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).