A lot of businesses are run by partners or groups of people. This brings many benefits like more ideas, money, and helping hands. There can be some disadvantages though, too, as there are chances for conflict or “too many cooks in the kitchen”. If you are in a business partnership and want smooth sailing, read the article below as it explains how to avoid disputes.
Partnership disputes often arise out of misaligned management philosophies, especially those regarding growth strategy, culture and branding. Sometimes, this misalignment occurs between co-founders whose prior friendship has biased them into equating personal compatibility with management synergy. Other times, misalignment occurs between new partners who are too uncomfortable to disrupt the honeymoon phase of their relationship with talks of worst-case scenarios. And sometimes, misalignment occurs between founders and their key hires who are so excited about building a product that they become aloof to the dynamics actually implied in their contracts.
There are certainly many more reasons why partnerships fail, but disputes often originate from poor planning–that is, a failure to proactively invest in diligence before misaligned expectations systemically and tangibly manifest themselves in the form of conflicted staff, schizophrenic branding campaigns, operational deficiencies, and ultimately failed ventures. A partnership dispute can be like a time bomb—if you can learn to hear the ticking, you might not be caught by surprise in the detonation.
In other words, the best way to avoid a partnership dispute is to begin preventing one from the outset of your business relationship.
Don’t begin work without a signed operating agreement. I’m not saying you shouldn’t work at all without an agreement (i.e., trial periods are fine), but rather that you shouldn’t start sacrificing without one. The contents of a well-written operating agreement are the subject of another post, but don’t quit your job, sell your apartment, move cities or make any other life-altering decisions without a written explanation of your role, compensation and protections, both now and as the business evolves. The more you sacrifice without an agreement, the less leverage you will have going into negotiations, and the more biased you will be to accept an offer to justify the time you’ve already spent.
Invest in a personal attorney. There are websites you can use to draft boilerplate operating agreements, and that route is certainly better than doing nothing. But if you expect your business to be your career, then the operating agreement is one case in which you can’t afford to be cheap, especially if your partner is getting a lawyer. I’m not an attorney, this article should not be considered legal advice, and every agreement is different, so I’ll only make my point by posing a cost-benefit question: does a few hundred (maybe thousand) dollars in legal fees now outweigh the cost of losing years of your life and thousands of dollars (maybe magnitudes more) down the road?
Address worst case scenarios. The first time I was presented with an operating agreement, I had a lot of questions specifically about worst-case scenarios. What would happen if there were a conflict? Could I be removed by a co-founder? How would my equity percentage change if founders decided to invest money? This made my partner very uneasy, the same way I suppose a pre-nup might make someone cringe. It’s never fun to discuss worst-case scenarios, but this is NOT marriage advice—in fact, one of the main reasons you have an operating agreement is to have an enforceable protocol for the obscure and highly unlikely doomsday scenarios. Absolutely discuss these issues with your partner. But first, acknowledge that you have to discuss them, objectively and collaboratively.
Allow ‘no deal’ to be an acceptable outcome. Partnership negotiations may take days, if not longer, so invest time into researching, soliciting the opinions of other entrepreneurs, and developing a list of questions that your eventual contract must answer. I recommend having two separate (and private) lists, one cataloging the answers you want, the other the answers you need. Bottom line, if you can’t get what you absolutely need, then you should walk away from the deal. Other reasons to walk away: your negotiations are reaching Cuban missile crisis proportions and you can’t keep up with the legal spending of your partner; you have a bad gut feeling about a lie your partner told; or you can’t get straight answers during negotiations. Trust your gut when it comes to your potential partner’s ethics, because odds are those ethics will direct his business dealings as well.
Draft a values agreement. A values agreement is a document that co-founders write together as a declaration of their ethical commitments to one another—it’s also a good opportunity to discuss personal philosophies regarding strategy. What kind of culture and leadership atmosphere do you want to create (will you implement a horizontal or hierarchical chain of command)? What kind of growth philosophy will you employ (are you a fail-hard-fail-fast-lean-startup manager or an old-school cash conservationist)? Your goal is not to ensure that you find clones as partners, but to force you to acknowledge your commitments and identify whether your philosophies can coexist. Consider drafting one together and having all members sign it.
Find partners with complementary skills. The more similar your partner is to you, the more redundancy in skills (and weaknesses) there will be, and the greater the likelihood will be that you want jurisdiction over the same areas. Find a partner who is strong where you are weak, and, furthermore, have a candid conversation in the beginning of the relationship regarding how each of your weaknesses may necessitate bringing someone else on board down the road.
Eliminate the win-lose mentality. Your goal in a partnership (and negotiations) is not to win against your partner—it is to find the best way to deliver value to your team, your customers and your investors. This demands equilibrium in your contract, which is not to say equality, but instead that you reach an agreement without either side losing respect or feeling cheated. You don’t want to walk away regretting that you left money on the table, but you also don’t want to worry about the other party losing the incentive to devote his best efforts because he feels resentful over a bad deal.