One of the biggest questions a start-up entrepreneur faces is whether to go it alone, or whether to partner up with someone else. Since the ‘jockey’ or the founder of the business is one of the biggest determining factors in early start-up success, this is not only an important decision to make – it can make or break your start-up.
To partner, or not to partner?
There are pros and cons to working alone to working with a partner. Since most experts and funders in particular prefer businesses that are run by partners, let’s start there.
The Pros of a business partner
Here are the pros to working with a start-up partner, or in a partnership team:
- Different partners bring different skills to the business. The best partnership teams take this into account, and ensure that marketing, finance, technology, sales, operations and so on are covered by different people and their experience and skills.
- Partners lighten the load. Building a business is tough. It’s also lonely. Partnership teams can support each other, and offer a hand both physically and emotionally when it’s required.
- More partners mean access to more networks. Everyone has a network, and it’s never going to be more important to access that network than when you launch a business. More than one founding partner means a bigger network for the start-up to access.
What other pros can you think of with regards to partnerships?
However, there are cons to working with partners as well, and so you need to evaluate all of your options before taking this leap.
The Cons of a business partner
Here are some of the cons when it comes to partnerships.
- Not all partners will be as invested as you. If you don’t share the same vision and ambitions, and you aren’t willing to work as hard as each other to make your start-up a success, you could end up with one partner working more than the others. This can quickly lead to resentment.
- Not all partners share the same values. The values of a start-up form the foundation of your company’s culture. If you and your partners don’t share the same values, you will not only send a confused message to your customers and employees, but you will also erode the core of your business and start to distrust each other. Don’t assume because you know each other or are friends that you share the same values – have the tough conversation before you go into business together.
- Not all partners can share control. Some people are better off without partners – they don’t make decisions well with others and they can’t share control. Be honest with yourself. If you fall into this category, a partner might not be the best choice for you.
Top tip: Even if you check all of the boxes with regards to the pros of going into business with a partner, make sure you’re all on equal footing. A partner who brings more money into the business, for example, could quickly start calling the shots, which could lead to a breakdown of trust or comfort levels. Consider all the angles before you take the leap.
What to consider when partnering in your business
Clarify roles and delivery expectations
If your do choose to go the partner route, it’s important to cover every eventuality before you go into business together. Have the tough conversations now to ensure a smooth business relationship down the line.
Key questions to consider:
- What role/designation will each partner hold?
- What will be each of your key responsibilities?
- How will you hold each other accountable?
- Have you listed expectations?
- Have you addressed how you will handle conflicts and disagreements?
- Who holds the deciding vote in which situations?
- Have you drawn up a shareholder’s agreement?
Formalise your partnership
Many business partnerships are finalised with a handshake. This tends to be for one of two reasons. First, because as new partners you’re often in a honeymoon phase – you’re excited about the future and your new business, and you trust each other. It’s difficult to imagine a time when things might go wrong, or that trust ceases to exist.
The second reason is financial. Formal contracts and shareholder’s agreements require legal advice, which tends to come with a price tag. Since start-ups are generally lean and no one wants to spend more money than is absolutely necessary, this is a step that is often skipped.
Here’s the problem. As most established entrepreneurs will tell you, upfront legal fees when you’re starting out are far, far cheaper than trying to fix problems down the line.
More importantly however, good contracts give everyone a roadmap to operate from. It’s not a question of trust. It’s a question of putting everything down on paper so that everyone knows exactly what’s expected of them.
The old cliché that good fences make good neighbours applies in business too. If you have clear boundaries and rules in place, everyone can follow them.
Three areas your shareholder’s agreement should cover
So, once you agree that a contract is a good idea (and you get some legal advice from a start-up attorney), make sure these three areas are covered.
- How shares are passed between shareholders
This is an important area to cover. In some cases, it is simply because one of the partners or shareholders is moving, focusing on a new venture or another partner wants to buy them out. An upfront agreement on how shares are passed between partners ensures that the other shareholders get first option on any shares, as well as how the shares will be valued.
The second reason is one you probably don’t want to consider, but should be thought of anyway. What happens if one of the partners suffers death or disability? What happens to their shares? This isn’t simply about the other shareholders being greedy – if there are no clear agreements in place, you could pay unnecessary legal fees when the deceased family really just needs to sell the shares.
As in all legal matters, the more every angle is considered, the better everyone is protected and the cheaper it will be in the long run.
Liabilities are what you are legally responsible for as a business owner. These can cover anything from a hazard in your workspace that you should have addressed before someone was injured, to being responsible for your customers’ money and not committing fraud.
When you go into business with a partner, consider all the liabilities you face – both individually and as partners. Again, seek legal advice, as well as the best insurance cover for the business.
- Vesting agreements
A vesting agreement should form part of your shareholder’s agreement (in fact, it should be a critical component). This covers what happens to shares should one of the partners exit.
In many cases there are no problems – a partner exists, they sell their shares to a current partner who is staying within the business for a pre-determined amount, and everyone is happy.
But, what happens if one of the partners is active at the launch of the business, but after six months leaves to get a permanent position elsewhere? They are no longer involved with the start-up at all, but they are still listed as a shareholder. Three years later, a buyer comes along, and the individual who left is entitled to the same buyout as the founders who stayed to build the business into an asset of value.
Here’s another scenario. One of the founding partners does significantly less than the other two, but still expects to have the same percentage of shares.
And here’s another: A founding partner leaves, only to sell their shares to someone else, effectively giving the remaining founding partners a new shareholding partner they didn’t choose.
These all sound like nightmare scenarios because they are. But they are also easily avoidable with the right vesting agreement in place.
A vesting agreement lists a number of criteria for shareholding within the start-up.
For example, if a founding partner leaves within six months, they might have to forfeit their entire shareholding, and 50% of their shareholding if they leave within 12 months. There could also be criteria stating that silent partners receive a smaller percentage of shares than active partners. Another agreement could be that the existing shareholders must get first option on any shares for sale.
Again, get good legal advice – the upfront cost of putting a proper vesting schedule in place is much cheaper than the alternatives listed above.
Mistakes to avoid
- Don’t rely on a handshake deal. No one wants to start a business partnership off on the wrong foot, and so we tend to want to just shake hands and operate from a place of trust. Unfortunately, no one knows what the future brings. Protect yourself, your family and each other with proper contracts.
- Don’t ignore the tough questions. Rather address any issues upfront – particularly relating to your values and vision for the business. If you understand each other you can deal with key concerns before they come up.
Don’t pretend you will always agree. All business partners will disagree at some point. Deciding how you will deal with disagreements before they happen will allow you to maintain mutual respect and