5 things to consider for a new venture with partners.

One of my early experiences as a non executive director was with a start up company developing bespoke software as a core element of of a lucrative consultancy offering. 

There were two founding directors, both with considerable expertise, a deep understanding of their market, key customers and strong networks. One was stronger on business experience and the other on technical expertise.

We were successful with  seed funding and had investor interest. Early results were encouraging with revenues coming from existing networks.

However board meetings were an interesting experience - it reminded me of the Poem "There Was a Little Girl". When they agreed,  it was all steam ahead - when they didn't it was a shouting match. Over time the disagreements became increasingly personal and vitriolic and finally exploded, resulting in a deadlocked board and shareholder position.. Despite mediation, what could have been, was resigned to that vast array of businesses that fail in the first three years.

Although the circumstances are different, and the outcomes less extreme - the presence of disagreements between business partners affecting the potential of their businesses is one I have seen many times. It varies from civil relationships with unspoken resentments to destructive conflict behaviours. 

Choosing a Partner

Being a solo entrepreneur is tough going, particularly if you have limited experience, which is why many people decide to launch their business with a partner or partners.

In many instances business partners are chosen from their existing circle of influence, which might include friends, family, ex-colleagues or people they know of that they admire. 

In doing so, they are automatically choosing from a limited pool. 

The challenge of partnering with people you know in a different context is that you expect that how they have behaved in the past will be the same as they will under, what will at times, be a high pressure situation. 

This is especially true of family and friends where familiarity can breed contempt.

In most countries there is support available from chambers of commerce, local economic development agencies or other mentoring networks which will provide the opportunity  for both some free or low cost training and advisors and the opportunity to meet other business owners. 

Be curious, ask question and if you find someone that might be a potential partner take time to get to know them, see how they react to the issues you are addressing and start a conversation about the potential to work more closely, well in advance of making a partnership offer.

While you and they may be excited to get on with the opportunity you should never feel rushed to conclude something without each doing your own due diligence - and understanding what success looks like for you not just at a company level but on a personal level. If one partner want to sell out in three years and another wants to to be a legacy for their children - then the strategy needs to take account of that from the outset.

1 - Communication

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Having decided to enter into a partnership the first key consideration is communication. If you have shared your views on what success looks like and have come to know, like and trust one another you are already well down the road.

It is worth digging deeper as to how to communicate with one another on many different levels. Behavioural profiles are a good way to understand one anothers motivators and stressors and to modify your communication style depending on what you are trying to achieve. 

On a practical level what form of communications works best - written, face to face or by phone - what time of day are they most receptive so you can target important information.

Be clear about your respective roles,  you can apply the technique used in project management of a responsibility matrix (RACI) to map out what matters each partner is Responsible for, Accountable for, Consulted on, and Informed about.

Some people prefer to get an overview and key points, others like details - finding preferences saves time 

Finally, however well you communicate on a day to day basis - there is a need for good governance, and that means a formal board meeting to step back from the operations, focus on strategy and see whether things are moving in the right direction toward your vision.

2 - Fairness does not mean equality.

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As a child my parents were scrupulous in trying to make sure that they treated us all fairly, but were clear that didn't always mean treating us equally. After all a trip out fishing was a treat for my brother but not for me and my sister.

Individuals in a business bring different assets to the party and are motivated by different rewards, so it pays to take time to tailor a solution that suits everyone.

The first negotiation partners face in a new venture is usually around equity.  It can be a really contentious issue but it needs to be remembered that equity has little benefit unless there is a realisable value on exit.

To my mind there are four issues that should be considered separately before crafting a deal:-

  • Risk
  • Unique asset
  • Reward
  • Control

Risk can usually be quantified in monetary terms - amount invested, benefit in kind, benefits sacrificed. 

There may be unique assets that a partner brings, without which the company could not be founded. This may be intellectual assets, unique skills or unique access to prime markets and customers. There may be a temptation to convert these to a value and include them in the founding equity. 

You might want to view these as promises that have yet to be delivered. As an example a new technology or process might look exciting but prove to be unscalable, someone might have great skill set but doesn't apply them or have a little black book to die for but becomes guarded about sharing it. Providing significant equity for these assets may become a bone of contention over time if they do not deliver on their promise. 

If you want to reward each partner fairly then you need to look at the type of reward that fits what they are bringing, that might be in a combination of founding equity, share options, salary, performance bonuses and / or royalty payments.

Often the arguments over equity are more about control than rewards. It is important to remember that regardless of what equity holding founders have the level of reward and control are governed by shareholder agreements and they can be separated. It is possible to have classes of shares that are non voting or preference shares and to define what matters require shareholder consent, and who is entitled to have a place on the board of directors managing the day to day operations,

Whatever route you follow, it is sometimes useful to have this facilitated by someone without a vested interest - and remember NOTHING is agreed until EVERYTHING is agreed.

3 - Dealing with the Unexpected

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Your may predict that your founding business partnership might be short term, going for a quick sale or longer term, but at some time your business relationship will come to a conclusion.

You may be family, close friends or respected colleagues but no-one can predict the impact of external changes or life events that might result in a fundamental change in motivation, availability or working relationships.

You can however predict some consequences and put measures is place. Some examples include:-

  • A partner wants to exit
  • A partner is willing but temporarily unable to deliver
  • A partner passes away or is long term incapacitated
  • A partner is under performing
  • A partner does not act in accordance with business ethics and values

You might consider what insurances (key man or shareholder) might mitigate the impact on the business, a cross option agreement might avoid introducing new shareholders into the business; a dispute resolution process and agreed arbitration might provide a measured way to air and resolve grievances and clear objective goals help define performance.

4 - Ethics and Values

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It is one thing agreeing what you are going to do as founding partners - quite another to explain how you will do it. Like the curved balls that might change your relationship over time - you cannot define all the do's and don'ts of what is acceptable practice.

This is where values are paramount. I have seen many start up companies view the establishment of values as a tick box exercise, selecting key words that they think will resonate with their customers. The problem with this approach is that you end up selecting a bunch of obvious  phrases such as "quality", "customer care", "safety first" that don't explain, guide or differentiate. Often you end up with a list so long that it isn't easy to remember and therefore is confined to the company handbook and doesn't become the defining principle of doing business.

If you are going to define values - you have start by living them and reinforcing them in interactions with staff and customers. Developing cases which demonstrate what those values mean in action allow you to articulate them clearly.

The book "The Barcelona Way" by Damian Hughes is a great example of how values define behaviours and how sticking to them sometimes seems counter intuitive but pays dividends.

5 - Some recollections may vary

​Whatever you decide as you start out on your journey as business founders you need to record what you have agreed. There will be legal agreements in place that deal with governance and investments but they do not capture all of the elements discussed. 

As was diplomatically put by the Queen, over time some recollections might vary.

I suggest that in addition to whatever legal documents are required that founders draw up and sign an additional document  that embodies the principles of their agreement. Recording not just what has been agreed, but why can be very valuable. It doesn't need to be long, but it acts as a useful reminder and a template to guide the selection of future partners.

The Partnership Charter by David Gage provides plenty of examples to underline the need as well as a useful template for such an agreement.

 

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Comments

  • really interesting Helen
  • Excellent blog Helen! Thanks for sharing this here
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