You have agreed with a friend or colleague to start up your business idea.
You are caught up in the excitement and euphoria of the idea and planning of your business but agreeing a partnership or share structure? No one wants to argue or discuss ownership, spend money on agreements and haggle over a business that is worth nothing at the start.
You both have other priorities and it seems difficult to put a number value on a business that is not yet up and running. But if you don’t agree upfront how to structure your ‘arrangement’ and at least have your mutual intentions, outcomes and involvement in some form, you can end up in big legal battles with money and time that could have been better spent on your business.
Three problems with no upfront agreement
All new businesses have inherent value, and combined with the energy of the team and commitment they are willing to invest, its best to agree early how to address important items upfront. But what if you have no agreement?
1. Proving ownership
In the event of any dispute or disagreement, the issue of ownership of the products, business idea, clients, financial investment – can all end up being a point of contention and can be further escalated when relationships are at risk.
2. The longer you leave it, the more difficult it is
If you delay too long, it’s harder to agree on past and future contribution, business value and future ownership, among other things.
3. You may have a partnership and not know it
If you don’t have anything formal in place but have more of a ‘verbal agreement’ arrangement, (which often happens when friends or colleagues with a good business idea start out together), this may, in some circumstances, be considered a partnership even though you did not intend it.
If this is the case, and in the absence of any formal agreement, the law may consider it an equal split and it may be assumed everything is shared equally, include all profits and losses, irrespective of input.
Three problems with making a partnership agreement too early
Most people starting up a business immediately think they need to agree on a partnership arrangement. But this may not always be the best option. Here are three issues to consider:
1. Partners in a partnership share risk and responsibility
You, as a partner, have joint and several liability, with unlimited liability to creditors. This means you are liable for your partner’s debts whether you agree to them or not.
2. Ownership transfer may be difficult
You cannot transfer your ownership unless all partners agree.
3. You are still liable for all debts after you leave
All debts that were incurred or agreed while you were still in the partnership, with or without your knowledge, are still your responsibility until they are discharged or paid.
As a result, you may not want to commit to a partnership at the startup of your business, which is understandable.
So what can I agree apart from a formal partnership agreement?
A less formal arrangement but a good alternative to consider is a Memorandum of Understanding (‘MOU’). It’s a document that outlines your intentions, involvement and strategy for your business and may be a way to ‘test the water’ on any business and working relationship before entering any formal structure.
The MOU has no specific status in law but in the absence of any other type of agreement, and when drafted well, is useful and effective.
Three benefits of using an MOU
1. Testing a partnership relationship
It may be a good way to trial a business partnership and set out understandings of this relationship, common purpose and outcomes.
2. May minimize risk of disputes
As well as give some evidence of understanding and intent of working relationship and contributions of both parties upfront.
3. Gives you time to work out more formal arrangements
You may still be working on clarity of facts, certainty as to level of commitment, funding, time to document requirements properly, etc. An MOU can set out your understanding and gives some form of agreement about common purpose and outcomes in the meantime. You can later move on to a more formal arrangement of a strategic alliance, partnership or other business structure.
The most important thing to remember about starting a business with another person is to ensure you both have a clear written understanding upfront about financial and personal contributions, business strategy and the outcomes of both a successful and unsuccessful venture.
Whatever method you choose to reflect this, make sure it is clear, well drafted and it reflects the intentions of both parties. It will be one of the most valuable assets your business owns.