I have written a few blog posts recently on aspects of partnerships, here are the transcriptions from those:
Issues with partners. Things that can go wrong with a partnership. There are as many problems with people working together as there are people but they generally come down to:
- Difference of opinion. When it comes down to it whos direction will you take and are they other people going to be ok with that?
- Family / personal life. The person starting is on board but the better half often doesn't quite agree. More annoyingly the NEW better half suddenly doesn't agree sometime into the venture.
- Effort put in. One works 12 hours a day an the other treats it like a 9-5. Each person will have a different opinion about the value of effort ... Especially Marketing VS Technical VS Management.
- Money and ongoing contribution. At some point the venture needs to pay for itself, when is that point, who gets when and when?
- Money and ongoing contribution part 2. Sometimes you will have down periods, you need to put in cash, you need to work for free or cheap. What is the agreement around the payoff and the "return on investment" during these points? Who gets the bad jobs. There are always things you don't really want to do, and neither do the other people ... who is going to do them and what is their incentive going to be?
- On sunset. One person leaves, you get bought out OR you decide to throw in the towel ... what happens, who owns what? What is the magic "buyout price number" so if one gets the offer they can have a guideline to work with.
- Big Red Bus senario ... what happens if someone is killed or seriously injured ... what happens to their shares? Do you want to start taking orders from their spouse or extended family? Do you want your family looked after? what happens to their position?
There is probably a whole host more but these are the ones I have seen others come unstuck with.
My advice is, if you're looking for someone, friend or a new person, you need to cover off these points in a 1 to 2 page "in principal" and "heads of agreement" before taking it to a lawyer to become formalized. If you can't make it past agreeing to these points, you're not suitable for each other.
There is probably a few others to add to this list and I am happy to accept contributions.
In principal agreement. What to clear up before you start. We have seen a lot of companies startup over the years, many with no real agreement or base line "in writing" to come back to ... so what are the basics to consider?
My advice is get an in principal agreement in place before starting, it doesn't have to be huge maybe 1 to 2 pages and you should be able to write it between you in an hour or 2.
It should cover the basics
- Share split, buy in time (say 2 years to get all of your shares OR key milestones)
- Who owns what – pre-existing IP and customer base is owned by the company and is part of the contribution in return for shares in the company
- What happens if someone leaves (do the shares revert to the pool, stay with that person or do they need to be bought out by the other partners). I would suggest anything in the first 6-9 months is a pure revert to the pool, after that first option to buy out from the other parties ... this should be evenly bought if possible.
- Sweat equity multiplier. If there is a period of no money what is the value of shares or what is the repayment on the time invested (agree on a figure 1 month = $8K or something) and it is paid out once things pick up.
- Sunset. What is the agreed “end goal” is it to be bought out, to publically list, to grow into a large player. This is important that everyone understands … it is allowed to change along the way. If it is a buyout, who and when is the goal and what is the minimum price so you're all happy.
These are the key things to get peoples agreement and signature to before starting then soon afterwards I follow up with a lawyer written contract to cover the bases properly.
DISCLAIMER: I'm not a lawyer, just a venture developer who has done this a bit. The formal answer is pay a lawyer to draw it all up or there are websites that sell "packs" of legal documents for starting up a business.
Share split guidelines. How to carve up the company. You have a great idea, you are assembling the team to execute it. So how do you qualify where the share and ownership goes? Well there are no hard and fast rules about this but here are the guidelines we set out for ourselves and others we are working with.
We typically have a few standard metrics we use to run through how much a share is worth:
- Idea: 3% - 5% - Ideas these days are cheap, everyone is having them it's execution that counts.
- Technical: 15%-35% - all developers (including myself) think it's worth more but if you don't have the rest in place then it's just a cool thing that sits on the shelf being worthless to everyone. That said, you want the developers to have a good stake in the product so they are suitably focused in the end result.
- Marketing / Sales: 15% - 30% - This is pretty important, if nobody knows about you, you're nowhere ... but put KPIs against it - X new customers / sales in a timeframe.
- Business: 20% - 30% - The leadership and vision, this is typically one or two people and they will make or break the company on its own, set the direction.
- Finance: the remainder, depending how much they put up, others adjust accordingly.
- Employee shares is the outlier here, for key staff you want to reward them ... either they get split under each of the headings above and are a part of those shares or they are a seperate block ... around 10-15% is reasonable to balance incentive against dilution.
A few notes about these splits
- Again for all of them it is to be qualified ... everyone should have a 1-2 year "buy-in" period where they have to perform at their role in order to receive the shares ... it's only by everyone pulling together that you will get anywhere.
- To start with 1 person may wear several hats, thus have more shares.
- Really these are pure guideline or a starting point for negotiation. At the second round fund raising, these all get diluted by the new party coming in.
These are just one set of possible guidelines, has anyone got another way to split up the inital plan