partnership

Asked by David Shaw on LinkedIn

1. First of all, never form a partnership, period. Use some form of incorporation instead. Partners have 100% liability for each other’s actions. But we often say “partner” when we mean fellow stockholder.

2. Never take on a “partner” if you can hire the person instead. Giving someone an equity stake because you cannot afford to pay them a salary will turn out to be the most expensive hire you ever make.

3. The only justified reason to bring in an equity “partner” is that they bring in something that you cannot obtain in any other way, such as:
— Capital. But even this is chancy. Much better to use a line of credit, or sell shares to a handful of investors.
— Synergy. The two of you have a proven wonderful working relationship and have complementary skills. For example Doer and Rainmaker, or Creator and Implementer.
— Connections with customers or resources that will make you rich.
— Access to a market that you could not otherwise enter.

If you do get a “partner,” get your working agreement (“pre-nup”) drawn up by the most hard-harded, cynical lawyer you can find, so it will have contingencies for all the worst-case scenarios starry-eyed newbies never think of.

By the way, the only thing worse than seeking a “partner” for your start-up is bringing in an equity “partner” to your established business. I’ve never seen a single instance where this worked out. Instead, hire them as a consultant.

If you want to bring in an equity “partner” to get a capital infusion for rapid business growth, don’t sell them a stake in your existing business. Instead, have them become a shareholder in a new venture the two of you start, while you retain control of your original company. The new company can contract for services from your original company.

mvh

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Q. What are the four or five most important things I need to consider in deciding if a partnership makes sense for me and my business? I need to build my client base and am thinking about entering a partnership with someone in my field. He has his own, albeit smaller, client roster but is not paying his way in.
Miriam  (from Linked In)

A. First, don’t do a partnership, period. If anything, form an LLC or LLP. A previous post already explained the importance of limited liability.

So let’s assume you’re using “partnership” in a figurative sense, i.e., someone you work closely in collaboration with.

I’ve advised many prospective “partners” on what it takes to succeed, and after this, 3/4 decide to do something else. Usually, the person who would have put the most in comes and thanks me profusely for talking her out of it.

All “partners” must make equal contributions and equal efforts. The contributions don’t have to be money, but “skin in the game” is essential. Bringing in someone who contributes less and doesn’t “pay his way in” is guaranteed to create problems. He has not earned ownership in your hard-won endeavor. You will resent his wanting a say in your business, and he will resent that you resist this.

Why not hire him as an employee? I know: you can’t afford to. Uh-uh. Giving someone an equity stake in your going concern in order to avoid paying him wages will turn out to be the most expensive hire you ever make!

There are only a few good reasons to bring someone in as a “partner.” These include:
— Synergy. The two of you click big time so you produce a lot more than either of you could separately. And you work really well together.
— Complementarity. Each of you provides a critical element or skill that the other cannot provide. E.g., marketer and producer, visionary and money-head.
But if one can hire the other, do that instead. That is, even if I’m terrible at marketing, why don’t I just hire a marketing whiz?
— You need a substantial investor and you’re willing to give up some control.

Even with this, there are big issues about goals, style, working culture, etc., that need to be explored.

Even if the stars seem aligned, I recommend you start with a joint project with each of you retaining your separate business entry. Test out all these issues in a time-limited working relationship and see how things go.

mvh

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