In the ever interesting world of startups and innovation, it is easy to meet a person and be intrigued by them – either by their crazy intelligence, or skill set or the promise of relevance they hold.
You, a guru in business development, go for a fireside chat and sit next to a promising freelance software developer. Both of you chit-chat throughout the main chat (of course, on serious matters such as why the facilitators on the chat are giving fake answers to real questions and so on). At the end of the fireside chat, you both realize that you both have a united burning desire to provide real-time and real-life advice on business development. You, then, both sigh and say ‘Wish we could make that happen’. Suddenly, one of you has a light-bulb moment and says ‘We can do this together!’. And the other person buys into the idea. The next day, you both have a name, a logo and a Slack channel.
That’s a fairly typical beginning for a number of tech startups. It is also a fairly dangerous beginning.
It is understood that many businesses start off without a real legal structure mostly because the cost of incorporation may seem discouragingly high for an entity that has not started yielding profit (by the way, check out a super fair deal to incorporate your company here). It is however advisable that even before getting incorporated and putting legal structures in place, you and your potential co-founder sign a partnership agreement.
What’s interesting about a partnership agreement is that although it’s not a document registrable at the Corporate Affairs Commission, it is still recognized as a valid agreement and can even be produced at banks or the government revenue service or other places requiring some sort of corporate documentation.
One of the obviously most important reasons for founders to sign a partnership agreement is to specifically outline expectations and exclude some default presumptions (called ‘common law presumptions’). For instance, except you both agree otherwise, it is presumed that all profit and loss are to be shared equally, or that when one of the partners dies, the whole partnership is automatically dissolved. Stuff like that.
Another solid reason why you should create that partnership agreement is that it comes in handy in the event of a conflict. Right now, it may seem really ludicrous to think of a conflict erupting – everyone on the team is cool. But history laughs and says, ‘It is very possible and in fact, very likely’. A partnership agreement is therefore not just used to manage expectations but to also contain conflict.
A partnership agreement does not have to be in a stringent format. Simple, take a sheet of paper (or open a new tab for Google docs./Quip/Dropbox paper/ whatever else you want to use) and agree on the following:
- Amount of capital contributed / to be contributed
- Sharing formula for profit and loss
- Ownership of the partnership properties (remember that digital assets also apply here)
- How your conflicts should be resolved
- How your partnership should be dissolved
- How the partnership should be managed (that is, management of the partnership)
- How new partners can come in
- Other basic bio-data info like Your names, the nature of business you want to carry on, name of the partnership, place of business
…and so on.
You can then shake hands when you’re done. You may also want to run it by a lawyer to assess your agreement with their important lawyerly eyes.
Finally, plan to incorporate your business in the long run.