By Philip Shaw, attorney at Cook, Little, Rosenblatt & Manson
Entrepreneurs can be reluctant to allow others into the inner circle of their businesses, and with good reason. Bringing on board the right business partner can be a make-or-break proposition for a startup. This column examines some of the important considerations for early-stage business owners looking to partner up.
What kind of business partner are we talking about? Not every startup has the same needs, and not every potential partner brings the same skillset to the table.
It can be useful to think of business partners as falling into two broad categories. In one category are internal business partners such as other founders and key members of the company’s management team. In the other category are external business partners like value-added resellers, suppliers and other strategic service providers. What we are not talking about here are investors. Although investors might sometimes be considered business partners, financial investment and capital-raising are outside the scope of this column.
What should an entrepreneur look for in an internal business partner? First and foremost, value is important and is influenced by a potential partner’s expertise, experience and network. A partner’s connections within the industry and with potential investors can and should be considered. Commitment matters, including a willingness to put in the necessary hours and an ability to financially do so. This factor can be especially important when internal partners will be expected to support themselves financially during the company’s earliest phases. Internal partners should also be of the same mind regarding the growth and eventual sale of the company. If one partner is hoping for rapid growth and exit, and the other is looking to support a stable lifestyle, then the partnership is unlikely to work out well in the long term. Finally, the importance of trust and open communication cannot be overlooked because internal partners need to be able to rely on one another and collaborate effectively.
Much of the same selection criteria apply to external partners as well. External partners must be willing and able to invest the necessary resources to get the project up and running. Depending on the nature of the partnership, it may be important that external partners exhibit business model similarities such as shared customers or complimentary products or services. The financial model of the partnership should be structured to incentivize both partners to actively develop the enterprise. Such a model could take various forms, but common structures include commission or royalty-based arrangements.
For all kinds of business partners, setting out clear expectations at the outset is imperative. In virtually all instances, the terms of the arrangement should be set forth in writing.
For instance, where a new partner is to share in the ownership of the company, it is common for that ownership to vest over time or upon the occurrence of certain milestones, and such vesting provisions should be documented.
Documentation is often even more important when the venture encounters unexpected obstacles or otherwise begins to unravel. What if a partner dies, becomes disabled or declares bankruptcy? What if the partners become deadlocked or unable to work together because of diverging goals or visions for the company? Creative solutions abound for each of these situations and taking the time to work through them on the front end can save all parties a great deal of time and money on the back end in the event things do not go as expected.
Boot Camp for Startups:
To learn more, please join me on March 19, 2014 from noon to 1 p.m. at the abi Innovation Hub where Matt Benson and I will be presenting a seminar titled “Partner Up: Choosing the Right Business Partner for Your Startup” as part of a nine monthly seminars in the abi’s “Launch Series: A Boot Camp for Startups.” To register contact Michele Petersen at Michele@abihub.org.
If you’re unable to attend the March 19th seminar, click here and I will be happy to answer your posted questions. at www.unionleader.com/expert or http://alphaloft.org/ask-the-expert/
About Philip Shaw:
Philip J. Shaw is an associate with Cook, Little, Rosenblatt & Manson P.L.L.C. in Manchester, where he focuses on transactional, securities and general corporate matters. He can be reached at firstname.lastname@example.org or 621-7108.