How do I structure a business partnership?
The idea I shared is my own and the person interested wants to invest finances through an equal partnership. He already owns his own business, so he has experience in that field where I do not. Do you recommend him being the face of the business, while I take the role of being the creative person in the background? I would like to control the business activities since it is my idea. What precautions should I take?
Before investing time and money in lawyers and legal fees, I'd spend time figuring out exactly what I want, what I'm comfortable with, and where I draw the lines. Then I'd speak to my potential partner about their wants, comforts, and limits. It might take multiple conversations to figure out 1) if there's a good potential fit for a partnership and 2) if it's going to be worth the time and investment. If and when you mutually agree that you can work together, then start drafting the details and get it in writing.
If you are looking to partner with people, I recommend you work with independent businesses. Both you and the partners retain your independence, but can assist you with services you don't provide. And you never know, you may have something they may need.
Make sure your partnership agreement has a shot gun clause.
You are asking a somewhat general question, let me give you a few ideas from my own experience.
If at all possible you want to retain majority ownership of the business – at least 51% if not more.
Whoever is the best with dealing with customers, closing sales, creating deals and making things happen should be the face of the company. It doesn't matter if your creative, or have the business sense, what you need is the ability to connect with people and persuade them to purchase your product in a very professional and non-aggressive way. So whichever one of you is the best at connecting with people should probably be the face of the company.
Before you start the business, make sure you have a very good lawyer who will sit down with both of you and go through all of the difficult and awkward questions before you get into the business and emotions start to run high or cash start to run low.
I would also take a great deal of time to very thoroughly map out exactly what each of your roles and responsibilities will be. Set exceedingly clear expectations about what both of you will deliver and what you can expect from each other. Try as hard as you can to leave nothing to chance. This takes a lot of time and effort, but it will save massive time and pain later on.
Also, before you build a business, I would be doing a lot of market research to know that my target customer was excited about my product, is willing to buy, has the money to buy and that the market is large enough to sustain the business over time. Just because you love something doesn't mean the marketplace will.
Lastly, get very, very, very clear on how money will be spent and divided up. Will you set aside a certain amount to reinvest in the business? Will your partner be able to pull money out of the business anytime they want to? Will you be able to get money out of the business if you want to? IT is easy to deal with the business when you are talking about small amounts and you are both investing time and sweat equity, but when the numbers start to get big with five, six or seven zeros behind them – people can change – and their life circumstances can change which will impact their ability to put money in – or the need to take money out. So get that really clear befoer a single dollar goes in the register.
I hope you found this helpful – John
I'll assume by "partnership" you're not referring to the actual business entity (LLP, corporation, etc.), but to the manner in which, you intend to operate on a day to day basis. Partnerships can work, but it's almost a guarantee that there will be struggles among partners eventually.
I agree that a partnership agreement is essential. It should also include an operating agreement that states, not only who is responsible for what, but what accountabilities are in place. Here's a short list of some thing that I view as critical...1) Buy/sell agreement in case one of you wants out, or you need to add additional stakeholders, or some unforeseen circumstance
2) Non-solicitation agreement so one of you can't run off with all your clients and start a new company
3) Possibly a non-compete clause, but that kind of depends
4) Officer election procedure
5) Key man insurance
6) Compensation because the expectation of equal pay forever, or only one partner being paid forever is a recipe for disaster
There are dozens of considerations, if not hundreds. I won't beat it to death. Basically, you need to get emotions out of it. People tend to want to make a new venture go no matter what, and push dealing with major issues off until it's too late.
In short, agree to everything, in writing now, and use that document frequently as a genuine guide during your growth.
My recommendation is that you immediately create a Partnership Agreement that details important things like the business relationship (is this a joint partnership, sales relationship, etc.) each partners responsibilities (e.g. how decisions are made, who can make the final decision if there is a disagreement, etc.), specific financial arrangement, ownership of any intellectual property, etc.)
The positive reason for doing this is to ensure a joint understanding of the partnership. If your partner is investing in your business he wants to make sure how he will achieve a return on his investment. One of your key needs is to ensure that you control use of your creative efforts so your partner does not learn from you and then do it himself.
This sounds exciting, good luck!
I agree with Ed on this. Partnerships are the toughest form of business. Don't cut corners on the partnership agreement. Go to a good lawyer who specializes in business law. You need a very clear exit strategy and it should be reviewed once a year since things do sometimes turn out differently once the business actually gets rolling.
Part of your question was a little confusing for me. You say he will be the face and you the creative person in the background and then say you want to control the business activities. That doesn't sound like being in the background.
I think if you have enough capital and all he brings is some knowledge of how a business operates, the fact that he has business skills is far less of an asset than having a partner is a handicap. I agree with Ed, you can hire those skills.
Nobody can guarantee a relationship. A couple who are very loving may break off subsequently. A partnership is a romancing process where the lovers enjoy the prosperity with correct chemistry effect but can turn sour anytime.
I don't fancy partnership, and would look at possible collaboration for start. This is a good way to build trust, understand how each other execute work, and give both parties to test on each other. Sound like co-habitation :)
Naven, partnerships are a very challenging affair and admittedly I am not a big fan. The notion of an equal partnership means that you will lose control of the company. With a partnership in general, the first challenge is to identify a trustworthy individual who accepts your vision and is willing to be guided by it. Whilst it sounds as if the person you have identified may meet these conditions only you can determine if it is so. The second step (this is straightforward and not a challenge, though it costs money) is to prepare a legal partnership agreement. Herein lies the protection you seek. Protecting your intellectual property may necessitate a patent or other type of covenant as well.
You are spot on to say the other person has skills that you lack. Whether a partnership or an investor is your best choice is less clear. If you can find investors who do not seek ownership, you will be able to hire folks who can do the things you cannot. My suggestion, tread carefully.