Imagine that you and your colleague, the lead programmer you have worked with for the last 4 years at the bank, have come up with something unimaginable that the market desperately needs. You chose a solid business model and strong people joined your team. Your idea has taken on tangible shapes, and the business is practically starting to generate revenue.
If you completely disregard hygiene rules, being toxic, inconsistent, selfish, and deceiving others, you won't reach any profit at all. Let's imagine that everything is going well, and you are all great, with serious profits just around the corner. That's when the castles in the air, carefully built by each team member, come crashing down. The first thought he was the leader and would take 80% of the profits because he sold the car, and the whole team lived on his money in the beginning. The second thought that the two founders would each get 50% since he was the programmer and created the application that everyone is currently profiting from. The third and fourth thought they would earn a share in the business as soon as the money started coming in since they worked almost around the clock and earned significantly less than they could have at the bank.
As a result, the business is on the brink of collapse. And all of this could have been avoided with proper agreements made upfront. How? Through communication and joint preparation of a partnership agreement.
A partnership agreement is the foundation of relationships and the basis for preparing necessary legal documents. I will not touch upon legal aspects in this article, as the main thing is to come to an agreement; the necessary documents can be handled by lawyers. From my own experience, I will share what can happen if business hygiene rules are not followed. After all, the primary aim of a partnership agreement is to remind you of the agreements. If something starts going wrong, you can always pull out the document and remind your partners of what you agreed upon. Usually, this is sufficient.
Everyone has surely heard that you shouldn't start a business with friends, you must agree upfront, you shouldn't hire your friends as employees, etc. Well, I have made all these mistakes, and I can say that it's invaluable experience that I would like to share with you.
Dima
We were best friends. We studied together at the physics and mathematics lyceum, went to competitions, attended concerts, and listened to Metallica. He enrolled at MIPT, while I chose MEPhI. During all that time, we kept in touch, enjoyed each other's company, wrote songs, and grilled shashlik at the dacha. After graduating with distinction from our institutes, we both entered the same graduate program. However, we didn't have any money. Neither of us planned to pursue a career in science. Sitting at my dacha, contemplating how to make money while staying free, we decided to venture into business. A month later, we registered an LLC, and at 22, I became the CEO. We started selling our expertise in implementing electronic document management systems to small businesses, knowledge we gained while working in our last years at the institute. More precisely, these were Dima's skills, as I studied more and worked less during my final years.
The first year went well, but the second brought us the 2008-2009 crisis and a sharp decline in demand for document management, especially among small businesses. Thankfully, we had a programmer and an SEO specialist on staff, and we completely shifted to website development and internet marketing. During the crisis, advertising thrived, and we received plenty of orders. But then one day, Dima came to me and said, 'Kolya, I registered my company; we are parting ways.' It was a shock for me. It felt like a beloved girlfriend saying, 'Kolya, I've found someone else; let's break up!' Arguing was pointless. We handled everything civilly and without major drama. We sat at my house, wrote down what belonged to whom. Now Dima has a successful business that extends beyond the country's borders, and I'm very glad that we still remain friends.
Summary: five people gone from nine, five major clients lost from eight, and the entire internet marketing division gone, leaving only website development.
Output: we rarely discussed what was important to each other. I didn't know that for Dima, it was crucial to be the leader, to be the face of the brand, and fully responsible for his domain. If only we had talked earlier about where we were headed, how, and in what partnership framework, there wouldn't have been a breakup. We continued to communicate as friends, but we needed to communicate as partners. Communication is key to everything.
Sasha
After my "divorce" from Dima, I was fortunate to work with a wonderful web studio, led and co-owned by Sasha. We shared an office together; they had 10 people, I had 4, and we started working on joint projects. I sold and managed the projects. The resources of developers and designers were essentially shared. I had programmers working on websites using MODx, while they used Bitrix. I wouldn’t say we were best friends, but we regularly organized joint outings and corporate events. At that time, I believed we were good partners and understood each other well. Together, we completed several interesting projects: an e-learning system, a video conferencing system for the Ministry of Education of the Moscow Region, and an online store for the largest supplier of souvenir products in Russia. In addition, I began working with Moscow, providing support services for their websites. This consumed 110% of my time, and I had to close the MODx website development direction. I thought we were running one business that included both support and development, believing they were my partners, and that soon we would be making decent money to share. However, after talking with Sasha, I realized we were actually two independent organizations. Both companies were growing, and one office was no longer sufficient; we parted ways.
