Partnerships aren't given enough attention when entrepreneurs are just starting out.
It's natural that, in the excitement of a new venture, founders come together with rose-colored glasses, preferring to see each other's strengths rather than examining weaknesses. There is often a lot of pressure to find the right talent to fill gaps in a founding team, and so there are a fair number of "shotgun marriages" that occur on the way to incorporation. Sometimes it works out, and the partners find themselves a good match. But more often than not, business marriages of convenience become painful broken relationships that end in estrangement, litigation and divorce.
I've had a number of these failed partnerships, and looking back, their demise isn't at all a surprise. My first business was started with a college friend and another guy who we met through a mutual friend. Though I had known my friend for a number of years, it didn't dawn on me that many of the things that made him a great salesman were also personality traits that would become a big problem as the business grew. Salesmen are always selling. And they sell everyone all the time. That trait can be a huge boon when you are closing funding and getting initial customers on board. But salesmen also don't like to say "no", and he didn't want to hear, engage or convey bad news. When it became clear that our initial assumptions about the market weren't correct, my partners and I split on how to handle it, what to divulge and whether to pivot to something different. It became clear to me that this was a fundamental difference between us that couldn't be easily fixed; we approached this issue with different values and wanted different outcomes. In the end, we broke up in a painful and expensive way.
Partnerships are prone to these kinds of "make or break" moments because you can't possibly know enough about your partner(s) to see how they will deal with situations of extreme stress. Partnership "dating" is usually fairly brief and excludes a lot of deep analysis of family, childhood and other type of values-based issues. The relationship is actually often pretty superficial, based on education, connections, experience and skills. One of my friends recently left his start-up because he realized that his two partners -- whom he thought he knew -- didn't want to work as hard as he did, and weren't as committed to the process of becoming a top performer as he was. Even after 18 months of working together daily, the realization came as a shock to him, and led to an unfortunate and unpleasant dissolution of their partnership.
So what can be done to avoid this kind of failure? Two simple steps to consider are:
The first is to engage in a thorough "pre-partnership" planning process. This can either be self-facilitated or done with the help of an outside consultant or coach. The process involves exploring and understanding each other's core beliefs, values and goals. At the minimum it includes discussing the following questions:
- What does success look like? i.e. what is the goal of the business? To build something big or to gain a quick exit?
- How much financial runway do each of us have?
- What specific roles will each play in the business and are we willing to put it in writing?
- What does "work-life" balance mean to each of us?
The answers to these questions can go a long way in determining whether vision and values will get in the way of the partnership working well -- at least in the beginning. Putting these answers in writing and revisiting them regularly will also help to keep things in sync.
The second is to "try before you buy". Most entrepreneurs rush to incorporate before they really have to, thinking the equity is easiest to secure in the beginning. But often this cements in place a partnership too early, before the founders really know each other. My suggestion is to establish a broad understanding of the equity split and put it on paper -- an agreement that can be signed by each partner -- that can serve as a placeholder while the team works together to get started. Take some time to develop the product, take meetings with potential investors, iterate on the concept, design and business model. Put the team through its paces. If the business seems like a go and you actually have a lead on financing, pull the trigger on incorporation. But until then, you have a chance to test the waters on how well you really work together.
And note: A colleague of mine asked me whether such an "equity-split" agreement before incorporation would be "legally binding" or not.
My answer to him was: who cares?
If you get to the point where you are arguing about whether the signatures are legal or the commitment you've made to each other will withstand a courtroom, you've already answered the question of whether you should be in business together or not.