Joint Efforts – Don’t Be Trapped

So, you are starting a business together with your family member, old friend or another trusted person. By now you already know that there are multiple ways of doing business together. For example, you can be sole proprietors who agree to combine their knowledge and time to achieve some mutual benefit. Or, you can go further and establish a partnership or even a corporation where multiple investors will work hard in an attempt to reach their common goal.

No matter what form of business organization you choose, when you share resources you expect a fair game. Most of the time, your business partners will think the same way. Indeed, you will have long and multiple discussions, you will reach some sort of agreement, and you will promise each other to settle all issues that may come up. After all, you trust each other, you have many other urgent things to do for the successful start-up, and you do not even have profit to argue about …

Still, in my professional experience, doing business with a trusted person can be a dangerous trap simply because you cannot control a power struggle, do not know how to balance weak and strong points of each other, have different approaches to finances and a unique vision of success, and just underestimate the efforts your partners put into the joint venture. You definitely heard about major disagreements over business issues between closest friends and family members. You know that such types of disputes can ruin business and your personal relationship. Then why don’t you want to put your rights and obligations in writing to reduce the risks?

Written Agreement – Boring But Effective

The type of agreement you need will depend on your business relationship. It can be a shareholder agreement if you go with a corporation, a partnership agreement if your business vehicle is a partnership, a “joint venture agreement” or a no-name contract if you work toward a common dream while remaining relatively independent, without any partnership or corporation being created. The length and focus of the agreement will also differ depending on your situation.

What all these agreements have in common is that they are an effective way to benefit from strong points of each of the business partners and to mitigate weaknesses and risks that are inevitable down the road. They provide for certain rights and liabilities, determine how you will raise funds and distribute profit or loss, address business management and control issues, set rules for resolution of disputes and end of relationship.

Make Sure You Address These Points

While there is no exhaustive list of issues to include into your agreement with business partners, the following points are worth mentioning:

1. Establishing of your joint venture

What type of business structure you choose, what opportunity you want to explore, and what steps each of you will take at the formation stage.

2. Contribution and distribution of profits/ losses

Provide details of your investments and expected returns, specify percentage and conditions of participation in profits and losses and how you are going to cover unexpected expenses.

3. Control and management of the business

Consider how you will make and implement major and day-to-day decisions regarding the joint venture, who will have signing authority and who will have supervision over specific aspects of the business. Address who will prepare your business financial statements and maintain the books and records.

4. Business prospects

Describe your business goals, staffing solutions and potential for inviting additional investors and business partners.

5. Confidentiality, non-compete, and non-solicitation clauses

Theses clauses ensure that your partners will keep strategic information confidential, will not compete against your joint business and will not solicit any of the employees.

6. End of business relationship

Specify the events the can trigger termination of your relationship, consider departure, death and disability of business partners, discuss what happens to business documents, your shares and contributed resources in that case.

7. Checks

Address the liabilities of each of your partners and of the business. What happens if any of you fails to contribute into the business, keep promises or perform duties? How are you going to resolve your disputes? What if your business is in default?

Do Your Homework – Save Your Money

You don’t have to hire a lawyer to draft the agreement formalizing your business affairs. However, you may want to hire a lawyer if you want to have a well-drafted agreement that protects and benefits your relationship. Often, smart people play with samples, articles and templates first, to understand what they need and to create their first draft. Once you have the basic concept of the relationship, you can come to a lawyer to make sure that your agreement addresses all important aspects of your business and is effective as much as possible.