Spending time on this one document now will save you major trouble down the road.
Starting a business with a partner is an exciting time in your career and, of the thousands of tasks with which you’re faced, a partnership agreement is one that should be handled at the very beginning. A partnership agreement (or also known as an operating agreement) is a legal document that defines you and your business partner’s rights and responsibilities. This is a very personal document where you and your business partner have to agree on each of your rights to your business. While there are several things to consider when putting together a partnership agreement, I want to share with you three of the most important items.
Perhaps the first and most important question you must ask is, how will you divide the equity between you and your partner? Are you equal partners in this business or is one person taking the front seat? Remember, the longer you wait to have this conversation, the more difficult it becomes. Right as you begin forming your business, clarify each of your ownership roles.
2. Financial and Time Commitments
Second, you and your partner must determine each of your financial and time commitments to the business. Are you both expected to contribute the same amount of money and time? This is important to clarify because I can tell you from firsthand experience that it is very frustrating to feel like you contributing more and working harder than your partner. Make sure that both of you understand how much time and money each of you is expected to give.
Finally, every partnership agreement should address what happens to a partner’s equity should they leave the business. Let’s say that you and your partner start a business and have all the right intentions upfront. But down the road, one of you decides to leave, whether it’s for another venture or because of a disagreement. The question is, what happens with that partner’s equity? It can be frustrating to be the remaining partner in your business while your partner who has left receives the benefit from you staying and working. To avoid this, your partnership agreement must address vesting – how the equity returns to the partner who remains with the business.
In the early stages of your business, sit down with your partner to address these items and clarify each of your roles in the business. Because this can be such an intimate conversation, many entrepreneurs think they can push off this task until a later date. But if there’s one piece of advice I can give you, it’s to have the conversation as early in the game as possible.
I also recommend that you find good legal counsel. While there are templates for drafting agreements, I highly recommend hiring an attorney to make sure you cover all these important steps and any other concerns you may have. Creating your partnership agreement upfront and getting very clear on each of your roles in the business can make the difference between having a great partnership and having a partnership that goes sideways from the very beginning.