There are some huge benefits to taking on partners at a startup. Partners may help you make better decisions, move faster, expand your resources, divvy up the workload, and prevent emotional meltdowns. But there are plenty of pitfalls to partnering, too. Here are some things to consider.
How good is the fit over the long-term? It may be a great idea to partner with someone who provides a skill set you don’t have – and that will be critical to the business over the long term. Maybe one of you loves product development (e.g. design, creative, tech, editorial) and the other is more “business” oriented (e.g. operations, finance, marketing, sales). But taking on a partner to fill a short term need can come back to haunt you later. I’ve seen people take on partners just because they can help build a website for free, although technology was not a core element of their business. I’ve also seen people take on partners who bring startup capital to the table, but not much more. After the short-term value expires, things get messy. You might find yourself doing all the work, while your partner doesn’t pull their weight. Worse yet, your partner might insist on being involved day-to-day, despite being incompetent. If you’ve got short term needs, see if there are other ways to fill them. Maybe an advisor can help. Maybe you can hire a consultant or vendor, and tie their compensation to the specific value they’ll provide – and when they’ll provide it. That could even include equity, but if that’s the case, be sure to vest it (more on this another day).
Do you have the same goals? Talk through what you’d like to get out of the business, and when. Do you want to plow earnings back into the company with the goal of growing big, fast and selling the business? Do you want to pay yourselves as much as possible along the way? What exit scenarios are attractive, and which ones are not? Would you sell out for $2 million in a year if that option came up, or would you rather shoot for $20 million in 5 years, risk be damned. Are other goals important to one or more of the partners, like publicity, philanthropy, or developing expertise?
How will you work together? Think through the roles of each partner, and make sure they are a fit with the big picture, and with your personal strengths and experience levels. How much time will you commit? How much will you get paid? What will your titles be? What resources will each of you bring to the table? Will you make investments?
How well do you know each other? Have you worked together before, so you know you won’t end up at each other’s throats? Do you have close mutual friends or family members, so there’s accountability if one partner gets out of line? Are you familiar with each other’s work (and play) styles? Suggestion – have each partner take the Myers-Briggs test and discuss the results…
What if things get ugly? While it’s not fun to think about the prenup right before the wedding, you’re better off safe than sorry. What happens if a partner leaves the company – will they get to keep their equity while others do all the work? What if a partner dies or get sick – will you get stuck with their insane relatives as your new partners? Can a partner get “fired” under certain circumstances, such as for gross-negligence? What if the partners can’t agree on a critical issue? It’s tough to foresee all that could go wrong, but the more you try, the better off you’ll be. Wherever possible, agree on mechanisms for resolving these types of issues, like equity carve-backs, vesting schedules, odd-numbered decision-making bodies, and advisors you all trust to arbitrate disputes fairly.