15 OctWhen Partners Depart

Justin Timberlake as Sean Parker and Jesse Eisenberg as Mark Zuckerberg in “The Social Network”.

I saw the latest blockbuster The Social Network this week and was thoroughly entertained from start to finish. Regardless of the accuracy of the portrayal of Facebook’s origins, there were lessons to be learned for any entrepreneur looking to make a buck with anyone else – friend or foe.  Fact is: Mark Zuckerberg and Eduardo Saverin were business partners that severed their relationship and it wasn’t amicable. Ultimately, lawyers had to become involved and Mark Zuckerberg settled. This can be the most expensive route to resolve a business dispute yet tends to be a route taken time and time again.

When considering entering into a business relationship, we must diligently look for the risks. There are always risks in conducting business (side note: please make sure you note them in your business plan) so it is best to think of risky scenarios and plan ways to mitigate them.
Consider this: in a partnership, there is always the risk of a partner moving on. When that happens, how does the fallout look? Will the partner be entitled to keep common stock or should the stock downgrade to non-preferred status since there will be less involvement? Or, must the shares be sold? Will the partner be welcome to remain on the board of directors, be an employee, or exit the premises for good (with no ability to join a similar venture for 3 years)? These questions and more must be answered to handle alleviate potential headaches later on.Nina Kaufman of Ask The Business Lawyer captures several issues an owner should consider when parting ways with a company.

Five tips for mitigating the risk of a poorly severed business partnership are:

  1. Capture everything about an equity partner’s exit in a written agreement and execute this agreement with the monetary or other resource investment. At the very least, make sure it’s captured in an email exchange. In the following link to the blog HighContrast, Simeon Simeonov has some great feedback on what should be captured in agreements for initial investors (or founders).
  2. Read the agreement, and ensure you personally understand the terms. Request drafts of the agreement before receiving the final version. Do not sign on your first point of receiving it either. It’s okay to take it home for the night, a week, whatever’s necessary so that you understand what you are getting yourself into.
  3. Share the agreement with a lawyer who is familiar with your industry to review and provide feedback on areas that are challenging or show vulnerability to you as a shareholder.
  4. Determine the process and jurisdiction to resolve disputes. It is imperative, from the company’s standpoint, to have some semblance of control over how far an investor can go to complicate a dispute with the company.
  5. Be fair.Ultimately, everyone should be clear about the purpose and mission of the company prior to heavily investing in it. With that in mind, make sure you are individually protected and your financial interests are respected.

Incorporating these tips into your decision-making process as a shareholder or company owner can alleviate future misunderstandings with potential partners.

A close family member recently severed a business relationship created by an oral agreement. Although he was unhappy with the relationship for quite a while, it took him a few months to finally express his concerns and demand the relationship to be severed. The moment was awkward and involved some tense, on-the-spot negotiation, but each party went his separate way. That said, it still has the potential to get messy later.

I still believe having multiple parties involved in owning a business will catapult it beyond where it would be if done solo. A takeaway from the movie for Eduardo Saverin, as blogged on CNBC this morning, was

that entrepreneurship and creativity, however complicated, difficult or tortured to execute, are perhaps the most important drivers of business today and the growth of our economy.

We just have to make sure our best intentions are behind each action or decision, and everything is in writing regardless of a person’s status as friend, family or stranger. And go see The Social Network – it was a good movie for 2010!

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2 Responses so far.

  1. admin says:

    Actually, I think friends can be some of the best partners when egos don’t get involved and legal precautions are put in place. Who better to trust than a close friend?

    If it goes south though, it can be a nasty breakup (as we’ve seen). It’s good to know and share your reasons and your partner’s reasons for getting involved before making any moves.

    Thanks for commenting Kesha!

  2. Kesha Brown says:

    I enjoyed this movie as well and am curious about how much is actually true :-)

    Regardless, I too learned a great deal about partnering with others and how to go about doing it legally and with protection for all parties involved.

    I was in a partnership (failed) a while back and wish I’d known half of what I know now!

    Lesson learned (friends don’t [usually] make good partners!) :-)

    Excellent tips!
    ~Kesha