If you are contemplating starting a new venture with someone else one of the first questions to discuss is how to divide the equity and profits. Everyone thinks this topic is easy-peasy. Your business will be HUGELY successful, there will be tons of money to spare and a 50/50 split of $1 Billion dollars is still a heck of a lot of money. So you and your partners agree to split everything evenly before addressing what the everyday, real work is going to look like.
In actuality, the dream is usually not as you initially anticipated. This is why talking about a partnership where equity is divided differently is important. Without a doubt, this is a hard conversation to have with people you want to work with. It is imperative, however. Here are 3 reasons why partnerships are almost always not equal.
1) You and your co-partners will not work the same hours. Most times you and your partners are at different stages in life. One of you may be starting a family or seeking a promotion at a full-time job or juggling two part-time jobs. Someone may be unemployed at the time and able to devote 100 hours a week to the new venture. Often, time equals money, and the partner putting in more hours may want to think about whether she is comfortable splitting the profits with a partner who can’t devote full-time hours to the new venture.
2) You and your co-partners have different skills. It almost never makes sense to partner with someone with the same skill set as yours. After all, if BOTH of you know a lot about web design and no one knows how to manage the books or recruit clients, then the business won’t go very far. These varying skills often have different values to a start-up company. You and your partner should discuss the value your skills bring to the long-term goals of the company and how that value relates to the success and profits of the company.
3) You and your co-partners are contributing different amounts of capital. Start-ups cost money. There are the filing fees, the cost of development and networking, not to mention product development and market research. All of these cost cold, hard, cash. People have different comfort levels with regards to how much they are going to pay forward without a guaranteed return. If one partner is willing to commit more funds (or find people who are willing to take this risk) this might lead to that partner believing he is entitled to more profit. This is a conversation you want to have BEFORE committing yourself to an even split.
These points suggest that you should have a long discussion with potential partners before agreeing to any split in writing. Instead of assuming an equal split, each partner should sit down individually and address where she feels her time, skills and money lie in regards to the start-up. Then the partners can have an open conversation about where things should start. A good partnership agreement can set out timelines for changing the profit structure over time or if circumstances change. The key is to set something down in writing that works for the current situation but is flexible enough to change when needed.
I have been reviewing a number of contracts and releases lately. Although the subject matters of each of them have varied, I have noticed they all share the common denominator of using confusing language. I want to use this blog post to make a plea to businesses and lawyers alike to STOP with the long sentences and giant words. Confusing terms and ambiguities don’t make your contract better or more important, they only serve to confuse readers and participants. I always make an effort to simplify my contracts by following these rules whenever possible.
1) Keep sentences short and direct. Instead of saying “NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:” Say simply: “The Parties agree as follows:” It saves ink, it saves time, it saves sanity.
2) Use the active voice, and not the passive voice, whenever possible. This makes it very clear who is supposed to be doing something and who she is doing it for.
3) Definitions are your friends! If a term can be construed in more than one way, and it is important to you or the other party how that is defined, clearly state what that term means in a definition section. This leads to clarity, something all contracts need more of.
If you have been asked to sign something you don’t understand, don’t hesitate to ask questions of the other party. Contracts can easily be marked up on the spot with a simple cross out and margin notes. It doesn’t have to go back and forth for a thousand revisions. Don’t be intimidated by the legal-ese that often shows up. Instead, ask for clarification and make sure you know what you are agreeing to before signing on the bottom line.
Summer months can mean down time for many individuals and businesses. This slow down gives you a great opportunity to re-focus. Take this time to pull out your company’s written materials to review and update them. Here is a list of some documents you might want to review:
Articles of Organization/Articles of Incorporation
This is the document you file with the state. It sets out things like your name, business address and purpose. Has your company moved offices or begun using a different name? If so, update this record and notify the state.
In New York, this isn’t filed with the state, so people often tend to draft it and forget about it. Forgetting it would be a mistake though because this document can prove incredibly valuable when issues arise. Use your extra summer time to re-read your initial plans for the business and update the document accordingly. Have you added more partners? Have you decided to invest your profits differently? Look over the provisions in this document carefully and see if it still serves your current business model.
