Friends turned business partners can be such a blessing for your friendship and business opportunities, but let’s be honest, they can also be complicated.
I am sure you are a lot like me, I am incredibly protective of both. For this reason, I always counsel my clients to clearly define the relationship and expectations, so everyone is on the same page.
First ask: Do you want to become business partners or simply collaborate on a project?
A partnership is the creation of a shared business on a more perpetual basis to create a new entity (likely an LLC) with each individual becoming a part-owner. Think of this as a business marriage. Think of your Operating Agreement as the prenup.
An Operating Agreement has many roles. It defines the business’s management structure, describes how the business’s profits and losses are allocated and distributed among the business partners, and sets out the nitty-gritty thing sometimes as friends you may not want to talk about.
Here are some conversation starters for friends turned business partners:
- Who will take on which roles in the day to day business operation and management?
- Do you own the business in equal shares or are there majority and minority interests?
- Will the business need additional capital contributions? If so, is a reasonable maximum contribution per year that would align with the business goals but prevent financial strain on the business partners?
- What are the boundaries around money?
- Which decisions need to be made together?
- What is the “ideal” exit strategy?
- What happens in the event of a disagreement? How do you work through it, or in the worst case, know when and how to go your separate ways?
- What happens if one of the business partners dies? Yes, grim I know – but necessary. Would you want your spouse to step in? Would your partner want your spouse to step in? Often, I hear a resounding no. Should the business get life insurance policies that can be used to buy out the deceased business partner’s estate?
- Are you considering adding additional business partners over time? If so, what is the process for approval and diluting the existing business partners’ interest?
A collaboration is usually a one-time project between 2 or more separate businesses that share a common goal to create some magic. Not literal magic, but the kind of magic that happens when people each working in their zone of genius come together to create. The key here is each business maintains its autonomy and there is no new business created.
Just like the Operating Agreement is the prenup for a business partner, a Collaboration Agreement will lay out the responsibilities of all the individuals involved so you can avoid confusion, maintain the friendship, stay on budget, and get to the beautiful destination you’ve been dreaming of as a united force!
Here are some conversation starters to consider for friends turned collaborators:
- What is the common goal of this collaboration?
- What contributions financial or otherwise are expected?
- What will be the roles and responsibilities?
- How will you share the profits or losses?
- What are the commercialization plans?
- How long will this collaboration last?
- What will happen to the offering when the collaboration ends? Will anyone be able to continue to offer this independently?
If you kept reading you probably have or are considering one of the two, so my challenge is: sit down with a coffee (or wine) and chat through these with your friend. Then, of course, get it in writing, so you can breathe easy!