A lot of entrepreneurs thinking about start-ups prefer to have a partner or partners. After all, there's lot of talk about "building teams" and "hiring up," so it makes sense to have a partner with whom you can talk, right from the start.
Partners bring critical skills that deepen the young company's capability. They share a dedication to the idea, the customer, and the (growing group of) early employees.
And, it is true, the CEO's job, especially in a small, expanding company, can be both lonely and harrowing. Decision making with imperfect data is almost axiomatic in that position. So, once again, having a partner to share those decisions with should make a lot of sense.
Right?
Well, yes.
But, the one of the worst decisions the entrepreneur can make is the quick, founding handshake with the comment, "Let's just each be 50-50 owners."
What's wrong with that? Isn't 50-50 a time-honored American tradition?
Here are some examples of what goes wrong:
1. One partner backs out, but expects to retain his ownership.
In a lot of early stage companies, documentation of "the deal," and especially the "buy-sell" isn't done, or is done poorly. Then, for any number of reasons, one of the founders decides to leave. In the absence of a stated arrangement that really can be implemented, this gets contentious. I have seen this many times. In one case, a buy-sell was in place, but the burden was so onerous on the company that it made no economic sense. In another, the departing partner's issue weren't settled for several years, during which time the calls and inquiries are never ending.
2. One partner has different economic "requirements" than the other.
After the initial enthusiasm starts to fade, one partner with half the equity but a higher compensation package than the other will be a thorn in the side. The usual solution, more for the 2nd partner, often begins to put a strain on the cash. I once saw a company, one of whose owners had, I think, three or four "company" cars. Needless to say the levels of cash compensation for the other partner were too high for the company to support. (Wyoming: "Lotta pigs in that trough.")
3. The contributions that one partner makes over time far outweigh the other and this becomes a problem for the other partner.
It is hard enough in early companies to have to deal with the reality of company growth outstripping the capabilities of early employees. It is even harder if this early employee is your 50% partner. This issue is virtually guaranteed in a 50-50 deal. (Investors will often have a CEO/founder's shares "vest" over several years so that if something doesn't work out, the shares can be re-allocated.)
4. As time passes and the company grows, time spent in meetings is less and less useful, and more focused on partnership issues rather than business opportunities.
The flip side of having a trusted colleague is that if positions diverge, stalemates can - and will - create endless discussions. Employees see it; customers will feel the effects. Opportunities get lost.
So, what's the answer?
Underlying each of these examples is the idea of stalemate - neither party can make a unilateral decision. Because of that, each of these problems that could have been resolved, (hopefully with sensitivity and good will) become insurmountable and can jeopardize the basis of the business itself.
I never do 50-50 deals anymore. (Yes, I did. Future essay: Whoppers I've made.) If the economics of the deal dictate ownership, fine. More often they don't. It's a hard discussion, but better on the first day than later.
Can 50-50 deals succeed? Sure they can. In effect, partners can agree on tie-breaker mechanisms and buy out agreements and cover all of the bases. But, if the end goal is to share equally in the reward, that can be done by agreement. Maybe that is the way to a solution, rather than through 50-50 equity.
In truth, partner turnover, whether 50-50 or not, is a gut wrenching experience. Leadership in a start-up is an evolving process, and turnover is going to happen. Management of the process, in the end, is easier with clear authority.
One of the few things my father said that I remember is that an honest man is willing to put his words in print to assure there is not mis-understanding and he is willing to sign it. Start with an agreement that clearly states the intentions and the expectations. Make sure there is an agreeable way out for everyone involved if they want to go antoher direction and document that too. Lastly remember that you can outsource just about anything today and avoid have to do either of the two things mentioned above. None of this is as easy as it sounds but if you want a lasting business relationship that may need to transcend this one deal, you will want to do your best to accomplish the first two if you cannot get the help you need via the third.
Posted by: Bob Bascom | April 28, 2006 at 04:20 PM