Entrepreneurs generally face uncertainties while establishing partnerships required to drive robust investments and resilient businesses, particularly when it comes to friends and family. As such, they justifiably harbour fears on the possibility of failed partnerships and loss of their investment.
How do you manage trust and insecurities as you build strong and enduring partnerships with friends or family? How do you protect your business from a failed partnership in this scenario?
I recently gave a keynote presentation on my entrepreneurial journey at an event and one of the many questions thrown at me was: “What are the key considerations when partnering for a business?” I have been asked this question several times and had some conversations on it too. Below are real-life examples of partnerships that ended on sour notes.
Friend A partnered with an acquaintance to set up a business. The partnership, however, failed as Friend A turned out to be the sole channel for obtaining contracts for the business. The other partner was somewhat uninterested and hence practically ineffective. To be able to continue this business, a new company had to be registered, after the acquaintance refused to give up his share of the parent company. A case of expectations and responsibilities not clearly spelled out?
A man resigned from a company he founded and managed as CEO for 25 years. Leaving on an undesirable note, he vowed to ruin the business as he felt cheated by his partner. He alleged the partner only provided funds for running the business while he did the heavy lifting of winning contracts running to billions of Naira. I wondered why it took him 25 years to realise that! Were roles of partners not defined and documented?
These unfortunate examples transpire when expectations are not clearly spelt out. And by that, I do not mean simply signing an agreement on company equity. The agreement also must be framed to clearly capture expectations and roles over specific periods.
Starting a business requires a lot of hard work, particularly in the early days. You need people who buy into the vision, are committed, supportive and self-motivated.
I founded a consulting business and registered it as a sole proprietorship a couple of years ago. After steady growth of the business for two years, I re-registered the company as a Limited Liability Company with two friends who officially became partners. I met Partner 1 during my MBA programme in the UK and we had been friends for a while. Partner 2 showed interest in my business from the early years and was therefore recommended by Partner 1. I invited Partner 2 for a chat to get to know him better, understand the value he would add, his readiness for the journey, the work involved and the intricacies of working on a part-time basis. He later admitted it was very ‘drilling and warning’ session.
To mitigate unpleasant experiences, the fundamental principles which guided my negotiations with Partners 1 and 2 are:
- Values: Analyse your values and theirs. What are your values as a person? What are the values of the potential partners? And yes, this includes friends and family! Is there a clash of values, work ethic, etc.
- What are they bringing to the table? Cash or technical expertise or both?
- How much control are you willing to give up? This determines the equity split of the company. If you want control, then you should plan to own the majority of the company. Depending on the scale of their contributions, will the potential partners accept that though? Consider that.
- Will the partner(s) be working full-time or part-time?
In all you do, you must be clear and transparent in the discussions to reach an agreement. I had gotten to a point where I needed partners, and they were coming in with their cash and technical expertise. We had lots of conversations around the ownership structure and what each person would bring onboard.
The back and forth conversations took weeks. We were able to come to a landing using a Founder’s Scoring Sheet (FSS) or Founders Pie Calculator. We created an FSS to decide how the shares of the company would be distributed based on different elements, such as idea, Business Plan, Domain Expertise, Commitment and Risk, Responsibilities and Founder’s Sweat. These can be modified to suit any situation.
Founder’s Sweat was included in our case because I had run the consulting business for 2 years and most of the assets of that business were being moved to the new venture. The elements were jointly assigned different weights by all partners such that the aggregation of the weights was equal to 100%. Each partner was then scored on a scale of 1 to 10 for each of the elements. Partner 1 and I planned to work full time, while Partner 2 would work part-time. This meant we will not all put in equal time. The allocation of the scores for each partner also reflected this. The scores were first multiplied by the corresponding weights and the weighted scores ultimately aggregated to give the portion of the pie for each partner.
In addition to the number of shares for each partner, details of the responsibilities and expectations of partners were included in our shareholders’ agreement. Cliff and vesting periods were also specified and tied to deliverables (in our first 3-year strategy plan). If a co-founder’s share of the pie is, for example, 18%, he, therefore, earns 6% yearly for the next 3 years, based on his performance on agreed deliverables. The cliff period means you need to have stayed and contributed to the company for at least a year before your shares vest (i.e. before you earn the first 6% of your shares). However, if you leave before the end of a year, you get nothing, and the company takes back its shares. All these were documented, with the help of a lawyer.
Do we disagree? Absolutely! But we do to agree. We have our difference and are constantly learning from each other. More importantly, each person focuses on the specified expectations to add value to the business. And over time, we were able to build mutual trust and respect.
There are other real-life examples of organizations where non-performing directors were relieved of their duties albeit retaining their shares and seat on the board. These examples were possible because the expectations were clearly documented.
The bottom line is: know your values, be transparent, be clear on expectations and document them. These really help if the partnership fails and the next course of action need to be underpinned by documented expectations, without hard feelings or necessarily ruining friendships. Let us stop this mentality of s/he is family or very close friend and do things properly. Proper documentation or having agreements does not mean trust is not there. Think sustainability!