Unite for success — or break up
Partnerships need nurturing, communication
Some of the world’s most successful businesses were built by partnerships. (Think of Hewlett and Packard, Jobs and Wozniak, Lazaridis and Balsillie). But not every partnership works out (see Jobs and Sculley, Zuckerberg and Saverin, Lucy and Desi).
Jeff Dennis knows all about the dark side of partnerships. The Toronto entrepreneur, who trained as a lawyer, started a business with a friend. “We built the business together, we worked closely together,” he says. “I never thought the relationship would break down.”
Then came a day when Dennis felt the company was headed in directions he didn’t support. He wrote a note to his partner to trigger the pair’s shotgun clause — an agreement made long before, that either partner could end the partnership by naming a price at which they would be willing to sell their shares or buy their partner’s.
“We had been through hell and back together, in both our business and personal lives, and I thought we would just work it out,” Dennis says. Instead, his partner changed the locks, packed Dennis’s office gear in boxes and dumped them on his driveway. While Dennis grieved the loss of both the partnership and the friendship, he was grateful they had agreed to the shotgun clause. Without it, unwinding a partnership gone sour could have been a frustrating and costly ordeal.
Dennis shared this story at a small-business seminar at the Toronto Region Board of Trade, to help others understand the importance of putting partnership agreements in place early in their collaborations.
“Partnerships are a necessary evil,” he says. “In a startup, you’re always missing things: people, talent, resources.” Partners help fill in the missing pieces. But no partnership lasts forever. Even if you never fall out, Dennis notes, your business can be disrupted, even destroyed, by a partner’s divorce, death or disability.
Dennis, who is “entrepreneur in residence” at the law firm of Fasken Martineau, presented with Fasken partner Tracey Hooey, an M&A specialist. They offered the following tips for partnerships:
Vet potential partners to determine your alignment in terms of contribution, values, goals, expectations and timelines. Chemistry matters: “If you have a bad feeling about these people, trust your gut,” says Dennis. “It’s usually right.”
Be careful about what form of partnership your business takes. Should it be a partnership, a limited partnership, or a corporation? “Make sure you understand the implications of the form you choose,” Hooey says.
As early as possible, reduce risk by defining the roles, responsibilities and powers of each partner. Who will earn what? Who can write cheques, and for how much? Who can hire people? Who can bind the company to contracts? Who can set strategy, and how? Who can decide to bring on new partners/ investors? Do major decisions require a majority vote, a super-majority, or unanimity? Who has the right to access corporate records and information?
Understand your company’s financial future. What are its initial and anticipated capital requirements. How will they be funded? Who will determine the timing and terms of any financial deals?
Create structures that support communication. Use annual retreats, quarterly planning meetings, budgets and performance reviews to bring the partners together and reinforce their shared mission.
Sometimes partnerships aren’t equal. Partners may own different quantities of shares, depending on when and how they joined the company, or what resources they brought to bear. Make sure you quantify the contributions of each partner, whether they be financial, intangible (e.g., intellectual property), or sweat equity. Agreements should also identify and defend the rights of minority shareholders to make or approve decisions made by a majority shareholder.
Control who future partners will be. Your agreement needs to restrict the transfer of your partners’ interests without your consent, whether it be a transfer of assets by statute (e.g., death or disability), through a pledge of interest (e.g., to a bank), or an indirect transfer due to a change of control of your partner (if it’s a corporation).
Restrict what your partner can do. Your agreement should include noncompete clauses, prohibit solicitation of customers, suppliers or employees, confidentiality agreements and mechanisms for dispute resolution.
Anticipate exits. “A time may come when you or your partner no longer want to be part of the business,” Hooey says. Determine how shares can be transferred, who gets first call, and how they’ll be valued. Ask your lawyer about puts and calls, shotguns, piggybacks, dragalong rights, and other tactics for ensuring shares end up in the right place.
Put everything in writing. “Crystallize your intentions and expectations. Address current and future needs, and the perspective of a future investor. Hope for the best, prepare for the worst.”