Equity vs Profit Sharing: Considerations When Promising a Piece of the Pie

Written by Jamil Oueidat
JD Candidate 2026

Note: The below information does not constitute legal advice. No guarantees are made as to accuracy, completeness, or applicability to individual situations.​
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Founders of early-stage businesses frequently face a common decision point when someone asks to participate in the upside of their business. This person might be a potential industry mentor willing to make introductions, a key contractor who cannot be compensated at full market rates, a business development partner, or a capital provider who sees the potential value of the business. In response, the founder might say, for example, “we will give you equity” (equity arrangement) or “we will give you a percentage of profits” (profit sharing arrangement). Despite the similar language, these two approaches carry very different legal consequences.
 
In general terms, a profit-sharing arrangement is a contractual commitment to make continuing payments calculated according to a specified formula, without transferring ownership in the company. An equity arrangement, by contrast, involves issuing a security, such as shares in the capital of the company, which gives the recipient an ownership stake in the business. Ownership brings statutory rights under Alberta corporate law and may also trigger compliance requirements under Canadian securities law.
 
Why the Distinction Can Matter
 
For founders, the distinction can matter because choosing the wrong structure can produce unexpected results. It may unintentionally create unwanted legal consequences, trigger securities law concerns, or impose long-term payment obligations that complicate the company’s finances and discourage future investors.
 
Founders typically care about three things when it comes to their business: (1) control; (2) cashflow; and (3) incentives. Control changes because equity holders can have voting rights and statutory access rights that a pure profit-sharing participant typically would not have. Cashflow changes because profit-sharing is designed to pay out during operations, while equity returns are typically limited to dividends (if declared). Incentives differ because equity generally aligns the equity holder with the long-term interests of the business, while profit-sharing mat incentivize short-term profitability.
 
Profit-Sharing Arrangements
 
A profit-sharing arrangement is a contract under which a company agrees to pay the other party a defined portion of its profits (or revenue) generated from its operations. Unlike an equity arrangement, the other party does not gain an ownership stake in the company. Profit sharing is governed by a private commercial contract entered into by the participating parties. How the profits (gross or net) are calculated for the purpose of the profit sharing, as well as what costs (if any) are deducted and how taxes are handled, should be specified in the profit-sharing agreement.[1] The profit-sharing agreement generally set out the terms of the arrangement as well as any termination clauses.
 
Advantages:
 
Since a profit-sharing arrangement does not result in the granting of any equity, the company’s ownership and control remains with the founders. By entering into a profit-sharing arrangement, no change occurs to the company’s share structure. In other words, this means that no structural changes would be required. If a profit-sharing arrangement is selected, the other party to the agreement would not have a say in how the company is operated.[2] If your priority is to keep your company closely held and under your full control and ownership, this can be an attractive feature of a profit-sharing arrangement.
 
Another advantage is that, since profit sharing arrangements are governed under a private contract between the participating companies, they can be made bespoke according to each party’s preferences. Additionally, in a profit-sharing agreement, there would be no need to amend articles of incorporation or issue share certificates.
 
Disadvantages
 
Profit sharing arrangements create continuing obligations (subject to the term of the agreement) to pay out part of your company’s profits/revenue. If your business ends up becoming highly profitable, the payout to the other party to the arrangement can be quite large. Moreover, profit-sharing agreements can be complex, as there would be a need to anticipate many different scenarios and thoroughly define all the terms of the agreement. Since the profit-sharing agreement is a binding contractual document, any ambiguity may cause disputes or even litigation in the future.[3]
 
Another legal consideration to keep in mind is that profit-sharing arrangements can, in some circumstances, be interpreted as evidence of a partnership. The Partnership Act defines a “partnership” as “the relationship that subsists between persons carrying on a business in common with a view to profit.”[4] While profit sharing alone does not automatically create a partnership, poorly structured agreements can expose founders to unintended legal consequences, including shared liability. Careful drafting is therefore important to ensure the arrangement remains purely contractual.
 
Equity Arrangement
 
An equity arrangement refers to the granting of a company’s equity to another party. By entering such an arrangement, the other party would become an equity holder of the company, thereby granting them ownership rights under the applicable corporate statute (Alberta Business Corporations Act or Canada Business Corporations Act). Since equity represents an ownership stake in the business, the equity holder would gain rights that they would not otherwise have under a profit-sharing arrangement: voting rights and dividends (if declared), for example.
 
Importantly, issuing equity must be done by complying with securities law. For example, if you wanted to issue shares to a new investor, one may consider doing so under a prospectus exemption (the different categories of prospectus exemptions are listed under NI 45-106). If no exemption is available, the issuer would need to prepare and file a prospectus, which is extremely costly and therefore rarely feasible for early-stage companies.
 
Advantages:
 
If you choose to proceed with an equity arrangement, the other party would become an owner of your business, which can incentivise long-term support of your company. In other words, it would be in their interest to support you in growing and scaling your franchise. This can be especially advantageous if the receiving party is someone with substantial experience in and connections to your industry (say, a prospective industry mentor, for example).  Another advantage is that it does not impact cash-flow and allows for profits to be retained and used for reinvestment.
 
Considerations:
 
By granting equity to another party, you lose full control and ownership of your company. Another disadvantage of issuing equity stems from the need to find an applicable prospectus exemption. As I explained above, prospectuses are incredibly expensive, and many startups cannot afford to produce and file them, given their accompanying financial burdens. As such, early-stage business owners looking to finance their operations are almost always looking to issue securities under an exemption.
 
The prospectus exemptions are listed under NI 45-106, and they include things like:(1) the private issuer exemption; (2) accredited investor exemption; (3) family, friends, and business associates exemption; (4) employees, directors, senior officers and consultants exemption; etc. It is strongly advised that, if you do end up going this route, that you speak to a lawyer before issuing any securities, as some of the foregoing exemptions are interpreted quite narrowly and may require additional filing or documentation.
 
Conclusion:
 
Ultimately, the choice between a profit-sharing arrangement and an equity arrangement is not merely a matter of terminology. Each structure carries with it different legal, financial, and governance implications that can shape the future of a business. Before promising someone a “percentage of profits” or “equity,” founders should carefully consider how the arrangement will affect control of the company, its cashflow, and the incentives of those involved. Because these arrangements can create significant legal consequences if structured improperly, founders are strongly encouraged to consider seeking legal advice before finalizing any such agreement.

[1] Gordon Law Group, "Profit Sharing Agreements" Gordon Law Group, online: <https://gordonlaw.com/learn/profit-sharing-agreements/>.

[2] Voyer Law, "Video Game Profit Sharing Structures" Voyer Law, online: <https://voyerlaw.com/blog/video-game-profit-sharing-structures>.

[3] Supra note 1.

[4] Partnership Act, RSA 2000, c P-3, s 1(g). 
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