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Business Partners and Investors: Guaranteed Divorce Coming Your Way!

Business

April 18, 2018

I started my working life in the car business. I quickly came to the conclusion that people spend more time researching the purchase of a television than a car. In other words, people buy cars on emotion and looks. When engaging with business partners, do not connect based on first impressions. Business partnerships are marriages with a guaranteed divorce. Before you get legally married to someone, get to know them well.

Before You Merge or Partner

  • If you are thinking about merging with another business, try co-locating before actually combining the companies. There is nothing like pulling an 18-hour day with someone to determine your compatibility. It is much easier to unwind a shared location than a legal entity.
  • Make sure you have a partnership agreement that lays out the divorce in advance. If you cannot negotiate the divorce, do not get married (figuratively speaking, from a business perspective)! The agreement should clearly lay out how the company will be valued at any given time. That value will determine the amount of money one partner will need to buy out the other partners. Get a lawyer involved early on.
  • Consider buying life insurance on each partner roughly equal to the value of that partner’s share of the company. Set the beneficiary of the policy to the company or other partner. That way if something tragic happens, you can use the proceeds to purchase the partner’s share from their estate. 
  • When choosing a venture capital group, angel group or individual investor, check their references, both successful and not. Mark Suster wrote a blog on this subject that gives several great tips. It is definitely worth a read.
  • If you are thinking about bringing on a co-founder or other employees and granting them an equity stake in the business, make sure you set up a vesting schedule for that equity so that the new person earns their equity. Do not simply gift the equity. Many investors will require all founders in an early stage company to earn their equity via a vesting schedule. Sometimes the vesting is based on time and other times based on achieving milestones. There is nothing worse than bringing on a partner and then having to buy back the equity from the partner after they failed to do any work! The same holds true for investors if a founder walks away from the business early on yet holds significant equity in the company.

Take your time and do this right. You do not want to end up "married" to someone you just can't work with. 

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