Summary: downsides of the website development direction, upsides of the growing business in information system operation.
Output: again, there was a problem of miscommunication; my expectations differed from reality. Additionally, we never discussed anything in advance, which led to minor conflicts.
Artem
I was friends with Artem; we took photos together and were active members of the photo club. He had his own established business, and I had mine. I considered Artem a very cool manager. I truly envied him because he had a steady source of income where he did almost nothing, aided by his wife, and had a couple of programmers and a sysadmin working remotely for him, generating a decent profit. At that time, my business was growing very quickly, and I needed help. He offered it to me "as a friend." He said he didn't need anything, that he had money, owned his own company, and wanted to work together and help me. Of course, we didn't discuss anything upfront. A year passed. The company had over 30 employees. The turnover was around 50 million a year. Then we were visited by the satellites of rapid growth—cash flow gaps. We took on new obligations, but we weren't receiving the money for them since payments were delayed by up to a year. There was indeed a crisis in the company at that time, and I felt responsible for it. We couldn't pay salaries on time. It was very painful and hard. The burden of financing salary payments fell on me, and I did what I could—my friends know. In the end, I left the business, and Artem became its general director. I stepped away from operational activities. I genuinely believed that Artem could rectify the situation, calm the people, and diversify the business. But things turned out differently. Artem, along with a few people, created a new company without the bloody state contracts, without problems, and unnecessary burdens. It became yet another small established business capable of working steadily and generating a constant income.
Summary: minus 15 people, minus the development department, minus the entire management team, and I was left with an almost ruined business and a small spin-off with our development inside.
Output: my trust, egocentrism, and rosy glasses did not allow me to recognize the clear symptoms. I also didn't see that the team really just wanted one thing—money here and now. I was building a business for the future while they were focused on the present. We had vastly different interests and again no agreements formalized anywhere.
Ivan
While working with Moscow and their portals and information systems, I have always dreamed of creating something similar and equally significant for other areas. I met several times at exhibitions with governors and their deputies, proposing our technology. At that time, we developed a platform under the code name 'AIST' based on the Java Spring framework and various other popular Java wrappers, for which we obtained certification. In 2013, we successfully piloted the implementation in Dubna, launching the automation of some government management processes. Importantly, we consciously funded everything ourselves. A few months later, we received a letter of gratitude from the head and an award from the governor. However, there was no money for implementations in the city at that time. I always felt like a technician who couldn’t sell, especially to officials, but who could execute projects well. My friend Ivan decided to support me, and together we created a company where I contributed the technology and he invested his strength, experience, and time. Together, we implemented a large project in one of the regions. It was a nerve-wracking experience, and a lot of energy was spent, including some normal workplace conflicts between us. Personally, it was very difficult for me to work with Ivan due to our interpersonal differences. Both strong leaders with our own opinions. We blamed each other for failures and rarely celebrated our victories. Eventually, I gave up. The project was completed, and I started working elsewhere simultaneously. It was time to part ways. This time everything was executed flawlessly. We sat in a restaurant on Novoslobodskaya, looked at the paper we had signed a year ago, took out the management report, and calculated who owed what to whom.
Summary: a minus share in the company, plus a nice cash flow, and we remained friends.
Output: for the first time, we did everything right. We signed a partnership agreement. In it, we detailed who had what area of responsibility and what each would receive in the event of leaving the company.
Main Findings
If I had to sign a conceptual agreement on the shore before starting a joint business each time, I would have faced significantly fewer problems in life. Much later, I listened to a lecture by Gora Nakhapetyan at Skolkovo about tandems and partnerships in business, and I read David Gage's book 'Partnership Agreements: How to Build a Joint Business on a Reliable Foundation.' My experiences only confirm that there are several mandatory sections in a partnership agreement that should not be neglected.
