Advice for starting a business with friends

Here's a sobering riddle for prospective entrepreneurs. When does a business-building coach like me also serve as a referee? The answer is: When friends-turned-business partners ask me to settle nasty relationship quarrels.

Yes, it does happen. Siblings, spouses, life-long friends, neighbors, and bar buddies all start their businesses with good intentions. They want to pursue their most ambitious goals with the people they trust.

So why, in my 20-plus years of venture community experience, do I often see friendships fold before the business itself? I think British author William Blake got it right when he said, "It is easier to forgive an enemy than to forgive a friend."

Underlying every solid friendship are expectations of a higher level of loyalty and understanding than is common among everyday work colleagues. Friends count on their business partners to be supportive when family obligations interfere with business deadlines. Friends also expect their business partners to defend their actions to co-workers, customers, investors, and vendors, even if all reason says otherwise.

When our friends let us down, resentments simmer in a profound and potentially debilitating way.

Sensitive areas to pay attention to

If you are planning to start a business with a friend, you’re in good company. About half of all startups today are organized among friends or spouses. Do I encourage best buddy entrepreneurs to abandon their entrepreneurial dreams just to protect a friendship? Not at all. But I do encourage them to take extra steps to minimize misunderstandings.

Here are four ways to successfully make the transition to becoming business partners as well as friends.

1. Formally agree on your time and financial commitments.   The typical startup business will take a lot more time and money to become profitable than anyone ever expects. This isn’t necessarily a sign of poor planning, but a reflection of the routine adjustments that are made as entrepreneurs learn more about their customers and competition.

   Nagging problems, however, arise when one partner can commit more time or rescue cash than the other partner. It is these commitment imbalances, especially in 50-50 partnerships, that tend to create the most emotionally-draining dissention.

   Prior to securing a domain name or printing business cards, partners should gain an understanding of the limits of each partner’s contribution to startup success. Pressuring partners to commit more money than they are able will create undue stress on the friendship and the business.

   Also, discuss how long each partner can go without a salary before having to look for outside employment. If one partner can commit more time and money than the other, simply agree to add to the lead partner’s ownership stake and decision-making authority. Lastly, develop some times when each partner can really leave the office without interruption or guilt.

2. Discuss "what-if" scenarios.   The best functioning partnerships always start out fully aligned about their strategies and spending priorities. With agreement in place they can move forward in a productive way. Without it, the business remains at a frustrating standstill. Here, partners are best served when they talk through a number of different "what-if" scenarios. Try this question as a good discussion icebreaker: "What if we run out of money?"
3. Decide who is ultimately in charge.   It’s easy for two pals to compromise on friendly disagreements when not too much is at stake. But in an operating business, partners have their time, hard cash, and professional egos on the line. It's completely unrealistic to assume your easygoing buddy will always be agreeable and supportive. What areas present the greatest risk for disagreement? Simply stated, it is debt and decision-making authority. Can a partner take on debt on behalf of the company?

   Can a partner agree to a customer discount without consulting the other partner? And last but not least, who decides an issue when partners can't agree?

   My recommendation to startup entrepreneurs is to (a) develop a board of directors with at least one independent member, or (b) find an experienced businessperson to help the partners work through the tricky issues of job descriptions, budget priorities, and the need for decision-making collaboration.

4. Draft a stock purchase and sale agreement as well as a partnership agreement.   Today you want to work in a startup; tomorrow you may not. The reasons for a sudden career plan change are more likely to be influenced by family issues such as an illness, a new baby, a divorce, a spouse’s layoff, or sudden family relocation, than concerns about startup viability. When one partner wants to sell out, quit, or reduce involvement, what happens? If one partner wants to invest more money in the business, what happens?

   The best time to negotiate these complex issues is before any money goes into the business checking account. Hire a lawyer to help you craft two must-have documents: a partnership agreement and a stock purchase and sale agreement. Don’t start a business without them!

More than 30 years ago, two friends named Bill Gates and Paul Allen organized a company to pursue their passion for innovative software design. These guys were disciplined, aligned, and determined. While the average new partnership today won't likely become the next Microsoft, each new enterprise-building experience can be tremendously satisfying, lucrative, and fun to enjoy with friends.

About the author   Susan Schreter is a Seattle-area investment banker and venture-funding expert serving startup entrepreneurs and fast-growth company executives. She also teaches business financing and entrepreneurship at business schools, angel forums, and microfinance organizations in the United States and internationally. Write to Susan at susan@takecommand.org.