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“Partnerships” in the broader, non-legal sense of multi-owner businesses, have given us some of the most successful businesses ever created: Google, Microsoft, Hewlett Packard, even Facebook (although this last one might be of better use as an example of how not to form a partnership!).
It makes perfect sense that partnerships would benefit founders. Starting and growing a successful business takes a lot of work. It’s much easier to get off the ground and flourish if you share the burden—both creatively and financially.
A partnership is a fantastic way to increase the likelihood of a successful business venture. With the proper guided discussion and advice on key formation issues and a comprehensive and properly drafted partnership agreement, a partnership can outperform the best solo business venture. To ensure that your partnership has the best chance for success, these two steps are critical:
To ensure that your partnership starts off on the right foot, be sure that you have a comprehensive and guided discussion with all partners about your expectations and goals. Some key parameters for this discussion include:
• The Future. What are the overall goals and vision of our business? What will the partnership do or not do in the ordinary course of business?
• Partner Investment. What assets, cash, or services is each partner expected to contribute or invest in the company? When must these contributions or investments be made? What stipulations or restrictions are there on these investments? Do they have to be made in cash? What is the market value of the partner-provided services?
• Division of Ownership. How will the ownership of the company be allocated? What is this division based on? Is an ownership percentage subject to vesting or based on continuing to work in the business?
• New Partners. What is the process for bringing on new partners? What costs are associated with it? How is a new partner’s ownership share valued?
• Management and Governance. Is there a Board separating management from ownership? What are the roles and responsibilities of the partners? Who manages the day-to-day operations of the business? What time commitments are expected of each partner?
• Partner Employment. What are the expectations of each partner regarding their employment within the company? Do they work full-time or part-time? What salaries are paid to the partners? What happens if a partner doesn’t meet the expectations? Is there a process for voluntary or involuntary termination?
• Decisions and Deadlock. How are important decisions made? Does each partner get a single vote or is it based on ownership percentage? What happens in the event of a deadlock and are there deadlock resolution mechanisms in place?
• Restrictive Covenants. Are partners subject to restrictive covenants? What types of restrictive covenants are to be used and why? What geographic scope and length of time should apply to them?
• Intellectual Property. How does the partnership handle intellectual property, patents, or other proprietary information? Will the business license the IP from one of the partners? What happens if that partner leaves the business, dies, becomes disabled or incapacitated?
• Partner Departures and Exit Strategies. If a partner decides to leave the business, can the company or the other partner buy back the ownership shares? How is the price set? How and by whom will the sale of the business be decided? What happens in the event that one partner dies or becomes disabled or incapacitated?
It isn’t enough to talk about these issues, however detailed the discussion. Once the expectations of each partner have been openly discussed and agreed upon, these expectations must be put into a written agreement that has specific remedies for a breach and is signed by all of the partners. This partnership agreement (LLC operating agreement, shareholders agreements, buy-sell agreement) sets the nascent business off on the right foot, with all the partners in agreement about its trajectory and goal.
Often the benefits of such an agreement aren’t entirely obvious to the business owners in the normal course of business. That’s because, when things are going according to plan, everyone puts the agreement in the drawer and forgets about it. It’s only when a problem crops up that they break out the contract, blow off the dust, and begin to read.
Many founder’s first impulse is to go online and search for a “partnership agreement template.” A word of warning: A partnership agreement is not one-size-fits-all. You, your partners, and your business are unique, and your partnership agreement must be tailor-made to your business and your goals, not the other way around.
A fill-in-the-blank form downloaded from the internet or bought at an office supply store is an off-the-rack suit that just won’t fit your partnership quite right. At the end of the day, you’ll never be able to achieve the nuanced and comprehensive agreement that you need by this means.
Fortunately, here at Alexander Abramson, we focus exclusively on business-related legal matters. We have advised business owners for 25 years on partnerships and partnership agreements. We can guide the partners through a detailed discussion of the choices and decisions they must make to ensure that they can start and grow the business successfully now and protect the business and their investment in the future.
Our exclusive Partnership Design System brings together our 25 years of experience to guide you and your partners through a discussion of 21 key partnership design parameters in order to create a fully-customized partnership agreement for your business. Our system will:
✔ Establish consensus about all of the critical issues that must be agreed upon and documented for the partnership to be successful,
✔ Offer the partners options and space to address each critical issue and discusses the pros and cons of each, so the partners can make fully informed decisions based on their business goals,
✔ Provide a record of those decisions to reference throughout the partnership design process,
✔ Produce a fully customized operating agreement that reflects the partners’ decisions and business needs, rather than a one-size-fits-all agreement that fails at the first sign of trouble,
✔ Ensure each partner understands what is contained in the agreement, so he or she knows all of the expectations and arrangements and doesn’t accidentally run afoul of them, and
✔ Guarantee the operating agreement and all related documents are properly executed, delivered to the partners, and, where necessary, filed with the state.
Learn more about our Partnership Design System and download a free copy of our Guide to Partnerships and Partnership Agreements!Learn More
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