Creating a Fair--and Successful--Partnership
I get a lot of questions about partners: Do I want them? How do I find them? How do I deal with them? But the most common question I get is: What's a fair way to divide up my company?
A partnership can be a two-edged sword. Sometimes, 1+1 can equal 3--and sometimes it can equal a lot of fights. I remember listening to a tape from one of my favorite speakers, Brian Tracy, who addressed the subject like this (paraphrased from memory): "If you have two partners, sooner or later one partner is going to do more work, and one is going to do less work, and the one who does more work is going to resent the one who does less work." I have to admit that this has been my experience in just about every business I've been in. I've wasted a lot of time and energy in arguments with partners over who was doing his share of the work or getting more than his share of the money. I've also had partners who contributed way more than their share. Unfortunately, I don't know how to find out, before you start, which kind of partner you will have.
My experience has also led me to believe that it really isn't possible to set up an ownership structure that you can look back on 10 years from now and be happy with. You just don't know who'll work harder or contribute more. And you won't be able to determine whether sales, marketing, engineering or bookkeeping is most important to your company, and whether, for example, a person in marketing is doing her job better than a person in engineering is doing hers. A company is a team, and it takes different people with different talents to make up that team.
So what do you do? You just have to do the best you can, make it as fair as possible and not worry about not getting it perfect. Take all your knowledge into account, forecast as best as you can and do what seems right. If you are already a partner in a start-up, look at what you are getting. If it's a good deal, then don't worry about what anyone else gets. If you focus on that, you'll save yourself a lot of unproductive stress and worry.
That's good if you already have partners. But what about someone just starting, who doesn't know how to divide up the stock? As an example, let's say that you start a company and have three investors who each want to put in $50,000. You won't put in any money but will run the company. What's fair? Twenty-five percent each? Ninety-four percent for you and 2 percent for each for them? Ten percent for you and 30 percent for each for them? You could read a hundred books on how to value a company, but the bottom line in a brand new business is that the company is worth what you all agree on. It is almost impossible to put an accurate value on a start-up like the one in this example, so you just have to sit down and talk to your partners, decide on what you think is fair and don't look back. Once you decide on the value and ownership structure, worry about how you can make the company succeed, not on how much stock you got or how much someone else got.
The decision about whether or not to take on partners is tough. On one hand, they may bring valuable skills that you don't have. On the other hand, you may not get along at all, especially under pressure. It is almost impossible to set up an ownership structure that will be fair when you start out and remain fair through the inevitable changes that will overtake your business. So divide the ownership up based on your current knowledge and concentrate on making the pie bigger, not on continuing to try to divide it up.
Keith Lowe is an experienced entrepreneur who is a founder and investor in companies in several industries. Lowe also mentors new entrepreneurs; serves as past chairman of the board for Biztech, a nonprofit high-tech business incubator; and is a co-founder and officer for the Alabama Information Technology Association.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.