Next, I will describe the main sections of a partnership agreement, using the partnership agreement from David Gage's book as a basis. I will also outline the key questions I recommend asking each other while preparing the agreement, so it will be easier to draft the agreement later.
Guide to Preparing a Partnership Agreement
Preface
- Why do you need a partnership agreement?
- What was before you decided to draft it?
- What might change after it is drafted?
- How often will we review the partnership agreement?
Section One: Business Aspects
1. Vision and Strategic Direction
- What is our business?
- What core value do we bring?
- What are we focusing on?
- What do we want to achieve?
- What does this mean for each of us?
- What problems do we need to solve?
- What criteria do we have for achieving the goal?
- What will the exit look like for each of us?
- Will we acquire other businesses?
- Will we grow organically or not?
- Are we ready to join a larger business?
2. Ownership
- Who gets what shares in the business?
- Who contributes what (money, time, experience, connections, etc.)?
- How is the company's valuation determined?
- Is the option holder an owner and a partner?
- What rules apply for selling shares if someone leaves the company (consider different scenarios)?
- What ownership goals are we pursuing in light of achieving the overall goal?
- What are the rules for the option program, if any?
- Who manages financing in the event of a cash shortfall?
- Under what rules?
- How are contributions from new participants made?
- Who has what preferences?
- Who represents us in negotiations with investors?
3. Operational Management: Positions, Roles, and Principles
- Who is responsible for what and what do they do?
- What are the clear boundaries of responsibility?
- What is the organizational management structure (board, CEO, voting procedures and decision-making processes)?
- What principles will guide us in building the management structure?
4. Employment and Compensation
- Who works how many hours?
- Is side work or freelancing allowed?
- What needs to be agreed upon with partners, and what does not?
- Is working for a competitor allowed if someone leaves the partnership?
- What are the salaries and other payments for each person?
- How are bonuses calculated?
- What privileges does each person have (e.g., use of a company car)?
5. Strategic Management
- How can owners influence decision-making in the company?
- Where are the boundaries of responsibility?
- What issues fall within the competence of the owners in the board of directors?
- What is the frequency of meetings?
- What forms of strategic management do we utilize?
Section Two: Relationships Among Partners
6. Our Personal Styles and Effective Collaboration
- What are our DISC typologies?
- What are our Myers-Briggs typologies?
- What is each person's management style?
- What fears do each of us have?
- What are each of our strengths?
- What are each of our weaknesses?
- What is the best way to communicate with each person and what persuasion methods to use?
7. Values
- What is important to us right now?
- What is important in the long term?
- What is each person's balance of self-family-work?
- What personal values does each person have?
- What are our common corporate values?
8. Interpersonal Fairness Among Partners
- What contribution does each of us make to the business?
- What will change over time?
- What will the partnership and company provide for each of us?
9. Partner Expectations
- What do we each expect from one another?
- What do we expect from ourselves?
Section Three: The Future of the Business and Partnership
10. Developing Rules of Conduct in Unusual Situations
- What will happen if we experience incredible success?
- What will happen if we face significant losses?
- What will happen if we receive an offer to sell the company earlier than the planned valuation?
- What will happen if one of us becomes seriously ill?
- What will we do in the event of a partner's death?
- What will we do if one partner enters into an interpersonal conflict with another partner?
- What if a partner faces a family crisis or personal problems?
- What will happen if the founder decides to exit the business?
11. Conflict Resolution and Effective Communication
- How will we resolve conflicts?
- Where is the boundary between workplace conflict and interpersonal conflict?
I highly recommend that before entering into a partnership in a new or existing business, everyone should sit down together and ask each other these or similar questions. Based on the answers, a partnership agreement can be formed. I reiterate, this is not a legal document. It will be unique for each business. The questions above are just my examples. And remember — communication is key.
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Source: habr.com
