Financial – Upstarts

The truth about partners

I don’t want to burst anyone’s bubble, but things are not going to turn out as you expect. Whether you’ve known your co-Founder a long time, or whether you are relatively new acquaintances, having a business is going to put you and your partner(s) in unexpected situations. These new and unanticipated realities will mean you’re going to be surprised by how someone behaves. You will even surprise yourself! All you can do is be as prepared as possible to mitigate some potentially problematic situations.

Did you come up with the idea on your own? One of the most important decisions you’re going to make early in the venture is whether or not to have co-Founders and partners.

It is possible that original concept may have been dreamed up by two or more people. If that’s the case, you will have to address questions related to ownership and responsibilities, as you will if you decide to bring someone into the business to work on your idea as a co-founder.

There are advantages to having partners in your business: but there are also challenges.

First, let’s discuss the positives:

Co-founders or partners can share the burden, work and stress. Having a startup is can be lonely. Partners can support one another when things are tough.
Having people to discuss ideas, plans and approaches with is a good thing. Other people can offer perspectives that force you to challenge your own assumptions and build ideas.
As mentioned on the funding page, if you’re going the investor route, the “team” is one of the key decision-making considerations.

The biggest risk is in any partnership is conflict, which can be bad for you, bad for your partners and bad for the business. (A bit of healthy conflict can be good, but in this case, I’m referring to the destructive kind.) Conflict can result from different personalities, work habits, personal and professional objectives, expectations, poor communication.

Questions to ask about yourself and your partner

Based on my personal experience, I can share some learnings:

Before going into business with someone, think carefully about your strengths and weaknesses, as well as those of your perspective partners. Optimally, but not necessarily, you want to create a team with complementary skills.

How well do you know your perspective partners? Be really honest when you ask yourself if they share your:
- Commitment – is this business the most important thing everyone is doing or is it a side-hustle? What other professional obligations do you have? What about personal priorities? Co-Founders should have roughly the same level of commitment to avoid conflict.
- Work ethic – do you know whether your partner(s) are willing to work as hard you work on their responsibilities within the business. This can become a serious source of friction if there’s a misalignment in this important aspect of the business. It is possible to share a work ethic and have totally different styles. You might be someone who logs a lot of hours in the office, while your co-founder does their best thinking in a coffee shop. The question to ask yourself is knowing that they have the same work ethic whether you can feel confident, over time, being tied to someone who works differently than you.
- Vision for the business – maybe you imagine becoming a billion dollar global business, but your co-founder is happy running a regional operation. Talk about your vision, short, medium and long term goals and make sure there’s alignment before moving forward. This includes the type and timing of any potential exit.
- Financial situation – this can be uncomfortable to discuss, but personal finances need be part of the conversation between prospective co-founders. Are you expecting salaries? When? How much? We all want to be optimistic when we think about our business, but 9 times out of 10 it’s going to take a lot of time and patience to generate revenue. How long can you manage within getting paid your “fair market value”? If there’s a disparity between co-Founder’s ability to thrive during the bootstrapping phase, this is something that needs to be understood and mitigated.

Be clear up front about what each person is bringing to the business and what each person’s responsibilities will be. Are you bringing the idea and your co-Founder is offering technical expertise or networks or cash? Are you responsible for overseeing manufacturing and your partner is doing sales? Is everyone willing to invest “sweat equity” or are some looking to be paid? Any combination is fine as long as everyone is clear about each person’s responsibilities and agrees about the value of the contributions.

Finally, ask yourself how you would feel if your relationship with your co-Founder changed for the worse. This is more relevant if you have a long-term professional relationship or personal relationship.

With all of these considerations carefully thought through, you can then determine ownership based on the relative value of what everyone is bringing to the table. Setting up equal ownership may seem like a good idea when all you have is an idea, however, it is most likely not the best approach.

Getting started with partners

Consult a lawyer – this may seem like a big expense, but it will save you time and aggravation in the future. Most lawyers that work with startups will have templates of shareholder agreements, employment agreements, stock options, and other basic forms. Some have fixed fees for startups.
Incorporate the business – incorporation provides a structure and makes the business a legal entity, de-personalizing it from the founders. Again, it is an investment worth making in the early stages. Incorporation is an eligibility requirement of many funding programs and may be needed to open corporate a bank account.
Have a shareholders agreement – this document formalizes the relationship between shareholders. It’s absolutely necessary.
Write job descriptions with titles, even though these may change as the business evolves. Defining roles and responsibilities from the outset is a smart strategy. The titles may seem unimportant, but they can become a source of irritation.
Develop a decision making structure and dispute resolution approach before there’s a problem.
Define outcomes and associated timelines for the responsibilities everyone on the team is taking on. As co-founders you want to be focused on deliverables, not the steps to get there.

Yellow flags

Working in a startup requires a high degree of flexibility. You can’t be good at just one thing. You also have to be ready to pitch in and do things you don’t enjoy with as much dedication and attention as you give to your passion projects. Obviously you should try to have people doing work that they’re capable of, but beware of anyone who is unwilling to work outside of a narrowly defined area as a startup co-Founder.

There’s no room on a founder team for someone whose main skill is leading large teams and reviewing and commenting on the work of others. Founders need to be able to produce work to build the business. If there’s someone on your team who just wants to be the “boss”, that’s a yellow flag you should address before you incorporate. Perhaps they’d be better suited to an advisory role.