Making Partnerships Work

Members of the ISP-Investor list discuss how to bring partners into a business in such a way that if the group decides to separate, everyone is treated fairly.

[December 17, 2001]

On the ISP-Investor list in December, BG queried,

"I'm about to take on some partners in a venture. What's the best way to structure the deal?"

RY advised putting such decisions in the hands of professionals:

"Each of you needs to have your own attorney, in order to make sure that you are all represented. It is a hassle, but getting the foundation laid right is the best way of starting to build. Have a written agreement clearly stating what everyone expects and is to do. Remember: contracts are not written for when things are going well-they are written for when things are not going well."

Others disagreed, suggesting that the legal profession is always a bad place to turn:

[BG complained] "Having spent more than $100,000 on attorneys in my life, I find that most people forget that attorneys are employees who should do what you tell them to do, instead of creating problems. As a wise man once said, contracts are only as good as the people that sign them."

[SC agreed] "My most difficult task has always been keeping the lawyers' fingers out of business decisions. Without exception, every deal I have ever negotiated successfully but which failed to close was the direct result of an attorney trying to be a businessperson. The only way I was finally able to overcome this was to cut the deal myself, then instruct my attorney that I wanted the deal closed as I had structured it. I insist that lawyers keep their noses out of the business side of the transaction."

BS contended that lawyers have an important contribution to make in setting the terms of any deal:

"One of the most important functions of a good attorney is creating the escape clause. A provision I like is that the person who wants to escape can do so by submitting an offer to buy or sell at a price, and terms (including pay-out terms), included in the offer. Then the other partner or partners have 30 or 60 days to choose between buying and selling. Another way is to have the board of directors set a 'market value' for the company at the annual meeting, and if they can't agree, the most recent market value will prevail. There are lots of very interesting variations, and a good business attorney can point out the advantages and disadvantages of each. But what a good attorney cannot and should not do is make the business decisions for you."

—End