Although we like to think of starting a business as an intentional practice, for many founders, it’s quite the opposite. Often times, founders fall into a new business idea and excitedly plow ahead with it, taking on business partners or key employees and verbally agreeing to sort out the legal and financial partnership components somewhere down the line. Unfortunately, these types of loose business agreements often wreak havoc on partnerships. Why? Because, as a wise business advisor once told me, “money makes people do crazy shit.” Learn from my mistakes... get your business and partnership structure documented - in writing.
I’ve often heard founders protest at the idea of putting legal agreements in place. “My business partner is my best friend and he doesn’t think we need to go to the expense of creating all of these legal agreements.” If you have a potential business partner that is resistant to legally documenting the terms of your partnership, my advice to you is to run as quickly as you can in the opposite direction.
Remember, picking a business partner is, in essence, like getting married. Both parties go into the relationship with what we assume are good intentions, but in truth, the chances of making it out as a team are 50/50 at best. Whether your business partner is a family member or a longtime colleague, setting the terms of the business relationship up front ensures that dealing with partnership issues or, worst case - a split, won’t have to mean the end of the line for your firm or your friendship.
Where to get started?
1. Align on Vision
Asking tough questions up front ensures you and your business partner(s) are aligned on the vision and direction for the company. Here are a few you may consider asking:
- Do you want to run a growth or lifestyle company?
- What is your exit timeline?
- How much time can you (or do you want to) feasibly dedicate to the business?
- What is your risk tolerance?
- What are your financial deal breakers?
- How do you manage stress?
- What does success look like to you?
- Which business activities do you love and which do you loathe?
- What are your key business objectives?
2. Establish Governing Documents
A Shareholder Agreement for corporations or an Operating Agreement for LLCs and partnerships (sometimes called a Partnership Agreement) are legal documents that provide business owners with control and flexibility over numerous aspects of the operation of their company, such as:
- Dictating shareholder rights with regard to selling one’s stake in the company
- Defining what happens to an owner’s interest in a company when he or she dies or is incapacitated
- Appropriately allocating profits and losses
- Management of the company and imposing procedures for dealing with disputes
3. Protect Your Brand
Failing to research a brand before adopting it can lead to a denial of registration by the USPTO (for those companies with a US entity) or worse, a cease and desist letter from another brand owner. Spending the time and money up front to determine whether a brand is available will help avoid rebranding or the high cost of a dispute or litigation.
It’s also worth noting that trademarks can appreciate in value over time. The more your business reputation grows, the more valuable your brand will be... and the more likely that a competitor will encroach.
The USPTO charges as little as $275 to obtain trademark registration, only a few hundred dollars after five years and another few hundred dollars every ten years. A US trademark will not expire as long as you are using it.
Don’t skimp on getting the proper legal support to set up your business entity properly. Sites like LegalZoom may suffice for some business formation documents. When in doubt, invest in a good business attorney.