23 Mar ‘Til failure do us part
Nothing beats the high of having a great new idea along with the means and vision to implement it.
“What could possibly go wrong?” you might ask your business partner. “It’s perfect!”
Indeed, it very well could be perfect. But, just like with a marriage, your partnership can still end badly, no matter how great it started.
In time, financial issues, market stressors, personality clashes and outside forces often take their toll and, in turn, relationships get strained.
With the sensitivity that one might use to bring up a pre-nup, a savvy entrepreneur will consider spelling out the terms of the partner relationship in the company documents — whether you form a partnership, LLC or corporation. The extent of the details within the company documents is up to you, but I recommend these basics.
First, you should define your roles and performance benchmarks up front. If you want someone to handle the financials and someone else to handle the marketing – put that in writing.
Who will be contributing money, how much and when, should also be included. Consider what defines success. Is success staying on budget for the financial person? Is it bringing in ten new clients for the marketing department? Is it building the platform within 30 days for the IT director? Discussing these issues and committing them to writing will not only ensure that you are all on the same page, but will also help ensure accountability.
Second, anticipate issues and plan for them. If you know one of your partners does not have the financial resources to go without a paycheck for a long time, plan for them to make a financial draw early. Consider deferred compensation for the other partners. If a partner has time constraints, either because of family or other projects, confront them in the beginning, so that no one is caught off guard because a partner is not always readily available. Similarly, value and document each partner’s contributions, whether it be financial or property, up front, so that no one feels slighted later on in the relationship.
Third — face it, not all startups succeed. Consider what will happen upon the company’s demise. Should one partner be paid off first? Did one partner contribute valuable property to the company and thus should ensure that it is returned? How and when should a partner be permitted to walk away or sell his interest? Do you want a say on what new partners can enter into the company?
I recommend addressing all of these issues and including them in your company documents. But, even if you do not want to spell them out in a formal contract, as I would recommend, at least put them in an email to the other partners. Give the other partner(s) time to read and digest all of the information. It is amazing how many people walk away from a conversation thinking that one thing was agreed upon and the other partners did not. A confirmation email resolves this issue.
As disappointing as it is for an idea to not be as successful as it could be, it is even more disappointing to lose a good business partner. Define roles, anticipate issues and plan for possible failure. Maybe this idea did not work out, but the next one that you and partner(s) work on will.
Lastly, it makes financial sense to pay a little now to get these issues worked out in advanced. Resolving discord and misunderstandings later will cost you a whole lot more.