I have started a number of businesses in the past and a few have had partners or when the business was acquired I instantly had them. Which is why when I came across this article from OnStartups about important questions that co-founders should ask each other I had to share and provide some perspective. Here are the 10 questions from the post:
- How should we divide the shares?
- How will decisions get made?
- What happens if one of us leaves the company?
- Can any of us be fired? By whom? For what reasons?
- What are our personal goals for the startup?
- Will this be the primary activity for each of us?
- What part of our plan are we each unwilling to change?
- What contractual terms will each of us sign with the company?
- Will any of us be investing cash in the company? If so, how is this treated?
- What will we pay ourselves? Who gets to change this in the future?
Dharmesh offers his own perspective on each of these questions on his post but I would like to take each on and give you my own. I always say when it comes to partnerships to “start with the end in mind” and these 10 questions center around that statement. Let’s get started…
How should we divide the shares?
This is about ownership stake and control. You can do this from the amount of money put in if you are all starting at the same time or if someone has started the company first and is putting most of the upfront cash in this may be a different structure. You will have more shares since you are a partner and taking almost the same risk as the founder.
How will decisions get made?
I going to quote this from Dharmesh “This is often tied to the number of shares (from #1 above), but not necessarily. You can have voting and non-voting shares. You can setup a board. You’ll need to decide what kinds of decisions get made by the board, and which ones don’t. Common areas to address are decisions around capitalization, executive hiring/firing, share issuance (dilution) and M&A.”
What happens if one of us leaves the company?
This is where I mentioned that you need to start with the end in mind. People will eventually want to leave for some reason or another. You need to work with an experienced attorney to put together a solid operating agreement. More on that one later in this post.
Can any of us be fired? By whom? For what reasons?
We all can be fired. Just because you a co-founder doesn’t mean you get to keep your job as the company grows and changes. You need to have mechanisms in place to evaluate this and handle an exit in terms of a termination, a buyout or a change in responsibilities.
What are our personal goals for the startup?
This is probably the most important question of all and it will change over time. Life gets in the way, people. You should make sure in the beginning that you all want to build a certain type of business and are willing to commit to the hours to meet that goal. If two partners want a $100 million firm in 5-7 years and you want a lifestyle business that does $500K then you all need to seriously consider going into business together. But life happens and will get in the way. People get married, have kids, have family issues and so on. This can change perspective and priority so a few years down the road, two partners are still working like crazy and the third one has checked out mentally because they need to deal with problems at home. You need a solid operating agreement with performance based metrics so things can adjust organically or someone can exit if that is the only remaining choice.
Will this be the primary activity for each of us?
If you are going into a business with other people you all better be explicitly clear how much time is dedicated. Is this a business that is part time for everyone? Is this a full time, quit your job, build a startup job? You don’t want a few partners working full time for no salary and other partners keeping their day job while getting all the upside once it starts to become a success.
What part of our plan are we each unwilling to change?
This is about the mission and goal of the company. In almost every case, what you start out to be with your initial plan is not how you end up so if one person is determined to build a technology platform and you must shift and be an e-commerce provider, there are going to be problems. Talk about this ahead of time.
What contractual terms will each of us sign with the company?
Most likely there will be a partnership agreement along with a shareholders agreement and an operating agreement that includes non-disclosures and non-compete clauses. It should protect you if another partner decides to leave and vice versa. It is not meant to be evil but it is to protect the business that was started and those who chose to continue on with trying to make it a success.
Will any of us be investing cash in the company? If so, how is this treated?
Usually, cash is invested in the beginning as paid in capital as part of the shareholders agreement. Anything beyond that should be treated as either a reimbursable expense or a loan to the company. In the event that a serious amount of money needs to be invested then the stockholders agreement will need to be renegotiated. This can cause all kinds of issues if one partner has some cash personally to invest and uses it to gain more control.
What will we pay ourselves? Who gets to change this in the future?
This is something that should be mapped out in the operating agreement and should be for the co-founders something that the board decides and must approve. This also goes to the issue of having a diverse board that is independent and has an odd number of people to break a tie. Also, a compensation committee should be formed to analyze whether performance goals and milestones are being met in order to justify the pay increases.
Got some thoughts or feedback or experience in this area? Please leave a comment.
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Tags: Dharmesh Shah, onstartups
Posted in Entrepreneurs, small business | 4 Comments »
