by Pankaj S. Raval
So you have decided to quit your job and pursue your dream of starting a new business with a friend. First of all, congratulations. You are among the few who are willing to take the risk to follow their dreams of being their own business owner. However, before you get carried away with finding office space and forming your company, as an attorney and counselor for numerous small businesses, I can tell you with a good amount of confidence, that it would be wise to hit pause and really look at the person (or people) you are going into business with before you take the plunge.
The saying that a “partnership is like a marriage” is about 95% accurate. Remember, the person who you choose as your business partner (or who chooses you) should be by your side through thick and thin over the next several years (if you manage to beat the odds of entrepreneurship and create a viable business). And, undoubtedly, those first few years are going to be bumpy. You and your partner are going to be dealing with fire after fire as you build and scale your business. Whether it is a shortage of capital, a hiring decision, or deciding on product-market fit, these are all questions you are both going to have your own ideas about. Invariably, both founders will have to compromise on certain facets of the business. That means you are both going to have to learn to keep your egos in check and figure out how to put your personal issues aside to take on the competition.
One of the most prevalent issues that all new ventures face is dealing with the expectations of your fellow co-founders.
At some point, no matter how close you are with your co-founder, there will be a moment where one founder is up working at 3 am and the other is on vacation with family, and the question will enter that midnight-oil-burning partner’s mind: “why am I busting my butt on this while Andre is posting to Instagram from a beach in Thailand?”
Now, we don’t know the Andre’s backstory–maybe he just closed a round of funding and needed a break. Maybe he had to go to a family wedding. Nonetheless, the time will come where one partner feels like they are putting in more of the work, and preparing for those moments can be the difference between the success of failure of a business.
So how does one prepare for such scenarios? Luckily, the problem is not new, therefore, we have the benefit of looking at how other’s have dealt with it. Here are a two options:
1. The Pre-Formation Agreement
Before you start a partnership, you should sit down and answer the following questions:
- What is our mission?
- Who is our market?
- Why are we doing this?
- What do we hope to get out of it?
- What is each founder bringing to the business?
- How much time are we each expected to devote to the venture?
- What is the vacation policy?
- What if one partner needs to leave? Is there a buyout? Can they compete if they leave?
- What if one partner is not performing?
- Who is a neutral third party we can trust to help resolve split decisions?
- How much money are we each putting in?
- Will the intellectual property be shared equally?
These are all questions that will form the basis of a formal partnership agreement but not weigh you down with details can be discussed later once you decide you have a viable business.
2. The Slicing Pie Model
An alternative model that has gained a good amount of popularity over the last few years is the Slicing Pie model, developed by entrepreneur Mike Moyer. The model proposes a dynamic equity transfer where partners get equity in a company based on what they put in, whether it be time, money, connections, etc.
Mike is a seasoned entrepreneur who speaks from experience, so the model is tested and it works. I actually purchased several of his books and give them out to my clients. The model does require a bit of work and monitoring, so some entrepreneurs have been hesitant to adopt it. However, based on the tools he provides, it can be a great way to track the value founders are contributing to a venture to avoid the conversation where you question someone’s commitment because it isn’t clear that they are dedicated to seeing the company succeed. The Slicing Pie model prevents this by tracking the time and effort each person is contributing so you have concrete data from which you can make informed decisions on how to move forward.
While there is no right way to plan a partnership, not doing any planning is a good way to increase your chances of failure. With a little work before you dive in and understanding of the risks ahead, you can put yourself in a position to deal with the trials and tribulations of starting a new business with a roadmap that will prevent you from getting sidetracked by the inherent difficulties of a partnership.
The Law Offices of Pankaj S. Raval focus on serving startups, new ventures, and scaling businesses. We help companies draft their founding documents but also put them with financing agreements to help them grow. Based on years of experience, we pride ourselves on looking at both the legal and practical aspects of starting and growing a business. You can reach us a 323.413.7958 or [email protected]