By Loren Charnley,
[Part 1 of this excellent guest post by Loren can be found here. Here’s part 2] -RSW.
We are gathered here today
No, this is not going to be another admonition that a business partnership is like a marriage (however true). Just like the money issue, you should carefully assess and discuss each potential partner’s marriage, family, or significant others expectations. Running a micro-ISV, start-up or even a small successful company can be one of the largest time-sinks known to mankind. This has ruined many relationships and marriages. Even more partnerships have been ruined by not talking about it. Does one of the partners subscribe to “family first”, and then define that to mean that he’s only in the office 4 days a week most weeks. Or only works in the office from 10am to 4pm because of their wife/husband/significant other’s schedule.
I hate to break it to you, but being a partner in a small concern is not an “equal opportunity” sort of thing. At the beginning, and many times throughout, the hours suck, the pay sucks and the stress sucks. This means that the partner”s family life has to be solid. Also, their families need to thoroughly understand and accept this. This does not mean that everyone needs to have a Wally and June Cleaver home-life, but it needs to be solid.
Lastly, work with your corporate attorney to draft spousal agreements that relate to the stock for the spouses sign. They might contain agreements to sell the stock back to the company in case of a partner”s death or in the case of divorce etc. Again – talk to an attorney, as state or federal laws may limit what will actually be binding.
An apple a day …
This might be a bit of a controversial topic., but my personal experience leads me to believe it is important. Before becoming partners with anyone, you should do your best to evaluate your own health, and the health of your prospective partners. Starting a business, or running a small growing business takes both mental and physical stamina. The hours can be long, and the stress is often significant. This is true whether your business is faltering or growing like wildfire. There is always some sort of challenge. If there is a significant mismatch in personal constitution, there will definitely be some problems. For example, say that you are healthy as a horse, never sick – but a prospective partner has a history of significant ongoing back problems. You might want to think twice. Imagine it is 1:00 am (again) and you are banging out code to meet a deadline, but your partner is in real honest-to-goodness excruciating pain (again) and on narcotic painkillers.
I am here to tell you that it is not going to matter to you that the pain is real and that they are not faking it – the bottom line is you are there and they are not. There are a lot of similar conditions that you should assess – migraines, allergies, etc. Remember that you should not be a charity in this regard. Also, if you have a delicate constitution, don’t expect to have partners that constantly cover for you without it causing resentment sooner or later.
Let me end this by saying that I am not advocating that you become an uncaring and unfeeling individual. If you are in a business partnership long enough, there will be some sickness, maybe an accident ” or maybe a child’s sickness. Without a doubt, there is a broad spectrum of situations where you should be supportive and caring. However, make sure there are not chronic conditions that would make someone unsuitable as a partner.
Businessman, Entrepreneur and Capitalists – Oh My!
This final topic is delicate, because it goes to the heart of what many people who start a business want. There are quite a few people out there that call themselves “entrepreneurs” or something similar – but really want to be Venture Capitalists. The problem is that they may not have any capital. These people look for situations where they can get into a partnership with the primary purpose of getting stock and some income. They might do some work in the beginning, but then decide that they want to do something else. However, they might own a significant amount of stock … and you might have problems getting it back. OK. You will have problems getting it back.
The reason I say it is delicate, is that most folks want to be able to eventually enjoy the fruits of their labor by hiring professional managers, or selling the company, or some other situation where they are not constantly thinking about the company and worrying about daily problems. The best thing to do about this is to discuss it upfront. Talk about the expectations in terms of contribution. This is an area where you will want to extract and codify the expectations in the partnership/shareholder agreement. For example, you might have a buy/sell agreement that mandates that a partner must sell his shares back in the case they are no longer an employee. Again, this is an area where having an experienced attorney involved might help.
The end. Almost.
You have certainly noticed that I talked about a lot of things that don’t relate to what most people think of when they want to learn about “partnerships”. Some people might think it is all about structure (Sub-S vs. LLC or LLP). Others might think in terms of advice about what should be in a “good” shareholder agreement. The bottom line though, is that a small company’s stock is practically worthless if you have a minority share. You might not believe it, or want to hear it, but it’s the truth. Let’s say that after working real hard for a couple years you have $900k in revenues – how much do you think a 20% share is worth? Realistically, basically $0 to anyone on the outside. Don’t believe me – ask an investment banker or business broker. This means that your best chance to get anything if you leave is to have a reasonable buy/sell agreement in place with pre-determined valuation formulas. Your 20% won’t be worth $0, but it probably won’t by you a Ferrari. In all likelihood you will have to take any buyout as a promissory note anyway.
So what does this mean, it means that you should be getting involved in partnerships carefully, and really understand who you will be living with for 50-90 hours a week, all the time. This does not mean you should not structure carefully, or put an agreement in place. I only have three bits of advice in this regard. First, get an attorney involved. A good one. It might cost you some bucks ($1k – $2k .. more?). But don’t do this until everyone has had a number of heart-to-heart talks about the above. Second, make sure you have the partnership/shareholder agreement signed before starting in earnest. Third, the fewer partners the better. The fewer the number of independent communication channels, the better.
All this might sound like I am against partners. This is not the case at all. In fact, I think that an appropriate mix of individuals makes it a lot more likely you will succeed in a big way. Just make sure you are partnering with people who make the challenge before the success worthwhile.
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,