|Justin Timberlake as Sean Parker and Jesse Eisenberg as Mark Zuckerberg in “The Social Network”.
Partners of different levels were illustrated in the movie blockbuster The Social Network. Founding partners, mentor partners, investor partners… it runs the gammit for a movie about a modern startup. The movie was thoroughly entertaining from start to finish. Regardless of the accuracy of the portrayal of Facebook’s origins, there were lessons learned for any entrepreneur looking to make money with others – friend, foe or in-between.
Fact is: Mark Zuckerberg and Eduardo Saverin were business partners that severed their relationship and it wasn’t amicable. Ultimately, lawyers had to get involved and Mark Zuckerberg settled. This is the most expensive route to resolve a business dispute yet is a route taken repeatedly.
When considering a new business relationship, we must diligently look for risks. There are always risks in conducting business (side note: please make sure you note them in your business plan). It is best to think of risky scenarios and plan ways to mitigate them instead of assuming no risk and getting surprised.
Fallout Risk For Partners
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 their shares be sold?
Will the partner be welcome to stay on the board of directors, remain an employee, or exit the premises for good (with a non-compete for 3 years)?
Answer these questions and more to ease potential headaches later on. Nina Kaufman of Ask The Business Lawyer shares several issues an owner should consider when parting ways with a company you founded.
Five tips for mitigating the risk of a poorly severed business partnership are:
- State everything about an equity partner’s exit in a written agreement. Execute this agreement with the financial 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 to capture in agreements for initial investors (or founders).
- Read the agreement. 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.
- Share your agreement with a lawyer familiar with your industry. Request a review and get feedback on areas that are challenging or show vulnerability to you as a shareholder.
- 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.
- Be fair. Ultimately, everyone needs clarity about the purpose and mission of the company before 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 reduce future misunderstandings with potential partners.
Partners Really Do De-Partner
A close family member recently severed a business relationship created by an oral agreement. Although he was unhappy with the relationship for a while, it took him a few months to finally express his concerns and demand the relationship 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.
Faith in Partners
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.
Go see The Social Network – it was a good movie for 2010!