity alliance" are often confused, but they're quite different. An equity alliance is a strategic partnership where companies collaborate without creating a new legal entity.

Here's the key difference:

• Equity joint venture: Creates a new legal entity with shared ownership stakes

• Equity alliance: More flexible arrangement with fewer risks and commitments

What about private equity joint ventures? These work the same way, but the partners are private equity firms pooling resources for investment opportunities.

What is a non-equity joint venture?

A non-equity joint venture, also known as a contractual joint venture, is a type of joint venture where participating companies enter a project or venture without the need to create a new legal entity or share ownership stakes. These companies establish partnerships through a contractual agreement that defines roles, responsibilities, and profit-sharing arrangements.

Example of a non-equity joint venture

An example of a non-equity joint venture would be a scenario in which Company A, a software firm, and Company B, an internet provider, decide to collaborate and develop a new outage diagnostics tool. Rather than create a new legal entity, the two companies enter into a contractual agreement that outlines their unique contributions, responsibilities, and profit-sharing arrangements.

Through the non-equity joint venture, they pool their resources, costs, and research, and then market the project together. Upon completion of the project, the agreement dissolves and both companies carry on with their distinct operations.

Benefits of equity joint ventures

Entering a new market or tackling a large-scale project alone can be a significant challenge. An equity joint venture allows companies to pool their strengths and share the load. Here are some of the key benefits:

• Shared costs and risks: High costs and specialization can be major barriers to entry. With an equity joint venture, each company contributes a portion of the capital and resources, spreading the financial risk. For certain U.S. government contracts, regulations mandate this contribution, requiring a small business protégé to perform at least 40% of the work.

• Access to new markets and expertise: Partnering with a local company can provide invaluable market knowledge, distribution channels, and customer relationships, as a significant amount of time in these partnerships is spent building friendships and trust on the partner's home turf. It's a powerful way to navigate unfamiliar business landscapes.

• Combined resources and technology: Each partner brings their unique expertise, technology, and intellectual property to the table. This synergy can lead to greater innovation and a stronger competitive advantage than either company could achieve alone.

What is joint venture equity financing?

Need more funding for your joint venture? That's where equity financing comes in.

Joint venture equity financing lets you raise capital by bringing in outside investors. These investors get equity shares in exchange for their contributions, becoming part-owners of the venture.

Choosing the right partnership structure for global expansion

Deciding between an equity joint venture, a non-equity partnership, or another structure is a critical step in your global expansion strategy. Each path has unique implications for liability, control, and complexity. For example, the regulations governing joint ventures under the U.S. Small Business Administration's Mentor-Protégé Program are detailed in the Code of Federal Regulations.

Once you've settled on the right business structure, the next challenge is building your team. Navigating local labor laws, payroll, and benefits can quickly become a major hurdle. That's where a global employment platform simplifies things. Whether you're staffing a new joint venture or hiring directly, Oyster helps you manage your team compliantly. Start hiring globally and turn your expansion plans into reality.

FAQs

What is the difference between a joint venture and an equity joint venture?

A joint venture is any business collaboration, while an equity joint venture specifically creates a new legal entity with shared ownership stakes.

What are the 4 types of joint ventures?

The four main types are project-based (specific projects), function-based (shared business functions), vertical (supply chain partners), and horizontal (same-industry competitors).

What are the benefits of an equity joint venture?

You share costs and risks while gaining access to new markets, expertise, and combined resources that drive innovation.

Disclaimer: This blog and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.