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What should you absolutely not forget to include in a business partnership agreement?
1. What Will Happen if it Doesn’t Work Out
This should be a given, but let’s talk about it for the sake of reiterating its importance. Any business partnership agreement should clearly outline what steps will be taken should the partnership go astray. People despise discussing this, but the reality is that we live in a world where disagreement happens and it’s best to have a plan in place in case it does occur.
2. Equity Valuation and Buy-Sells
Names, ownership equity, and how the business is going to be operated are always must-haves. However, most problems arise when there’s not a clear method for valuing the equity down the road, or when there’s no buy-sell agreement included. Always know how equity is valued should it need to be sold to or purchased by another partner, and don’t forget to properly fund your buy-sell agreement.
3. Legal Inclusions
While it’s important to include standard legal items, such as non-solicitation of your employees, confidentiality, and ownership of work product, one important thing to never forget is clarifying the business relationship. The Department of Labor errs against employers in situations where a business partner might be considered an employee, so including clarifying language is key.
4. A Vesting Schedule
One of the biggest mistakes I made in my company early on was the fact that my partners and I vested immediately. The was a problem after one year when my partner decided to stop working and took another job. I was left holding the bag to grow the company while he still had shares in the business. A typical vesting schedule has a four-year cliff. Be sure to set this up in the beginning.
5. How a Buy-Out Will Be Paid
In the event that a partner splits, it’s vital to determine how they’ll receive their fair share of the business. If this isn’t in writing, they could request all of their payout at once, and feasibly bankrupt the business. By determining a payout structure, you can ensure a clean, positive break-up.
6. Roles and Responsibilities
Roles and responsibilities should be clearly delineated from the beginning and in writing so there is no confusion, and to minimize or even eliminate conflict. It keeps everyone on the same page from the start and lets each partner go out and get done what they need to without question.
7. Operating Agreements
This is the foundation of the business that handles everything from A to Z. In most agreements, you should discuss what happens if one partner has health issues or wants out. Also, take consideration of voting rights and who is on the hook for what. All the key elements should be discussed and documented in the operating agreement. This is the prenuptial agreement for business partners.
8. Expectations for Hours, Vacation and Company Budget
Everyone has very different expectations for how many hours they should put in, how much vacation, and generally on what and where the precious company budget should be spent. Sit down with your partner and draw out what a year would look like for all expenses and time commitment with best/worst case scenarios. You will uncover some interesting discussion areas.
9. How Costs Will Be Shared
Most individuals enter into partnerships based on the fact that there could be a high return in the form of equity. Equity is fantastic, but the reality in accounting terms is that the individual who shoulders the most costs will in effect be the one with the greater equity. Cost sharing is an important part of equity sharing, and it informs how the pendulum of equity will swing over time.
10. What if a Partner Is Injured or Dies?
You have to think about a business partnership agreement as if it’s a prenuptial agreement. Even if you hope nothing bad will happen, you still have to prepare for the worst. Have steps in place in case an acquisition or a merger occurs. If a partner is injured or if the partner dies, there needs to be a solution in the agreement.
11. Non-Compete / Non-Disparagement Clauses
Unfortunately, business partnerships don’t always work out. In fact, sometimes business partnerships can go wrong and a former partner can abruptly quit only to start a competing business. The partner may also say nasty things about you or your business. Therefore, it’s very important to include a non-compete and non-disparagement clause in a partnership agreement to eliminate issues later.
12. General Expectations
Unexpressed expectations are equal to premeditated resentment. Although you can include conduct and expectations in a separate document, it should be a part of your partnership agreement. Otherwise, you could end up resenting your partner, and that’s not good for business. You need to be on the same page in terms of the goals you’re trying to achieve, even if you have your differences.