“I never said that!”
“That wasn't what I meant.”
“No, that's not what you told me.”
We've all had a similar argument before, usually with a significant other or maybe a pesky friend. How many times have you wished you'd been recording an earlier conversation, just to one-up whoever is doubting your word? But a spat with your business partner can mean a lot more than hurt feelings or sleeping on the couch. You've poured every drop of strength into your startup, so why jeopardize your brain-child (not to mention your financial investments!) over a predictable dispute?
Introducing the partnership agreement (or operating agreement or corporate bylaws, depending on your entity's form): the prenup of startups and small businesses everywhere. Just like a prenup, laying down the legal lines doesn't indicate a lack of trust in your partner. Rather, it's an agreement that covers the roles of both you and your business partner, in sickness and in health, in world domination and in applying for corporate jobs two years from now. With a partnership agreement, you'll cover basic business rules for you and your co-founder(s), such as:
- Who contributes what to the startup, financially and day-to-day, and who owns what. Who's bringing in the capital? And does that mean you each own a proportional share? Whose garage are you starting out of? Who is CEO, CFO, CQO, CMO, COO, and what does that actually mean in practice?
- Decision-making. How will you make big decisions? Can you put the kibosh on a decision if your co-founder wants to give away 70% of the company's shares for a $10,000 investment? Even if you one partner owns more than the other, you might decide that certain major decisions require 100% consensus, or if you own the same amount, create a tie-breaking mechanism. Better to create a process before things get heated...
- Distributions/Salaries. It seems self-explanatory, but don't let this one get swept under the rug! Will you and your partner be able to pull money from the business? If so, when? Will your startup aim toward a national brand, where most of the money will go back in for investment? Or will the startup remain compact, with each partner retaining a larger percentage of the profits?
- What do when a partner kicks the bucket... 'Til death do us part, right? It might sound morbid, but tragedies happen, and a good startup anticipates and prepares for the worst.
- ...or worse yet, withdraws. At the beginning stages of partnership, excitement, novelty, and a general honeymoon period might make the prospect of one partner jumping ship unimaginable. However, life happens: cofounder divorce is a major cause of business failure. A partnership agreement helps outline a buyout scheme if one partner leaves the startup, by choice or maybe not.
So, how do you go about obtaining a partnership agreement, operating agreement or bylaws? No surprises here, hire a corporate lawyer through Priori Legal! You wouldn't trust an online quiz to solve your relationship, so don't be fooled by filling out a DIY partnership agreement. Get smart, get legal counsel, and get your partnership agreement squared away today.