The Real Reason You Need a Partnership Agreement

Today we’re talking about the reasons that you need a partnership or founders’ agreement. There are four big ones and the one that most people think is the most important is surprisingly the least important.

The reason I’m thinking about this today is I was talking to someone few days ago who’s going into business with a family member – a very, very close family member. We were talking about the need for a partnership agreement. This person said, “Well I don’t think we need that. We would never ever sue each other, and we’ll figure it out so there would just never be a reason to have an agreement we need to enforce. We know what our deal is with each other.”

So, I can imagine, I could certainly imagine that there are people in the world that I’d be in business with that I would never ever sue, that it’s just hard to imagine ever coming to. I think you have to be careful if this is your mindset because family members end up in lawsuits together, people who love each other end up hating each other. I wish it weren’t so, but business often has a way, money has a way of becoming a priority and affecting relationships – it’s just how it goes.

I think you have to be very careful of telling yourself that would never happen when a lot of other people have said that, and they end up in that situation. Let’s just say that this is a person that you would never ever in a million years be in that situation with and you have an agreement that you need to enforce. That’s the fourth most important reason to have a partnership agreement or a founders’ agreement or any business contract by the way, so that is a reason. But, if you get to the point of needing to enforce an agreement, things have gone really, really wrong and even lawyers who are litigators will tell you that litigation is a lose-lose situation where no one ends up happy. It’s just a really brutal process and we really hope we never get to that point and that’s where these other three reasons come up. So, the fourth reason again is to have an agreement to enforce if it comes to that.

The first most important reason is to be sure you and your partners talk everything through. So, having a process going forward, you need to commit things to paper. The decisions you need to make when you work with someone like me, a corporate lawyer, is to talk through all the different things that need to go into a partnership agreement. These are things that you might not think about otherwise, that you might not bring up, you would never have talked about until they come up. I hand out something like four dozen questions to new clients, just all these things – have you thought about this, have you thought about that and those are things that they work through together and most the time these founders haven’t talked those things through. So, number one is to be sure that you talk through all the important things, but also the relatively important and even the more minor stuff. It’s really important to walk through all those questions, and the process of needing to get things on paper makes you do that.

The second most important reason is to know you have a meeting of the minds. It’s real easy for people to talk past each other and to think they’re hearing each other, but putting things down on paper has an author and will crystallize and clarify things. When you take it from, “hey we agree that this is how we’re going to make a decision” and then good a corporate attorney is going to turn it into very clear language, well there might be a little bit of legalese but it’s going to be clearly stated. There’s not going to be a lot of room for ambiguity or miscommunication once it gets put on paper. That’s the reason that you want to, and the second most important reason to have a partnership agreement.

The third most important reason is to have a very clear record of what you decided. The reason for this is that we are human and we’re emotional and flawed. The mind is not a machine, it’s a work of art and people often misremember. Some of them do it intentionally, but we all do it unintentionally. It just happens. Our memories are not nearly as perfect as most people think and there’s been a lot of data and studies about that. So, when you put things down on paper you avoid that whole situation of misremembering: “No we spoke about that, here’s what we agreed to.”

Again those are the four reasons. The least important is to have something to fight out in court. So, even if you’re going to business with your mother you still should take the time to put together a great partnership or founders’ agreement to work through every question, to clarify and be really crystal clear that you agree on all those issues and avoid any instances of misremembering. Hopefully you’re never in court with your mom, but again, that’s the fourth and least most important reason.

So, that applies to all business contracts not just partnership and founder agreements, but it’s particularly important in that space. I’m interested in what you think about that. Certainly, drop me a line. Thanks for stopping by today.