You’ve got a great idea and someone else who likes it, too. That other person may be a friend, colleague, or even a family member. The two of you grab coffee to talk about it, and the idea grows. You both see a business opportunity.
Fast-forward a few weeks. You and your prospective business partner are getting really excited. You’re taking notes and drafting projections. You’re designing a website. You’re almost up and running. Keep going! … But maybe slow down just a little. Having a business partner is extremely rewarding when it goes right, but immensely stressful if it goes wrong. To get your partnership on the path to synergy and success, you have to talk about the following upfront:
What are each partner’s responsibilities and how will the roles evolve with the business? Who signs the checks? Who pitches to prospects? Who makes which decisions? Whether you divide and conquer or tag team different functions of the business, leave nothing up for interpretation. During the startup phase, it’s especially important that the two of you work efficiently and know what the other is focused on, in the day-to-day and in the big picture. Don’t be afraid to get formal and draw out an organizational chart. It will be one of the key pieces to understanding your business both strategically and tactically.
When it comes to compensation, there are no handshake deals allowed. Agree to a clear compensation structure and make it a legally binding contract. This is the time to put emotions aside. Be logical, be reasonable, and be honest. You’re both putting your livelihoods on the line and you both need to make money to support yourselves and your families. There are a lot of fuzzy intangibles in business, but money is not one of them. It’s the measurement for everything from salary to bonuses to distributions and expenses.
Early on, keep an eye on whether your compensation structure supports your business model. For example, if two partners are taking low salaries, financial success for the business on paper in year one might not translate to growth if one or both partners will need a significant increase in salary in year two. If both partners are taking less than market rate in compensation, ask yourselves, “Does the business model work if we were to be paid market rate?” The answer will be telling as you build out infrastructure.
When you hear the word “purpose” in business, your mind likely goes to establishing your company’s mission, vision and values. These are all important, but purpose also carries over to your own interests as business owners. Why are you risking it all to be an entrepreneur? What do you want out of being a business owner?
Someone who wants to grow and scale a business will work and lead much differently than someone who wants to run a lifestyle business. You and your business partner may have notably different motives, and that’s fine as long as you align on expectations. Your purpose doesn’t necessarily need to be esoteric, either. You can be in business to make money and work for yourself while still creating an authentic and uplifting brand identity for the business.
Going into business brings risk and everyone has their own risk tolerance. Naturally, risk is tied to money. Risk can also impact reputation, which is a big part of being an entrepreneur. Business partners need to know what risks they are taking on and what additional risks they’re willing to take on as well as how the possible outcomes of the business could impact their personal finances, short-term and long-term goals, and the perception of them as individuals in their professional and social circles.
If one partner is ready to spend company resources while the other is trying to save every dollar, things can and will get uncomfortable between the partners. Employees may also begin to feel like they’re caught between competing directives. There are other areas of risk to consider, too, such as business banking, borrowing, hiring, how to handle company expenses and considering which insurance policies to carry.
Realize it or not, from first whiteboard session to first client signed or first product sold, the relationship you’re building with your business partner is your company culture in the making. So, consider how you want the environment to be when more people—your first hires!—join the movement. Does your company aim to create, compete, control, or collaborate? This competing values framework comes from widely respected finance professor Anjan Thakor at Washington University in St. Louis. Read more and learn the quadrants in which you and your partner jive and thrive. Be deliberate, be decisive, recognize each other’s efforts, and most importantly, celebrate every WIN along the way.
The nature of two (or more) humans bringing different perspectives will either break a business partnership down or build it up. Oftentimes, honest communication is the difference between the two. Initiating the discussions above, rather than avoiding them, will help you work toward a successful venture together.
By Andrea Steinbrenner, Chief Operations Officer, Exit Consulting Group