Partner Predicaments: Founding
You’ve decided to start a company with your best friend/next door neighbor/co-worker. Both of you are giddy with excitement over the money you’re going to make and the lives you’re going to change and the industries you’re going to redefine. In your rush of excitement and goodwill, the two of you hastily grab a free operating agreement from the internet and set up your LLC. It takes 2 hours and you think “Finally! I can get to building my company”.
And for a few months things go great. But then you start to gain a lot of traction/you struggle to gain any traction/you run out of money/you earn an insane amount of money and the first signs of partner discontent bubble up. One of you feels that they are doing more work than the other. Or one of you feels that you should both cut back on your salary. Or one of you gets pregnant/gets married/buys a house. Suddenly you’re at each others’ throats and your operating agreement has not clearly outlined how to handle these situations. You end up stalemated and your partnership issues end up consuming all of your free time and drive the company into the ground. Instead of splitting ways amicably, you end up without a company or in court.
When starting a company, literally EVERYONE thinks that their partnership is perfect and will never have the problems that others speak about. Yet, I was in a room full of successful business mentors the other day and asked how many had issues with a prior partnership. Every hand in the room went up. And still, we all give and get bad advice about the earliest moments of our company. Too often we’re told to worry about making money or getting customers or gaining traction. The other stuff will take care of itself. It never does.
Here’s my plea for the week. The moment you decide to start a company with someone, go seek out a neutral, third party adviser. Make it someone with experience and someone that all parties involved trust, but make sure they are neutral. Sit down with them and your partners and talk about all the uncomfortable what-ifs, failures and success possibilities. Only after you have done this, should you draft your operating agreement. Once drafted, sit down again and discuss all these possibilities again. Communication is the only tool that will make you successful in the long term. Modeling that behavior early is crucial for success.
Caveat. Even with open communication, many partnerships do have rifts and some end in complete failure. This is okay. No operating agreement is going to make every issue go away. The agreement is simply in place to help navigate when something inevitably happens (not necessarily goes wrong). But, without this agreement, things are bound to be significantly worse. It’s not enough to have an operating agreement. Get your partners together, get a third party involved and hash out everything. It will be a priceless investment of 5 hours of your time.