Business owners can often get surprised when an employee approaches asking for a review of his or her contract. Get ahead of the game and pull out contracts to see where an employee stands BEFORE she asks for something more. Are you an employee with a contract now? Take the time to review your contracts and see what you like and don’t like. Reviewing annual contracts will highlight potential flaws and give you an opportunity to figure out where you can improve. Do you have someone working closely with you that you never asked to sign a confidentiality agreement? Has an employee with poor performance been working under an expired contract? Looking at all of these documents when there is no pressure means you can re-negotiate with less pressure as well.
Use the summer down time to your advantage. Take the time to locate and review often forgotten documents. Give them a quick rundown and be sure you like where you stand. Your productivity and sanity will be greatly improved in the more busy months ahead.
I am all for not-for-profit organizations. Many of my clients have brilliant ideas for how to improve the world and forming a not-for-profit is a great way to attack some of society’s ills. Without being a Debbie-downer, I want to caution that forming a not-for-profit is hard work! I suggest you consider some things before you commit yourself to full-fledged not-for-profit status.
Think about these questions BEFORE filing any official paperwork:
1) What state do you want to start in? Even if you plan on going national or international at some point, you are going to have to incorporate in one place. Choose a location where you will be focusing your services on or where you will focus your fundraising efforts or, ideally, both.
2) Who will be on your board of directors? In New York, not-for-profits must have at least 3 members. Being on a not-for-profit board comes with some legal responsibilities so you should understand what you are in for (as a potential board member) as well as what you are asking your friends or colleagues to sign on for.
3) How will you run your organization? After filing the Articles of Incorporation in New York State your board should enact by-laws. These rules set out how the board will make decisions. Some things are routine, but other things, like whether you want a board that meets in person, may matter more to you. The entire board should participate in drafting these.
4) How will you manage your finances? If you will be seeking 501c3 status, you need someone who is savvy in accounting to help you document the money you will have coming in and going out. Set yourself up with someone early on so that they can keep you from making financial mistakes that may cost you down the line.
If you have solid answers to these questions, you are well on your way towards being ready to incorporate as a Not-for-Profit. Managing a not-for-profit means more than just doing good for humanity, it also requires being smart about the legal and financial obligations you are committing to in the future.
All throughout grade school, teachers asked us to “partner-up.” If you were anything like me, unless your best friend was also in the class, you spent at least a little time contemplating who would make the best partner. In grade school my criteria usually revolved around who had the coolest color of glitter pen and which classmate’s mom made the best cookies.
Unfortunately, these criteria aren’t very helpful in the business world. If you are looking to “partner-up” you could take a lesson from those grade school days and write down your own list of criteria before committing to a business partnership with another person.
Forming a partnership is serious business and a partner shouldn’t be taken on lightly. In a recent blog post on Forbes.com, Amanda Neville posited that business partnerships are more difficult than marriage. Think about the care you took (or plan to take) before entering into that partnership. A business partnership should be approached with the same amount of scrutiny and consideration.
While I send my clients home with a full page of questions before meeting with them about the details of any potential partnership agreements, I think there are three questions you absolutely MUST consider before filing any paperwork.
- What kind of business do you want to have in the long term? Here you get to think big picture, if everything works out perfectly, what do you and your partner see as being the ideal business? Each partner should develop her own ideas before discussing long term hopes together so you don’t influence each other during this discussion.
- How will you settle disputes? In the beginning, it is easy to think you will always agree about everything, but as anyone who has ever worked with a partner will tell you, this is never the case for long. You should talk in the beginning about how you will proceed when you don’t agree. Do all the partners need to agree to move forward? Will you see outside counsel when you disagree? From whom?
- What is each partner bringing to the table? Here it is important to talk about finances, expertise and work availability. The best partners are often people that have different skills and interests, because then your business doesn’t have to spend additional time and funds outsourcing critical tasks. Talk about what you see your role in the company being, how much you can contribute both financially and time-wise.
Discussing these points may seem uncomfortable at first, but they are necessary if you hope to build a partnership that won’t crumble at the first sign of trouble.