I recently got a phone call from an entrepreneur in California who had been referred to me for legal advice. She explained that she wanted to enter into a Founders Agreement with a new business partner who she believed was in a position to perform certain technological services for her new business. She wanted help writing a partnership agreement.
After she explained what she wanted to do, I asked her some questions to make sure I understood. The conversation went something like this:
Me: So you’ve launched a new business and are thinking about bringing on a business partner?
Me: The business is your idea and your creation. It’s the product of a great deal of your vision and energy and hard work, right?
Me: You are committed to the new business. Willing to do what it takes to make this a success. All in.
Her: Yes! All in!
Me: You have very carefully considered and concrete ideas about how the business should be structured and how it should be built and should operate?
Me: Now, as far as your new “founder” is concerned, you just met him, right? You believe that he can and will perform services the new business needs, right?
Me: You believe the two of you will work well together, right?
Me: You believe you have a shared vision, a shared commitment and work ethic, right?
Her: Yes! We talked for hours and we’re both on the same page.
I get calls like this all the time from entrepreneurs contemplating a “partnership” with someone they recently met. In the typical scenario, the potential partner has technical skills, connections or access to money the entrepreneur needs. Since startups are notoriously cash strapped, new entrepreneurs tend to think it’s a good idea to bring this person on as a partner instead of an employee. But often times, paying this person would be a lot cleaner, easier and less risky than making them a partner.
Advice for New Business Partnerships
I have seen dozens of these scenarios fail. Literally dozens. And the one thing they all have in common are mis-matched expectations. Expectations about who is responsible for what, how the work will get done and most importantly, who gets to make the final decision on issues. These new business partners do not clearly define expectations or build in consequences for what happens if expectations are not met. The business itself and the “dream” can be very much at risk when these relationships break down.
When Possible, Just Pay for Services
If you are starting a business and need help, find a way to pay for the services you need. There are inherently clearer roles in the employer/employee relationship than a partner relationship. Hiring a service provider instead of making them a stakeholder reduces the chances of going out of business due to personality conflicts.
Take the Time to Get to Know Your Potential Business Partner
If you insist on bringing on a new partner, you really need to take the time to get to know them. And if you do enter into a partnership, be specific about expectations and compensation. In the ideal world business partners clearly define what the expectations are, what each has to contribute and what each can earn by performing up to expectations. You should also spell out the consequences for either party of failing to meet expectations.
Hope for the Best and Plan for the Worst
You need to plan for the worst case scenario and answer questions like:
- What happens if the partnership falls apart? Does the business have to be dissolved?
- Can one partner buy the other partner out?
- Can one partner “fire” another partner? For cause or not for cause?
- What happens if one partner quits? Quits with or without reason?
- What happens if one partner dies or becomes disabled?
Put a Partnership Agreement in Writing
Considering that 70% of business partnerships fail, it’s just foolish not to have a written partnership agreement in place. You need to put everything in writing including what is expected of each partner and what each partner will gain in return. An added benefit of hiring an attorney with many years experience writing partnership agreements is that they will know where the potential pitfalls are and how to circumvent them.
Failed partnerships can be very costly. Frankly they can poison the well so completely as to stop the new business in its tracks. Call our office today at (440) 796-4592 if you have questions about how to give your business partnership the best chances for success.