By Loren Charnley,
You have probably already figured out that I am going to say something about having partners and partnerships. But what is a Panjandrum? From the Oxford American Dictionaries:
“a person who has or claims to have a great deal of authority or influence.”
I’ll come back to that in a bit. Why don’t we start by establishing my bona fides. After spending about the first ten years of my working career in electrical engineering for medium and larger companies, I had what Michael Gerber’s book “The E-Myth” calls an “entrepreneurial seizure”. As a result, I ended up co-founding a Gigabit Ethernet start-up in the late ’90’s.
Although we fortunately avoided what Gerber calls “the most disastrous assumption anyone can make about going into business.” (“That Fatal Assumption is: if you understand the technical work of a business, you understand a business that does technical work.”), we did manage to find yet another of the thousands of ways a business fails. After that, I founded a consulting company. Being a good acquaintance with a fellow who did contracting work for my first start-up, we started talking about working together so we could get contracts that required more resources than we had individually. In the end we merged companies, and I became a “partner”.
Ah! So there it is. Partner. Partnership. Mine is just one of the motivations for finding a partner, or going into a partnership with someone else. There are lots of other reasons. For those of you who read the Business of Software forum, this might sound familiar. There are a fair number of people asking about how they should find a partner to make up for this or that shortcoming that they have seen in themselves.
After spending a little over 5 years with the two other partners, I made the decision in August 2005 to leave the company. I have heard this called a “business divorce”. Although, I felt strongly that leaving was the best decision for me personally – I had hoped the process would not be like a “business divorce”. In fact, I had made it clear that I wished for my exit to be as friendly and painless as possible. That it wasn’t “their fault” or something they “did”. I thought that the fact we had put a partnership agreement in place would prevent this wish from being simple naivet??. In the end, it was not to be. Although the partnership agreement largely accomplished it’s purpose with respect to valuation, many feelings were hurt all around, and emotions laid bare. At this point, I can’t even tell you for sure whether it was more their fault or mine. More to the point, it probably doesn’t matter.
However, all of this does give me a certain perspective. In a sense, it is perhaps a bit unique because I left a company that was viable and successful. It is more common to hear cautionary tales coming from folks whose partnerships came apart because of business failure. In my experience an interesting, yet sad, note is that a partner leaving even a functioning business can be very difficult for both sides. I am sure that I can’t give you all, or even most of the reasons for that – they will surely be unique to every circumstance. However, maybe I can talk a little about some of the issues that you will should confront before taking on, or becoming, a partner.
Okay. This is a big one. Perhaps the biggest. You might think I am getting ready to tell you to never enter a partnership without a written agreement. I will – later. This issue even surpasses that one. Here it is: Partnerships are not equal. Although there are a small handful of counterexamples (i.e. two close friends as partners in a small company), equal partnerships are problematic. Someone needs to be the “Panjandrum”. This needs to be reflected in the partnership arrangement somehow. If you have equal financial stakes, you can solve this by having someone with additional voting rights. This is not to say that your other partners might not be able to collectively out-vote the Panjandrum, but organizations abhor a power-vacuum. If the organization is not clear on who the Panjandrum is, they will pick one (or more than one, thus creating fiefdoms). In my estimation, this causes many problems. Not the least is that there may be more that one person who thinks that he should be the Panjandrum. In our case, we never directly addressed this before I became a partner. In retrospect, had we tried – I would probably not have become a partner. As it was, this one issue caused frequent problems.
Related to this, is that everyone needs a clear idea of what their roles are, and their boundaries. There are plenty of leadership positions to go around, but partners need to be clear what the roles are, and what the other partners expect from them in those roles. Again, in some small two-person partnerships there may not be a need to be explicit, simply because both people know what is going on, and feel alright with some small amount of duplicated effort from time-to-time.
Friends or Strangers?
You may have heard the old saw about never having your best friend as a roommate or business partner. Having had both circumstances, I think it is dead wrong. I have found that if you really know someone, and are honest about your own strengths and weaknesses, as well as theirs, then good friends are better roommates and business partners. Maybe it’s just me, but it’s the things that you don’t know until much later that start really tearing up partnerships. I realize that very few people out there have really close friends that have the right technical skills to be ready made partners. However, the more you can get to know someone before forming a partnership the better. This might mean having to work with someone a while before discussing a partnership.
A great example of this is my first major start-up. The founders of the Gigabit Ethernet start-up consisted of myself, my wife and a best friend. Although the business failure was a difficult time financially and emotionally for all of us (and our investors), I am still married and my best friend is still a best friend. I think that knowing each other so well allowed us to define roles very accurately, and to have the healthy and necessary disagreements without suspicions of ulterior motives.
Honesty, is such a lonely word
With apologies to Billy Joel, this is really the fundamental place that I think a lot of folks go wrong. As you are talking with your partners to be, there are a lot things you need to agree on. Are you building the company to sell, or is it a lifestyle play? Product or Service? Who do you want as customers? Who is in charge of what (business, sales, production, etc.)?
The biggest danger here is not that others will be dishonest with you (although that is a danger). The biggest danger is that you are not honest with yourself. Brutally honest. What do you want? Really? What are you great at doing? Really? Write it down. Concentrate on it. This is lonely work. You can’t even really consult with other people about it – they certainly can’t tell you what you want. This is big-time grown-up stuff.
If you take the time to do this, and it could take quite a bit of time, you will have a firm foundation to really engage in the tough questions. More importantly, perhaps, is that you might find issues that you need to address, that might never have even been discussed. The big problem with a written partnership agreement is that it can never address things that you don’t know need to be addressed. Honest self-examination can help to uncover issues that if otherwise overlooked can cause problems within a partnership.
This is another one of those topics, that my view is maybe a little different than some others. I am not talking about how much each person gets paid (important though it may be). I am talking about the fundamental way all the partners view Money with a capital ‘M’. Sooner or later, you are probably going to know more about your partner’s personal finances than you thought you wanted to. It’s better to talk about it before you become partners. Are any of the prospective partners in deep trouble if they miss a paycheck? Does anyone have poor credit? Deeply in credit card debt? Too much house? Greedy spouse? Do they balance their checkbook every month? Do they have any cash reserves?
I am not saying to ditch someone as a partner because they don’t have perfect finances (who does?). However, what I can tell you for sure is that the way your partners view their personal finances will impact they way they view their business finances. Further, depending on the partnership structure – the tax consequences can affect everyone involved. Be open about this, and demand openness in return. Remember, in the early days any financing or leases will probably involve personal guarantees from the partners. Don’t get too caught up in particular numbers (e.g. don’t get too worked up if someone doesn’t want to tell you exactly how much they have in retirement savings), but the more you know about how every partner views money and deals with it – the better.
Finally, in a foreshadowing to the next section, you should also probably discuss your prospective partner’s spouses view of money, and their outlook of the business partnership from a financial perspective. Specifically, when it comes time to draft those magical partnership documents, you need to make sure that everyone does their homework along with your corporate attorney as to how to protect the company financially in the case a partner divorces or is subject to a “palimony” type suit.
[Of Partners, Partnerships & Panjandrums, Part 2 tomorrow…]
Loren Charnley is an engineer & programmer (Masters in Electrical Engineering) who has successfully made the transition to businessman & entrepreneur. Having sold his partnership interest in his last company in 2005, he is now on the prowl for his next adventure. You can reach him at firstname.lastname@example.org
By Loren Charnley,