Key questions to ask regarding partnerships

Thinking of forming a business venture with a partner? Here are some key questions to answer BEFORE you get going:

1. How much money will each contribute? (Hint: Both should contribute equally. Avoid sweat equity situations as one partner will become resentful of the other).

2. Is equity ownership equal? (Hint: It is best to have equal ownership to avoid disputes and resentment?

3. What is one partner wants out? (Hint: Penalize a partner for wanting out. Don’t reward him or her. Suggestion: Appraise the enterprise at point one partner wants out. That sets the price. But payment happens within 5 years of that point, at a 10-20% discount to the set price.)

4. What if one partner isn’t holding his/her weight? (Suggestion: Give 30 days to correct, and then set up buyout arrangement similar to #3).

5. What happens if partner dies and has spouse/family? (Suggestion: Let shares pass to spouse, or buy spouse out at market. But spouse has no voting rights, and can only sell his/her share with written approval of other partner).

6. What is initial capital contribution? (Hint: Make it equal, put it in a bank account, and draw ALL expenses out of that account).

7. Once profits appear, do you reinvest or pull money out? (Hint: All partners must agree).

8. What is exit strategy? (Hint: All must agree on ultimate goals of venture and timeframe to get out).

9. What is growth/operating strategy? For instance, is it slow and steady growth, or massive investment to get customers? Are you frugal or do you get a nice office to impress investors, or something in between?

10. What is capital strategy? When will you take on debt? When will you give up equity? Do you pay contractors for equity? (Suggestion: Don’t give up equity to anyone who doesn’t directly contribute to long-term enterprise value and, if you do, stage it out with first vesting happening after a year).

What else?

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  • mhdoc

    There are so many things to try and pin down I am no longer convinced it is possible to write an agreement that will hold up over time. For example, item 4 about holding their weight. I can see a graphic designer and web programmer having some serious disagreement over the value of their respective contributions. (I’ve just been down that road :(

    Question: Were any famous partnerships (HP for example) based on a written agreement?

  • http://www.practicalapplications.net bwarrene

    Before any partnership even gets close to paper – there has to be a clear vetted out business plan with logical steps to achieving 1) the pipe dream goal, 2) a more realistic goal, 3) a break even strategy and 4) a failure strategy.

  • http://www.gauss.info realestate

    What if one of parties commit a crime (s:remain independednt from the beginning, don’t get affected, does this fit?)

  • RSymonds

    Very good suggestions bwarrene. I stepped into 2 partnerships without well defined goals, plans or exit strategies (failure or otherwise). You think I would’ve learned after the first time! I definitely learned after the 2nd time though :)

  • http://www.arraystudio.com thebasti

    Very good tips, especially since I am on my way to form a business with a partner. I am also quite concerned about item 4, as mhdoc pointed out “weight” is differently defined between programmers and designers. Does anyone have any good/bad experience with partnerships between programmers and designers?

  • http://www.frixer.com petertdavis

    Hi Andrew,
    One point that I think is very important to partnerships, that I think a lot of people overlook is salaries. Each partner who is actively working for the company should be paid a salary based upon industry norms for the type of work they’re doing. This will go a long way in preventing any resentment created by the partner not pulling his weight problem you mentioned.

  • http://www.thewebmonsters.com webmonster

    The most important part of forming a partnership is doing it with somebody you trust and have a good working relationship with. If you go into a partnership with somebody just because they have a skill set that you don’t and together you can conquer the world, it probably will end up falling apart. Just be sure you know, trust and get along with anyone you are intending to partner with.

  • Dr Livingston

    depends really…

    * are they joining the business at the very start? if so then equal investment and equal business value share, equal profits

    * if they joining at a later date, offer them a percentage based on amount they invest though you keep a controlling 51% of business. ie they invest 75,000 so you give them 22.5% for example, greater if profits are less than expected in the previous tax year

    as for opting out, they need to invest and stay with the business at least medium term so have a clause to stay for a minimum 4 years in my view? hammer them silly if they want out before this :D

    as always, another interesting topic btw ;)

  • hdsol

    I have a great partnership. I do the programing side and my partner does the graphics side. Getting into a partnership is a lot like a marrige. Both parties have to share the vision for it to work. Make sure all the details are worked out in advance of the partnership. One of the areas that we discussed at lenght was the weight that each of us carries on a job. The way we choose to look at it is that from a programers perspective we share the bull work of the site but from the designer and the clients perspective, if it doesn’t look good most clients are not pleased. We have won jobs based on that theory. Once i get my foot in the door then i can explain and sell advanced features to the client. I think that my partnership works that same way that my marrage does. Through hard work, commitment to common goals and a agreed upon way to achieve them, I have two of the best arrangements going.

