Are you considering a collaboration or partnership or have some fear around doing all or most of the work while only getting half the credit like we did back in school during class projects? In business, these behaviors have a lasting impact on the relationship and the product or service, so it is necessary to invest in setting clear expectations whether it is a partnership or collaboration! No more handshake deals and unresolved boundaries.
I have both lived and witnessed collaborations and partnerships strengthened through setting clear expectations. In addition to sharing this topic with you today, I released a blog post that has conversation starters to pair with today’s podcast episode. It’s an especially great resource if you are considering partnering or collaborating with a friend.
I want to set precedent for the difference between a collaboration and becoming partners with another business or individual! A Collaboration is when two separate businesses come together and collaborate on a product and create a specific collaboration offering. The two businesses do not become partners in the sense that they are now one new company, but have partial ownership of the product or intellectual property created.
A collaboration is usually a one-time project between 2 or more people who 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.
Now that I have shared with you what a true collaboration is, I want to help paint the picture of what expectations you can set to strengthen the relationship as a collaborator….
The agreement should clearly define the scope and nature of the parties’ contributions to the work. Essentially describe what everyone is bringing to the table, so everyone knows their role. Do not be afraid to be detailed here. Think of this as the agenda for everyone to work to.
Sometimes a collaboration starts as the spark of a shared passion among friends or industry partners. I am going to be the loving reality check, you need to chat expenses. Together you will need to decide if all expenses require prior mutual approval (or only those outside of the agreed budget). Alternatively, each may be covering their own expenses, if so then you can give each party the latitude to unilaterally incur expenses, but be sure you won’t be on the hook later. This obviously should be decided before the expenses begin, so you are on one page.
You may also decide that one party is going to incur the costs of production of the product in trade for a higher percentage of the profit.
When in doubt on what is best, ask who each of the planned expenses most naturally lives with or, who is best able to bear that risk of keeping those expenses on a budget.
Be sure to establish an overall deadline (this should work together with the contributions), so the parties have a mutual understanding of the work’s intended timeline and target launch date.
Of course, I would suggest a more detailed completion plan with interim deadlines or project milestones and corresponding descriptions of each party’s respective responsibilities, but this can also be very fluid (depending on the project) and the timeline can be decided as you have a more clear understanding of the scope of the project. But be sure to acknowledge what still remains open for discussion and mutual agreement.
Lastly, you will need to decide if one party fails to uphold their end of the bargain what happens next. A few options are: does this simply trigger default or termination and can the non-defaulting party continue on without them? This is a tough but honest question you should discuss and get in writing.
What I have shared with you so far are practices that I have implemented into my own collaborations, so trust me in this, I understand the behind the scenes work that goes into a successful collaboration. This is why I created the Collaboration Agreement to be customizable, so you cross just one more thing off of your to-do list…
Partnerships are a little different than a collaboration in that the goal is usually a long term, continuing relationship as opposed to a one-time project.
Just as I shared what expectations will strengthen the relationship in your next collaboration, I want to speak to you about what expectations you can set for a successful partnership….
These three are going to look a little more fluid than the conversation we just had around collaborations because now you’re in it for the long haul.
1. OWNERSHIP INTERESTS: Do you own the business in equal shares or are there majority and minority interests? Sounds like a simple question but one that absolutely needs to be in writing. Speaking from experience here. Generally, we hear people talk about equity and distributing income but what about the share of losses. This is one of the first questions, so you can structure the partnership to support your vision. This will influence voting and what decisions need to pass with either unilaterally or by majority vote. Don’t worry you will layout voting in the Operating Agreement.
A few things you may vote on:
- Investments outside of your budget
- Adding another business partner
- Merge the Company with any other entity
- Amend the Articles of Organization or the Operating Agreement
2. MANAGEMENT: Who will take on which roles in the day to day business operation and management? This is actually one of the questions you will need to answer when filing your LLC.
3. CAPITAL CONTRIBUTIONS
A capital contribution is a contribution that a member makes to an LLC in exchange for its membership interest to fund the business launch and operation. The members usually receive membership interests pro-rata in exchange for their capital contributions.
If noncash assets or services (aka “sweat equity”) are contributed to the LLC, the parties should agree on and acknowledge:
- the specific noncash assets or services to be contributed,
- wow these assets or services are to be conveyed or contributed, and
- the value of the contributions.
ADDITIONAL CAPITAL CONTRIBUTIONS
Considering that often businesses need additional capital contributions to fund launch and expansion, you’ll want to plan for this. I always suggest setting a maximum contribution per year that would align with the business goals but prevent financial strain on the business partners? While it may not be a comfortable topic, it is a must to know what your business partners’ boundaries around money are.
When we invest in the proper upfront protection we have a clear understanding of how to serve everyone’s goals!
Until next time, join us in our private Facebook group as we will be talking more about this very topic right now!
Resources Shared In This Episode