Never Underestimate Just How Stressful a Business Partnership Can Be
Years ago, a true-crime television series, City Confidential, took viewers on a weekly trip to an American city and recounted a murder there. It was notable for the resonant, ironic narration by the late Paul Winfield and for the time spent showcasing the personality of each city. This mini-travelogue provided an interesting contrast with the darker content that inevitably followed.
An episode that stuck in my memory involved two business partners, one of whom was ultimately convicted of murdering the other. The victim was hard working and competent, and had decided to abandon the shared business due to his partner's poor performance and lack of effort.
The less diligent partner realized that the business was already in trouble and would certainly fail if his partner left. He realized that a large “key man” insurance policy offered a solution to his problem. If his partner died, the proceeds would pay the firm’s debts. He'd be in full control of a well-capitalized business. So, he decided to speed up his partner's demise by killing him. Arrest and convicted for murder thwarted his anticipated happy ending.
Few business partnerships lead to murder, but lots of them generate hard feelings when the partners have different expectations for their effort and performance.
The digital world we live in means that businesses can be formed quickly in response to a perceived market opportunity. A few friends can envision a new mobile app over dinner, and by the next day have development underway. With no need for physical assets, the ability to work independent of location and low capital requirements, make starting a business as easy as filling in some blanks and signing at the bottom.
These advantages, though, can turn into disadvantages. Remote work allows the addition of partners with unique skills, but can aggravate problems. Partners who are geographically separated may communicate far less than local partners, and they don’t have any opportunity for informal bonding. In addition, even determining what a partner is doing or how much effort he is putting forth can be difficult.
And, when partners don't have much capital invested, they are more easily distracted by other opportunities. A partner who was full of enthusiasm at the outset might become bored. She might get a job offer from Google, or find a new project that promised even greater returns. Without a major financial incentive to stay, he may move on.
I’ve been part of both in-person and virtual startups involving multiple partners/founders, and the potential pitfalls are quite similar. (In some cases, “fellow shareholder” might be more accurate than "partner" from a legal standpoint, but I'll use the latter term for simplicity.) Some went very well, and others less so. From my own experience, and from what I've seen happen in other startups, here are a few ways to avoid reaching the point where you want to bump off your partner(s).
Partner with quality people.
Love is blind, and so is new business enthusiasm. Just as individuals sometimes overlook flaws in the people they marry, or assume they’ll change the other person, so do entrepreneurs. Nothing is more important than choosing partners who have a track record of positive accomplishments and have demonstrated integrity over time. Markets change, business needs change, but a solid individual will remain an asset throughout. Check with past employers or business partners to avoid surprises. If you have reservations about an individual or his background, or are unable to determine much about his history, don’t get involved in a business relationship.
Clearly define roles and expectations.
In the enthusiasm surrounding a startup, partners can plunge in with only a vague idea of who will be doing what. When things get rolling, it may turn out that one partner had a much different idea of what she would be doing, or how much effort would be required. I saw one such partnership blow up when one of the founders of a bakery/restaurant realized she would have to start work at 2 a.m. every day.
Establish milestones and tangible performance indicators.
If a partner is expected to complete specific tasks as part of the startup process, define these. Set dates for completion, and state how completion will be measured. The more specific you can be, the better.
Decide what happens if a partner can’t, or won’t, meet obligations.
Setting expectations is great, but you also need to decide what happens if these expectations aren’t met. Will ownership be reduced? Will compensation be cut? Since often “sweat equity” is a big component of these startups, it may be that adjustment of ownership is the only solution.
Have a lawyer create your documents.
“Do it yourself” agreements are better than nothing, but investing a few dollars in a lawyer who understands the laws in your jurisdiction is well worth it. A small firm or solo practitioner who specializes in small business will likely provide better value than a big, brand-name firm.
Define how partners exit the business.
Partners can exit the business implicitly, simply by not showing up or putting forth effort. In other cases, a partner may need to exit because of other circumstances, like health problems or family issues. Regardless, the agreement needs to define what will happen under these circumstances. Will the partner forfeit all rights of ownership? Will compensation be due? How will time affect this determination?
Some partnership problems result from festering issues. One partner thinks another isn’t working hard enough or is taking the wrong approach. Instead of addressing the issue head-on with the other partner, he stews about it, complains to other partners or team members, and does nothing to solve the underlying problem. Not all issues can be resolved by communication, but it is always better to try that approach before forcing change via the legal documents.
It’s infinitely easier to solve problems before a venture starts than when it is well underway. I’ve been involved in negotiations to straighten out messes created by poor partnership arrangements, and they are no fun at all. Get everyone to agree on terms while enthusiasm is high and while relations are cordial, and you'll avoid becoming part of a true crime story later.