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Keeping Yourself Protected When Starting a Business With a Classmate

Protecting Yourself When Starting Biz with Classmate

This is Part 10 of our Back to College series, which aims to help college students thrive as small business owners. In Part 9, we covered running a food cart in college. To view all the posts in the series, click here.

 

Keeping Yourself Protected When Starting a Business With a Classmate

When starting a business, especially if you’re starting a business while in college, it’s often comforting to have a business partner to help you along the way. Many great companies have been started by college classmates, such as Google (Larry Page and Sergey Brin were classmates at Stanford University) and Microsoft (Bill Gates and Paul Allen co-founded Microsoft while Bill was a student at Harvard). However, for every success story of college classmates starting and building a successful company together, there are also stories of failed business partnerships, or poorly planned partnerships where people started out working well together, but then saw their business relationship devolve into hard feelings and even lawsuits.

If you’re going to start a business with one of your college classmates, it’s important to protect yourself – and protect the company – by establishing a clear contract, or partnership agreement, upfront. Having a good contract will protect both of your interests and clarify expectations for who owns what part of the company, who is responsible for which aspects of running the company and who earns what share of the gains (and bears which share of the risks) as the company matures.

Here are a few key things to keep in mind as you create your partnership agreement:

 

Decide who does what:

No business partnership is truly a 50-50 split of responsibility and effort; each business partner brings their own unique strengths and skills to the table. Your business partnership agreement needs to clearly spell out the expectations for what each partner will contribute to the business, whether it’s labor, hours of work, cash to invest in the business, key customers or other contributions. Will you both be working in the business part-time? Is there a set number of hours per week that you each want to work? Be sure to make this all as clear as possible, in writing, to avoid any misunderstandings or hard feelings or resentments down the line. A common cause of disagreements among business partners is when they feel like one person isn’t carrying enough weight for the business. So make sure to clarify expectations early so there are no unpleasant surprises.

 

Decide on compensation:

You’re both in business to make money, right? It might seem simple in the early days when your business is just getting started and there isn’t a lot of money to divide up, but setting clear expectations about compensation in your partnership agreement can also help protect both of your interests in case the business becomes wildly successful. Your compensation agreement should include such items as percentage of ownership shares (do you want a true 50-50 split of ownership of the company, or did one of you do more to develop the original idea for the company? Did one of you take more financial risk early on to set up the company, such as maxing out credit cards to buy materials or equipment? If so, make sure that you both agree on what share of ownership should be assigned to each partner. What salaries – if any – will the partners be paid? How will you divide extra profits at the end of the year? Spell this all out in writing in your partnership agreement, and be prepared to revisit it as needed as your business grows.

 

Decide on your decision making process:

Who’s the boss of the business? If you have a single majority owner (with 51 percent of the shares of ownership, or more), does that partner get full say in the decisions about the company’s future, or does the minority partner get to vote too? What if you disagree – how do you do a tiebreaker? It can be hard to anticipate all of the various scenarios and decisions that you’ll have to deal with as business partners, but try to think ahead and figure out an agreeable framework for how your executive team of two is going to navigate the various complex decisions that lie ahead.

 

Decide on succession plans and future ownership interests:

Your business is a separate legal entity that exists outside of both of you and that ultimately can and should live on even after you and your partner decide to stop working together. So specify, in writing, what you want to have happen in case one of the partners is no longer part of the business – in case of death, retirement, bankruptcy or just one partner deciding that they want out of the business. You might also want to include a non-compete agreement or non-compete clause to prevent one partner from leaving the business, stealing customers and competing against the original business.

 

You can use a standard business partnership agreement template to create your contract (here is a template from Rocket Lawyer), and you might want to hire a lawyer to look over your contract and advise you on any weak spots or loopholes. Don’t be afraid to ask each other tough questions and have uncomfortable conversations early on – you want to clarify things as much as possible so no one feels disappointed or shortchanged later on. Map out hypotheticals and plan on worst-case and best-case scenarios – failure or wild success can both be disastrous for your business partnership.

Your partnership agreement doesn’t have to be complicated, but it should be as thorough as possible to cover the various possible eventualities of running a business. And you can always revisit and renegotiate your partnership agreement along the way. Ideally, a good partnership agreement will protect the interests of both business partners and keep your business running smoothly. When people feel like they’re getting a fair deal and that they’re protected against big losses (and able to share in big gains), they work harder and more productively. And hopefully, your business partnership agreement can help protect your personal relationship with your business partner, so that you stay friendly and on good terms through the ups and downs of running your business.

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Kabbage Team

Kabbage is here not only to provide access to the small business funding you need, but to also help you grow your business through free marketing tips, webinars, tools and more. Is there something you'd like us to cover or want to get your small business featured on our blog? Send us a note at content@kabbage.com.