Are you planning to start a business with a friend or family member? If so, you are in good company. About half of all startups today are organized among friends, family members or spouses. It makes sense too because in today’s highly competitive business climate, startup entrepreneurs want to pursue their most ambitious goals with people they trust.
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So why is it that the longest, most emotionally wrought letters I get from business owners seem to involve partnership battles with “former” best friends?
Underlying every solid friendship are expectations of a higher level of loyalty and understanding than is common among everyday work colleagues. Friends count on their business partners to be supportive when family obligations interfere with business deadlines. Friends also expect their business partners to defend their actions to co-workers, customers, investors, and vendors even if all reason says otherwise. When our friends let us down, resentments can simmer in a profound and debilitating way.
Here are five ways startup misunderstandings can spiral out of control.
No. 1: Unmet expectations. The typical startup business will take a lot more time and money to become profitable than anyone ever expects. This isn’t necessarily a sign of poor planning, but a reflection of the routine adjustments entrepreneurs have to make as they learn more about their customers and competition.
Nagging problems, however, arise when one partner can commit more time or cash than the other partner. It is these commitment imbalances, especially in 50%-50% partnerships, that tend to create the most emotionally-draining dissention.
The antidote to partnership commitment squabbles is to acknowledge at the time of startup that no partnership is ever a perfect balance. Pressuring partners to commit more money than they are able will create undue stress on the friendship and the business. Also discuss how long each partner can go without a salary before having to look for outside employment. If one partner can commit more time and money than the other, simply agree to add to the lead partner’s ownership stake.
No. 2: Work style conflicts. Business partnerships are like marriages. Since you will spend a lot of time together with your best friend business partner, you should explore work style compatibility. What’s fun at a sports bar may not be welcome at the office. How do you each feel about vacations, overtime or just taking time off on a whim? Are you a morning person who likes to work in a neat and quiet environment? Does your friend work the same way? Talk it through now.
No. 3: Business strategy disagreements. When I meet with new startup partners they tend to be well aligned to the grander goals of an organization, but rarely have worked through the nitty gritty details of how to achieve these goals. The process of developing a formal written business plan and financial projections is a good test of partnership productivity. If you can’t agree on how a company will function and how it will be funded then the decision is easy. Don’t partner.
No. 4: Spending conflicts. One of the most common areas of disagreement is spending authority and budget priorities. One partner's definition of a necessity may seem like an excessive luxury to another. To navigate these issues and prevent unwelcome surprises, set specific policies regarding the authority of any partner to write checks, offer customer discounts, incur debt, buy equipment, or charge expenses to a company credit card.
No. 5: No way out. Today you want to work in a startup; tomorrow you may not. The reasons for a sudden career plan change are more likely to be influenced by family issues such as an illness, a new baby, a divorce, a spouse’s lay-off or sudden family relocation, than concerns about startup viability.
When happens when one partner wants to sell out, quit or reduce involvement in the business? The best time to negotiate answers to complex breakup issues is before any money goes into the business checking account. Hire a lawyer to help you craft two must: have documents: a partnership agreement and a stock purchase and sale agreement. Don’t start-up without them!
Here’s one extra tip before going into business with a best friend. Share credit histories. If a prospective partner has a low personal credit score or filed for personal or business bankruptcy during the last seven years, your new company will be disqualified from getting bank loans on the best terms possible. No matter how uncomfortable the conversation, the trick to any successful business collaboration is candid disclosure of issues that might interfere with productive business building.
Susan Schreter is an entrepreneurial and small business advocate; a 20-year veteran of the venture finance community; and a university educator in entrepreneurship. She is the founder of www.takecommand.org, a community service organization that offers one of the largest centralized databases of startup and small business funding sources in the U.S. Follow Susan on Twitter @TakeCommand.