Monday, March 29, 2010

Partners & Co-Founders

On April 17th, I'll be speaking at a "how to start a business" seminar being hosted at Peninsula Bible Church in Palo Alto, CA.  One area I've been asked to discuss is partners and co-founders.  My current company, Infrastructure Group, was co-founded with a partner. And most of the technology startups I work with, especially those planning to seek institutional funding, involve at least two or more partners.

To Partner or Not to Partner
To use the oft repeated cliche, entering into a business partnership is like getting married, and it should be approached with the same degree of care.  There are pros and cons to taking on a co-founder or partner vs. hiring an employee or contractor.

The pros:
  • Partners can provide complementary, critical skills that you lack - This is the most common reason technology startups have co-founders.  The range and depth of skills required to build a scaleable technology enterprise are almost always more than any one person can provide.
  • Work load sharing and backup - A partner can help share the work load and act as a backup.
  • Bringing a different perspective to business decisions - A good partner can be a sounding board and bring a different perspective to problems, opportunities, and decisions facing the business.
The cons:
  • Profit sharing - You will be sharing the profits and gains with your partner.  This means that you will need to generate sufficient revenue to support not only yourself, but your partners as well.
  • Potential conflicts - Having partners means that they will have a say in business decisions and direction.  You won't be free to just do things the way you want.  And the process of compromise takes time, energy, and some degree of interpersonal skill.
In deciding whether to take on a partner, weigh the cons against the alternatives.  For example, you can acquire missing skill sets and share workload by hiring contractors or employees.  They earn a wage, but you get to call the shots and keep any profits for yourself.  Need a sounding board?  Seek out trusted advisors or meet regularly with people in your network whose judgment you trust.

One bad reason to take on a partner:  emotional support.  Starting and owning a business can be scary.  So many people take on a partner to give them emotional strength.  This leads people to take on friends as partners who might not otherwise be qualified which then leads to problems if that person isn't pulling their weight.  Rather than being a source of emotional comfort, the partner now becomes a source of stress.

What to Look for in a Partner
Assuming that you've decided that you want to take on a partner, other than skill set, what else should you look for?
  • Trustworthiness - Can you trust the person completely ethically and financially?  If you can't trust them with equal access to your business bank account, even if things were to turn bad, do not take them on as a partner.  This is non-negotiable.
  • Shared Values & Objectives - Do they share the same core values as you with respect to right and wrong, treatment of people, ethical behavior, fair play, and other values important to you?  Do they have the same objectives for the business?  Are they in the partnership for the same reasons you are?  Shared values are important in being able to resolve the decisions and disputes that will ultimately arise.
  • Can Place the Interests of the Business Ahead of Their Own - There comes a time in all businesses when the partners need to make short term sacrifices for collective long term gain.  If your partner can't or won't do that, it will make it difficult to build the business.
  • Compatible "Stress" Style - How will your partner react under stress?  How do you react under stress?  And when you're both under stress, will those two styles work together or explode?  How should your partner deliver bad news or confront you?  You want a partner with whom you can disagree without losing respect for each other.
  • Compatible Work Style - How does your partner like to work?  How do you like to work?  Do you share the same work ethic?  This is the area where little irritations can build up, so it's best to get them on the table now.
  • Complementary Personality - In addition to complementary skills, a partner with a complementary personality can strengthen your business.  Are you an introvert who hates to sell?  Maybe having an extrovert partner would add strength to your business.  Do you like to wing it?  Maybe partnering with someone with a more deliberate style would act as a nice safety net.  However, the same personality differences that can add strength can also be a source of friction.
As you might guess, being able to determine this means knowing your potential partner quite well.  And this means you have to spend time with that person beforehand.  Don't rush into a co-founder decision.  There is one thing worse than having no co-founder;  it's having the wrong one.

Entering Into a Partnership
If you decide to take on a co-founder or partner, what's the best way to proceed?

  • Legally Incorporate - The exact form will depend on your business and tax situation.  Even though this adds expense, the reason I recommend this for partners is that first, this reinforces that this is a business partnership, not just an extension of friendship.  Second, you will be co-mingling assets and will need to define profit sharing splits.  As part of this process....
  • ...Work Through an Operating Agreement - If a business partnership is like a marriage, this is the pre-nuptial agreement.  In addition to working out profit and gain splits, defining mutual decision conditions, and spelling out rights and responsibilities, the most important benefit of an operating agreement is working through the "what if things go wrong" scenarios.  An operating agreement should spell out under what conditions a partner separates from the firm and what the associated mechanics are.  And if you find that you can't discuss this with a potential partner, then you aren't close enough to be in partnership.
  • Define Roles & Responsibilities - To minimize points of conflict, it helps to define the areas of responsibility for each partner and spell out under what conditions a business decision needs to be made by mutual assent vs. when it can be made autonomously.
While taking these steps is no guarantee of success, they should improve the odds that the partnership ends up being a source of strength, not strife, for the business.

1 comment:

  1. Hi Edwin, This is great! I look forward to reading more about your blog. Thank you! Terry Kim