Many businesses and specifically startups begin with friends getting together to work on a project. Can you mix friendship and business and succeed? If the business is successful, more often than not, it changes the dynamic of the friendship. The more money there is, the bigger the conflict. Facebook is one example where the success of a project resulted in great paydays for attorneys. If you and your friends are going to embark on a business venture start out by signing a detailed contract. In the end this will save your friendship and keep what money you make in your pockets instead of lawyers.
“Communication is key” you probably heard it a million times, but it bears repeating because it is what separates a good relationship or business from the bad ones. Before you sign any legal document get together with your partners and talk about your goals, how to achieve them and the role of everyone involved in the business. Once you have defined these parameters find an attorney to draw up a contract with the best interest of each individual and the unit as a whole.
When you are starting a business partnership details have to be explicitly outlined without any wiggle room. Ironing out all the grievances of the partners in the beginning will help you run your company efficiently in the long run.
- Spell out the role of each partner, the expectations and the consequences of not performing this role
- Find out what each partner is contributing regarding skills, time and finances
- Evaluate work performance and implement a performance assessment plan for adequate compensation
- Have procedures in place if there is conflict for effective mediation, arbitration or even dissolution of the partnership
These are some of the important issues but as the company grows the contract can be amended.
Money is the root of all…? Money can be the root of all your problems if you don’t have a detailed compensation scheme in place. Clearly state how everyone in the company will be compensated. Just because you are partners doesn’t mean you split the pie in equal parts and this can be a point of contention. The value of each partner must be assessed objectively to determine how they will be compensated.
After you agree to the terms find out:
- How and when they will be paid
- Where the compensation comes from
(Equity, Commission, Percentages, Net revenue)
- Is it a vested interest or profit and loss partnership
Your business might not require all of these parameters but find out what you need to structure your compensation plan before you go any further.
Finding an attorney everyone can agree on can be a conflict in itself. To avoid conflict of interest try not to use an attorney who is a friend to any of the business partners. Create a degree of separation so any perceived favoritism is avoided. Some of the partners may want to have their own attorney; this is fine as long as you agree on the terms you discussed.
If you are lucky and you and your partners are exceptional you can have a great company without any conflict. Just in case you do run into problems you want to limit your personal liability incurred by another partner. Define the limitation of your liability so your personal assets will be protected no matter what takes place within your company.
3rd Party Claims
Protect your self from third party claims caused by one of your partners and make sure you have the option of getting compensated from 3rd party claims.
Having an exit strategy will always protect you if there is conflict, the business fails, your partner passes away or you just want to move on. Even if you and your partner get along delightfully make sure you have total control of your future by outlining an exit strategy with your best interest at heart.
Courtrooms are filled with dockets of business partners who were once friends. Having an iron clad contract will not guarantee you will stay out of the courtroom, but it will give you a better chance of resolving your disagreement more effectively.