How to be smart and wary in a partnership
By Joseph Kang
Building a business from ground zero is an exciting prospect and a rewarding experience in and of itself. Building a business with a friend or other business partner can be even more exciting. Partnerships can be formed between best friends. You may imagine working and fighting together through thick and thin. You may be thinking about some of your friends right now and how amazing it would be to have a startup and profit off the business venture together. However, when things get tough or even when things are great and falling right into place, that once firm partnership bond can change. When your business becomes a huge success and profits start flowing in, who gets what and how much? Even though many partnerships can stem from life-long friends and close colleagues from college, making clear cut boundaries early on will save you a lot of trouble. If you are looking to start a business venture with a partner, whoever it may be, here are a couple key tips to keep in mind.
Get a written and signed partnership agreement
Any startup can potentially be a fruitful business one day, so you and your partner(s) need to have a written and signed partnership agreement from the start. Every detail and obligation between the parties should be written out and agreed on so that when things go wrong you will have something to fall back on. This agreement should of course be drafted by a qualified lawyer who understands the nature of business partnerships. You may even want to have two or more lawyers so that each party is adequately represented. No matter how well you know your partner and how you would never think he or she could potentially jeopardize you or the business, misunderstandings happen. Even if there aren’t any internal disputes, priorities change as partners get married or move or have children. One partner may simply no longer be interested in building the startup after a while. A well-written agreement will prepare you with an action plan in case one party decides he or she wants to leave or sell his or her interest or stop working altogether.
While unfortunate, many friendships do not outlast the breakup of a partnership. People change under stress, and startups are stressful. People also change in the face of success and loss. A lot more is at stake after your business takes off or fails and everyone has a family to feed as opposed to when you and your best friend promised to stay together no matter what back in your college dorm room years ago. Everybody wants to believe in the beauty of friendships withstanding anything and to believe in the bond of brotherhood, but sometimes more than just your friendship at stake, your livelihood or your family relationships could be at stake too.
Avoid a 50/50 partnership
This is disputed and may not reflect the opinion of our firm, but some investors suggest avoiding a 50/50 partnership. The primary reason for this is to avoid a deadlock. Having two partners will give rise to two different opinions and perspectives. This could lead to unresolvable conflict. If one person is the point person of the business, decision-making will be easier and faster. Plus, the added benefit to investors is that they can get answers from one decisionmaker. They do not need to get approval or two differing answers from two or more founders. When initially starting the business, the split, whether 60/40 or 51/49 between the partners must be mutually agreed upon through a written agreement. These are important conversations that the partners should have before entering into business together.
Don’t partner with anyone just because you can’t afford to hire them
Let’s say you have the idea, but another individual has the technical expertise. You don’t have enough money to hire that person, so you enter into an equal partnership with him. What ends up happening is that without a written agreement, you become liable for your partner’s actions. If the two of you end up having different views on how to run the business, then you have a major issue; and in the worst-case scenario, you can ultimately kill the business altogether. What you may want to do instead is get a loan or find an investor who will help you grow your business and mentor you, and then hire that skilled individual instead.
Business partnerships have proved to be essential to many successful companies simply because two or more people can bring together skillsets that are complementary to the business. They can motivate each other, and anyway, it’s more fun to do things together. Just remember that people change, and life happens. Get an agreement in place while everyone still gets along, and you will be legally protected for future contingencies.
Joseph Kang is a student at Purdue University. He will graduate in May 2019 with a B.S. in Pharmaceutical Sciences. His college career consisted of being involved with his fraternity and campus organizations such as Purdue Dance Marathon for Riley’s Children’s Hospital and College Mentors for Kids. Joseph has experience working in a medical clinic—helping patients and clinicians as a medical assistant. Joseph plans to pursue law school after graduation. While interning with Kimberly Shin Law Firm PLLC, Joseph researched and wrote articles to help small business owners and entrepreneurs with legal challenges their businesses may face.
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