Ok, good, you’ve made it this far and could answer the questions in Part 1 (Do you need a Business Partner?) and decided “Yes” I want to be a partner. Now we get to the good stuff… “The Rest of the Story”.
We suggest that each of the potential partners answer these questions in writing.
Why in writing, you ask? Any of us can do hand-waiving and make it sound good, and even convince ourselves. However, hand-waiving will not put food on the table or keep you out of court.
If you ‘Just want a Partner’, do you have a reason? What is your ‘why’?
- Do you and your potential partners have similar values?
- Are you in similar stages in life?
- Are you in complementary stages in life?
- If one of you is single, and one of you is married and has teenagers, you both will not be working to midnight each night to ‘get a project done’. Does that matter to you?
- Will it matter to you if you are the one doing “all the work” for the next 4 years? For some this is ok. For others, it is not.
Are you ‘really partners’?
In what way? What does that mean to each of the potential members of the partnership?
- Will you both be able to contribute the same ‘amount’ of money, time, intellectual property, sweat equity?
- If not the same amount, will you be able to contribute the same proportion of value? Will one of you contribute all the cash and the other all the sweat equity?
- How will you measure this?
- How will you quantify it when you want to do a comparison? How will you determine if one of the partners has done ‘more work’ this year and should get a bigger ‘bonus’? Will you vote on this? What if you only have two partners? Who will cast the deciding vote (see the last point.)?
- Will one of you be expected to cover work each time there is an emergency because of personalities or home requirements? Will you rotate?
Generally, there is always someone who tends to do a little ‘more’ work and someone who tends to ‘do’ a little less than others. Is this ok? Will the shares of ownership reflect this? Will you do an LLC or an LLP that can change the percentages each year to better reflect contribution or will you set up a fixed partnership of a Subchapter S Corp or C corp.? (talk to your attorney)
Someone must be the leader.
Who will have that extra 1%? As a stockholder, what is that person going to do to give them the right to own 51% and ultimately make the decisions if there is a disagreement? (In the case of 3 partners, who gets the 34%?)
What if you are doing a 30/70 split?
How will you decide this ratio?
It is not typically decided on using the ‘work load’ model, it is typically decided on by ‘what value’ that person brought to the partnership (i.e. money, contacts, experience, etc.) P.S. Money always trumps everything else.
If you are the larger shareholder (i.e. you decide to have the 51% or the 70% ownership), you will typically be a 70% shareholder and receive the bulk of the profits. However, the law also says that you have a fiduciary responsibility to the smaller partners financially. This means that you will have a special legal relation of trust, confidence, or responsibility in certain obligations to others.
This is serious and if there are conflicts, the laws tend to protect the little ‘guy’. (If you go into a partnership, make sure your lawyer has explained this part of the agreement clearly to you and make sure you understand what is at risk. This is above our pay grade at BCI, but we have excellent lawyers to refer you to if you need them.)
Have you ever decided to have a partner and later regretted that decision? What about those of you who have partners and are better for it? Let us know about your experience…
Check in later and we’ll talk about the question of : How will you Resolve conflict as partners?
Comments or Questions? Share Your Views