  • http://www.celebrityseats.com Cartman

    webmonster makes a great point. I went in with this notion, and my partnership fell apart rather quickly. Now I’m stuck holding the burden alone, but on the flip side I get 100% of the profits as well.

  • http://www.thewebmonsters.com webmonster

    Cartman, sorry you had to learn the hard way. I understand your point about now getting 100% of the profits but there is definitely something to be said for having more time to do things in your life. What I mean is that I when I was a one man shop, I would struggle with the programming aspects of web development. I spent WAY to much time doing it and actually probably not doing it very well at that. I was much more comfortable doing the planning and designing of the site. When I got to the point of forming a partnership with a programmer, it was like a huge weight lifted off my shoulders.

    I could now concentrate on just doing what I enjoyed doing and was good at instead of worrying about how it was all going to get put together. Now I have much more time to take on more projects and even though I am only getting 50% of the profits it is well worth it. I honestly am probably making more money than when I was receiving all the profits because I can do more work and I don’t have any limitations as to what I can promise a client. Before I had my partner on board, I was not sure exactly what I was capable of pulling off regarding programming. Now I don’t worry about it because I know how good my partner is at programming. I just tell the clients the sky is the limite now. It’s great!

    A good partnership can really make your business take off.

  • hdsol

    I agree with webmonster. I figured out that together with my partner we can produce 4 times the amount of work with less errors or problems. Just to have someone working with you to bounce ideas, provide perspective and to motivate makes a big differance.

  • http://www.designoweb.com raka10

    Recently i have been asked by someone to do patnership. We both are in the same web development business but operating from two different countries. He proposes to have common website showing portfolio of both companies at common website. Apart from questions listed by Andrew, what are possibilties/questions that need to be considered before going for partnership?

  • http://www.interactwebsites.com kwallenbeck

    I too am struggling with this right now. Started a company over 3 years ago now he isn’t putting any effort in and expects his piece. Nothing formal and I have all the code so good for me, but I want to be fair.

  • http://www.rswarren.com Robert Warren

    Sorry to go so basic on this, but something else to consider before partnering is the twin curses of ambiguity and hope. The entire reason so many people *don’t* ask these questions, and *don’t* get it down on paper, is because one or both sides are comfortable with ambiguity and hope things will work out. They figure that confusion will come out in their favor in the end, or at the very least will come out fair. (Of course, all that comes to a screeching halt when trouble happens.)

    I agree with Andrew on this one: they’re all great questions that need to be asked. Just be sure to get real, specific, concrete answers; if you don’t get them, be aware that you’re walking into a minefield. A lot of people out there stay deliberately vague because they plan a coup later.

    Don’t get hung up on all the motivating forces behind the ambiguity (not wanting to break the deal, hoping that the other person will act honorably, etc.).. the world isn’t fair, and the easiest way to avoid problems is kill hazy confusion wherever you find it. Never get so enchanted with a business deal that you’re willing to walk a plank for it.

  • http://www.rswarren.com Robert Warren

    Sorry to go so basic on this, but something else to consider before partnering is the twin curses of ambiguity and hope. The entire reason so many people *don’t* ask these questions, and *don’t* get it down on paper, is because one or both sides are comfortable with ambiguity and hope things will work out. They figure that confusion will come out in their favor in the end, or at the very least will come out fair. (Of course, all that comes to a screeching halt when trouble happens.)

    I agree with Andrew on this one: they’re all great questions that need to be asked. Just be sure to get real, specific, concrete answers; if you don’t get them, be aware that you’re walking into a minefield. A lot of people out there stay deliberately vague because they plan a coup later.

    Don’t get hung up on all the motivating forces behind the ambiguity (not wanting to break the deal, hoping that the other person will act honorably, etc.).. the world isn’t fair, and the easiest way to avoid problems is kill hazy confusion wherever you find it. Never get so enchanted with a business deal that you’re willing to walk a plank for it.

  • http://www.rswarren.com Robert Warren

    (Sorry for the dupe post, guys. Browser weirdness. – R.)