Tim and Harry were friends. They both love ice cream and inventing their own flavors. The latest, “Cold Sweat” made of an ice cream base with hot sauces, picayune, habanero and Thai chili peppers was so successful they decided to partner in a new company – 50/50… and on a “handshake.” Later, Harry bought a pepper company that sells to their partnership. Is this a good idea?
50/50 Partnerships. Maybe, but problems are on the horizon. Forming a new startup with a friend who shares the same vision would seem only fair to split 50/50. However, keeping good friends requires that good planning and that “bet the company” issues are in writing – sell, buy, borrow, and merge, among others. But what about suing and defending lawsuits? Without a partnership agreement creating authority of officers or an agreed process to resolve deadlocks on these issues, the partners risk their friendship, the value of their company, their investment and perhaps more. And, if Harry’s company doesn’t pay its bills, what is the likelihood that he will permit his pepper company to be sued?
Tilting the Scales in Your Favor. If you want to partner up with a friend who shares your vision, at a minimum consider –
- Define Business Roles. Describe each of your responsibilities even going so far as to specify the responsibilities and authority of the president or manager, member or treasurer, for example
- 50/50. A limited liability company allows different percentages of ownership, profit distribution and decision making, if appropriate. Or, at the least, have a “tie-breaker” solution that does not require a lawsuit for a solution.
- Communicate. Plan to meet regularly to share new ideas, concerns and solutions.
- Partnership Agreement. It may sound obvious and simple, but many partners don’t take the time to agree on the “what if” problems which can often be fair and simple if agreed from the beginning.
- Related Entities. If you must do business with another entity owned in whole or in part by your partner, agree on a person or plan to resolve complaints. It’s called a conflict of interest for a good reason.
Yes. Forming a new company with your partner is a good idea, but that alone is not enough for you to manage your legal risk. A written organizational or partnership agreement is a must.