The Startup Law Guide
Entering into a new business partnership is an exciting prospect for any entrepreneur. And while it would be great if all businesses were successful, the reality is that many fail for reasons that are avoidable. Before things get off the ground, you should consider some of the biggest pitfalls partnerships face, so hopefully, you can avoid making the same mistakes.
1. Unbalanced Roles
When you started your partnership, you likely had an image in your mind of a mutually beneficial collaboration where everyone has his or her role and brings unique skills to the table. In reality, though, it doesn’t always work out that way. Over time, one partner may start to take over, either as a result of the natural evolution of events or by a show of force. What naturally comes next is an imbalance in responsibility, authority, workload, or time commitment.
Partners on both sides of the imbalance can be left frustrated. The partners doing the most work may become bitter and feel they deserve more, while the partners who are being underutilized can start to feel as if they’ve been cut out, leading to resentment. While business demands obviously shift over time, it’s important to keep an eye on whether all partners are satisfied with their level of contribution to the business in the bigger picture.
2. Unmet Expectations
It might seem obvious that you’d discuss your expectations for your business with your partners before you took the plunge. All too often, though, the excitement of starting a new business takes over, and discussions of the details fall by the wayside. Sure, you both might have the same end goal of running a successful company, but that’s not necessarily the same thing as having the same expectations about how it will all work.
Before you jump in, take a moment to talk about your goals – things like how you see the company being run, the division of the workload, and how you plan to make money. In today’s digital world, face-to-face communication is increasingly rare, but this is one of the times it’s worth it to sit down over a cup of coffee and make sure you’re on the same page.
3. Insufficient Contracts
Many partnerships are formed between friends, family members, or other close acquaintances. When you’re dealing with people close to you, contracts and agreements might seem like awkward and unnecessary formalities. Nothing could be farther from the truth.
Even the best-intentioned partnerships can fail for unforeseen reasons. When you hit a snag in the plan, it won’t only be your relationship with your partners that might suffer, but the future of your business as well. That’s why it’s absolutely crucial to have the terms of your arrangement in writing. Start with and Operating Agreement or Partnership Agreement, depending on how your business is structured. From there, consider adding other agreements like nondisclosures or noncompetes. Even if you’re going into business with friends, it’s still a business that needs to be taken seriously. Asking a legal advisor to handle all the business formalities can lead to a lot fewer headaches down the road.
Financial matters can make or break your partnership. After all, you’re running a business and the point is to make money, so it shouldn’t be surprising that money issues can cause serious problems. Disagreements about how the company will spend, receive, invest, or control funds can have detrimental consequences.
Beyond the company’s handling of money, disagreements commonly arise regarding how much partners are bringing in or whether the company is making money fast enough. Add to that inevitable surprises like unexpected expenses or delayed payments, and things can get ugly fast. It’s important to manage expectations going in regarding compensation and equity arrangements, plans to boost revenues, and realistic timeframes for bringing in profits.
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