If you are reading this blog, chances are that you are working on a business project or trying to find a new one. In a previous post, I argued that carefully picking your associates can be decisive for the success of your company. And while we are used to writing formal partnership agreements when we register a company, we rarely take time to discuss the association while the company still only has a codename.
I think that's a mistake, since this can be the perfect time to define the perimeter of a venture, and will not only save you some time and sweat the day you'll decide to turn this business project into a company, but will also help you check if you agree on the terms of your association.
I am currently working on a hobby / side project with a guy I've met via a very close friend of mine. Everything is going just fine so far, and I intend it to stay that way.
To make that happen, I decided not to rely on luck only, and began drafting what will soon be our pre-partnership agreement. I like thinking of it like a partnership agreement spoiler: not comprehensive, but clear enough so we can refer to it in case of doubt.
Here are the chapters I put in the pre-partnership agreement.
What is the agreement about
That's the introduction of the document. This first part describes why you are writing this agreement, what's the approach. Don't let just one of the party write this paragraph by himself. All stakeholders have to participate in its elaboration because it's the foundation of the act. Everything else is going to be built on this first section.
The following questions can help you to get started:
- Why are you writing this document?
- What does it contain?
- Who are the stakeholders on this project?
What's the project?
This one seems (is) obvious. Don't write down the whole strategy or business plan, just a short narrative about what this project is about. What is the goal, who does it serve (customer target) and how? In just a few lines, it should be descriptive enough to leave no doubt about what your team is building.
People in the project
This section could be split in three.
First, talk about skills, abilities, and experience.
What are everybody's backgrounds?
Second, list everything material (tools, equipments, service, garage, customers, money, prospects or lead).
Lastly, aggregate parts one and two, and add a description of everyone's role in the venture.
Agree on a set of points you want to specify for each stakeholder.
- Name, First name
- Bringing to the project
- Role in the project
- In charge of
- Will report to
- Will work at least xx hours per week on the project
How do we make decisions
Now, this is really important. Even if you're just two associates at the moment, you have to write down the process of decision-making so you won't get stuck on details.
There's no right process. You have to pick one that will work for you and it will most likely depend on the way you work together.
You could designate one person responsible for deciding when the time for debate is over. This person would probably be the person who'll take the CEO position when the actual company starts. Or you can share refereeing power, by allocating certain categories to a person. Technical dilemmas would then be arbitrated by the future technical director, while financial ones would be by the future chief financial officer.
The democratic way
If you are an odd number of associates, you could go with the democratic way and vote to settle mired situations.
Repartitions of the shares
As I said in the intro, the ultimate goal of this kind of project is to turn as a company sooner or later. So you'd better think upfront about how you're going to split shares in this future business. Keep in mind to go straight to the point. You're not writing a business plan and simulating financial numbers here.
If you have no idea about how to do that, you can simply write the name of the partner, the percentage he'll own in the future company, the conditions, and one short sentence to justify the whole.
The exit: What if something derails?
In your actual partnership agreement, you will have the liberty to describe exit cases as finely as you want. In this document, all you have to write about is the way someone can leave the project. Describe the conditions, what she will have to hand over and what she will get.
For instance, if she leaves before the company is created but her work will still be used, maybe she should have some shares anyway. Or maybe you'll pay her a predetermined amount of money when the company starts to do well out of her work.
I highly encourage you to set an expiration date on this document. It's beneficial for the group to review this founding document from time to time and, if needed, to update it.
I know it's easy to sound distrustful to your associates when you suggest to work on a pre-partnership agreement. You'll have to defend your point and use pedagogy.
Don't renege. Explain why it's important for the future of the team and how it will reinforce the cohesion by verifying that you all are aligned regarding the terms of this association.