Partnership is one of the most beautiful things about entrepreneurship. Like marriage, you are supposed to work together as one unit, offset each others weaknesses and step in when the other is unable. Unfortunately, no business runs perfectly forever and when times become hard the partners need to make uncomfortable decisions about carrying the business through or dissolving it.
Conflicts
There are a couple different things that yield partner disagreements and conflicts. The most common is company goals. Company goals vary widely and can be anything from human resources, financial planning to company expansion. Many partners have different styles of management, communication and levels of commitment to the business. If these are not aligned, conflict can arise almost instantly. Another popular disagreement partners sometimes have is that of the exit strategy. An exit strategy is the act of transferring ownership of a company over to another entity through a merger, acquisition, IPO or even dissolution. Many partners disagree because one may want to sell the company to cash out and the other may want to hold on to the company and expand it.
Death is an area that no one ever wants to talk about but it is just as important and creates as much confusion for partners. When a partner dies, they leave their ownership of the company behind. Unless there is proper planning, even in death the ownership belongs to the individual or the successor. The problem is most business don’t have succession planning documents in place which freezes the surviving partner from making any other decisions. In some cases the company has to be dissolved or the partner has to deal with the successor. In most cases, the successor doesn’t have a working knowledge of the business, and is probably a relative of the deceased partner. All the successor knows is they want (financially) what has been transferred to them. Inherently, this is a major problem for any partner.
What You Can Do
So how do you split up ownership unequally with someone you are starting a new business with? Well first you have to determine what each partner brings to the table. From there, determine who adds more value to the business, now and into the future. Use some of these factors to determine who gets majority and minority ownership:
- Whose idea was it first?
- Who is investing the most time to the venture?
- Who is investing the most capital into the venture?
- Who has the most connections to help the business realize it’s goals?
Once you’ve determined whose going to get more or less of the pie, it’s time to get specific. There are a couple of different structures you can use:
60/40 (Most Common)
Don’t pay attention to the numbers exactly, it’s really a figurative way of saying someone should have more and the other less. You could just as easily have 51/49 or even 80/20. The point here is that someone has the deciding vote in a conflict.
49/49/2 (Less Common)
This structure requires three people. It allows for 3 partners to have equal ownership while the other has minimal ownership. This allows conflicts to be resolved easily because the majority will always rule. This is used in cases where the minimal owner may be important to the business but not providing as much value or dedication to the company as the other two.
Partnership Ain’t All Bad
Like I said before, partnership is a beautiful thing when done with diligence and future planning. The excitement of starting a business can be joyfully overwhelming at periods which makes us entrepreneurs want to get everyone involved. Remember that when you are getting someone involved, make sure it’s less about the excitement you’re experiencing and more about their values and what they bring to the table.
Pretty good commentary Dez! Keep it coming.
Comment by Nate Hammond — March 18, 2009 @ 12:12 am
Great post!
Comment by Tobin — March 18, 2009 @ 12:50 am
I completely agree that partnerships can be an amazing opportunity for everyone involved. Personally I have witnessed this firsthand with my business as it has definitely been beneficial to have a partner. However the partner can not be just anyone as you had alluded, in my case it was an accidental meeting that turned into a solid working relationship. I do not agree however that true partnerships should be broken down into who adds more or less value - in reality this is often very difficult to quantify and most value is intangible and readily calculated into ROI.
In my business I believe that my partner and I add equal value, but in different ways - my strengths compliment her weaknesses, and vice versa. Fortunately for most aspects of the business we agree on most of the decisions and direction of the business, for those items where there is disagreement we can each make an intelligent argument and case to convince the other. At one point I would not have believed this possible until I had experienced it myself. There has been more than one instance that we have each stopped one another from making a less than optimal business decision, if we did not have equal weight in decision-making we could have steam rolled over one another and proceeded with the poor decision.
Personally I believe each partnership is situation dependent and truly unique. Each member of the partnership will instinctively know when it is right and the optimal working arrangement will just “fall out” over time.
Comment by John R. Sedivy — March 18, 2009 @ 1:32 am
Desmond
Great post. I would also add that there needs to be a clear definition of responsibilities. Like one is primarily responsible for sales while the other is totally responsible for operations. From past experience, this needs to be clearly defined from the beginning so that the partners do not fall into the trap of doing what they both are most comfortable doing and allowing the functions that are less desirable fall by the wayside. This also assigns responsibility for accomplishing tasks and setting goals for the business. This is much more difficult than just saying I will do this and you handle that. This needs to be clearly defined and detailed to work effectively.
Brian
Comment by Brian May — March 18, 2009 @ 6:29 am
Partnerships! WOW what a minefield. You have got to have a very special relationship to make this one work. You are right about “values” if you don’t understand these be sure there will be trouble ahead. Personally I’d rather stick pins in my eyes. Interesting post thanks.
Comment by Affordable Website Design — April 14, 2009 @ 7:27 pm
Dezmon, should a 50/50 split even be considered, when one person pays for material and supplies but pays no salary, has little knowledge of the industry and puts in about %5 of his time. While the other person has years of knowledge, has created all the product samples, and will be putting in %100 of her time in to the production process, website sales, marketing, and advertising? what’s fair?
Comment by Deirdre — September 27, 2009 @ 8:50 pm
Hey Deirdre,
Great question! I don’t know all the details but it sounds like you’re doing all the work!
Off the cuff, this sounds to me like you should get 80% and the other person should get 20%.
I would like to know how much the materials and supplies costs, also do you have employees you have to pay salaries too?
Comment by Dezmon — September 27, 2009 @ 11:10 pm
As you rightly say partnerships are about working together as a unit and it’s important to understand the partners roles right from the start. By ‘defining’ that role, responsibilities and objectives can be applied to individuals that as a whole help the company reach its long term objectives.
Nice post
Comment by Web Design Company Buckinghamshire — October 5, 2009 @ 9:33 am