Alright, you decided to start a business. That’s wonderful. You and your best friend, co-worker, Internet buddy or whoever are going to give entrepreneurship a shot. Before you venture off into the wilds of business, you need to figure out what the deal is between you and your partners?
The agreement between you and your partners is the most critical agreement you will do. It basically sets the stage for how you will run the business. Without a clear understanding of how you will work together, things can get messy quick.
Don’t think of this as not trusting someone. These agreements serve to clarify assumptions about who does what. I cannot stress this enough. Get it in writing. No matter who it is, you need to get it in writing. This is just good business practice and has nothing to do with trust. Even your most trusted friend or family member will assume certain things. Throw money and stress in the mix and all rationality will go out the window. Not getting assumptions down on paper will end up creating bad feelings.
Typical Agreement Items
There are many items that can be included in these agreements. They are not meant to be lengthy legalese that spells out every possible issue or term. Rather, they are the basic assumptions about your partnership. As with anything, it all depends on the scope of the business. Some agreements can be as short as a page while some might be several pages. No matter the length, it’s best to get enough down so that the original assumptions can be reproduced with some fidelity. Here are some ideas on what might be in one:
- Business Definition: Defining the potential venture is an important piece of any agreement. Describe it in as much detail as necessary.
- Roles and Responsibilities: If there are certain roles and responsibilities that each partner needs to perform, then put those in. It could be as simple as Joe runs the business while Jane is the silent partner. This specific topic can be a real source of conflict since assumptions about control usually turn ugly. Don’t be shy about dealing with this. You are starting a business and roles need to be clearly defined.
- Initial Funds: Usually, some sort of start up funds are required. You should write down who put it in what. Payback preferences should be put in as well. For example, if Jane put $10k in the business then it should be stated how she gets paid back. Another good idea is to put in reimbursement methods for business related expenses.
- Assets Contributed: Any kind of tangle asset that has been contributed or will be contributed should be listed. That way, it is clear who owned what before the venture.
- Ownership Assumptions: Along with who does what there should be some mention of the ownership. Usually, this is a percentage or maybe a certain number of shares in the company.
- Milestones: Describe the milestones that need to be met along with the work required to be completed. This way, you know when you are ready for the next step.
- Conflict Resolution: In the event things go wrong, how will any conflicts get resolved. This could be as simple as binding arbitration or a neural third party that everyone trusts.
As you can see, you could write something up in about a page and it would be pretty complete. Once it’s all done, all parties should sign and receive original copies.
Doing this up front will ensure that your venture starts out strong. One of the major reasons partnerships turn sour is due to unclear expectations. Getting those assumptions in writing will allow conflicts to be avoided. If you are still not convinced that it’s worth the time, read the story Staying Power – What’s Your Exit Strategy? about what can go wrong.
This is a pretty cool tool to figure out the amount of equity you might want to distribute to your founders.