You are at a networking event for entrepreneurs when this spunky person across the room catches your attention. You walk up to this gem and start discussing your newest business venture into the world of mobile app development. As the conversation progresses, you realize that not only do you have a shared interest in mobile app developments, you also both have traveled to Malta, enjoy craft beer and go to bed exactly at 11:28 pm mountain standard time every night (despite residing in the eastern standard timezone). It truly is a match made in business heaven. Naturally, the next step is to discuss how you can work together. Before you know it, you two have formed a general partnership and are plowing full steam ahead in developing the latest and greatest dating app.
Things are great at first. You both have contributed equal amounts of money and have dedicated countless hours to the project. One of you manages the project and works with developers to ensure a great user experience while the other hunts down investors to keep the money flowing (because at this point both of you are on a steady diet of canned tuna, ramen noodles and Crystal Light). A software that you worked on a few years ago was recently, and unexpectedly, acquired by a Fortune 500 company and you have just come into a large amount of money. This is great because your dating app, Dating for Winners (a name picked out by your partner), is nearing completion but you have your last (and biggest) payment remaining. One of your investors has suddenly pulled out of the project so you decide to use your large payout for the final payment.
Much of this cautionary tale could have been avoided if these two individuals had a partnership agreement in place. Partnership agreements are important (read: essential) because they lay out some important considerations: partnership expectations, how your business will operate, how decisions will be made, how profits and losses will be divided, the terms for exiting the partnership or even selling the business. Like a marital prenuptial agreement, partnership agreements provide a vehicle for people to plan for the mundane and the worst while hoping for excitement and the best. The warm and fuzzy feelings abound in the early stages of a business venture but can quickly wane when you experience some of the harsh realities of running a business. You want to make sure you have contemplated all of the above-mentioned considerations before entering a partnership and, if you are smart, put the partnership’s decisions in writing.
Partnership agreements are also critical is because if you do not have one and your partnership is ill-fated (as so many are), you are at the mercy of your state’s default rules for partnerships. The default rules are such that they aim to be a one-size-fits-all solution. Unless you and your partner(s) have reviewed your state’s laws and decided that they work for you, you are better off setting forth your own rules in an agreement. The time and money you will invest on the front end pale in comparison to the time, money and emotions you could invest in resolving a partnership dispute or dissolving a partnership altogether.
There are a number of things that every partnership agreement should have. In addition to addressing how disputes between partnerships will be resolved and when and how the partnership should be dissolved, you should also think through the following:
-Constitution of each partners’ contribution (cash, expertise, services, property, etc.)
-Decision-making process within the partnership
-Authority to bind the partnership
-Addition/removal of partners
These are not “sexy” things to discuss with potential partners but they are necessary. Stuff happens...even to businesses.