Verbal agreement partnership - bad idea!

Many software businesses nowadays are started as partnerships between 2 or more friends and often, in the interest of simplifying things, the legal entities that are formed do not necessarily match the real agreements between the partners. If you try to dig a bit on the stories, as I have often done, you will find that there is a clear and simple rational for the decisions that have been made during the way - no surprise in that, after all those are very smart people we are talking about and reason is one of their fortes. However, the surprising part is that many of them do not get the real agreement on paper!

Usually the partnership starts with excitement and enthusiasm, a verbal agreement which consists of 20% of explicitly stated terms and 80% of implied or assumed terms, a handshake, and a toast to the success of the new venture!

The beginning is great but conflicts are bound to develop soon thereafter – from vision for the future, to level of commitment of each partner to the venture, down to minute technical details everything presents an “opportunity” for conflict. Partners start developing mistrust for each other and the funny part (not so funny indeed) is that each partner thinks that the others are not living up to the agreement that they made when they started! The root of the trouble as you can imagine is without fail in the implied terms of their verbal agreement – each partner made a different set of assumptions as to what those terms were!

If trouble arises early enough in the process and the partners involved are wise people chances are very good that they will work out the differences and move forward with a clear and written agreement where nothing is implied.

However, oftentimes when the conflict that has been boiling comes in the open it is too late and impossible to settle the differences – some of the partners may end up with the short end of the stick and feel betrayed, friendships are destroyed, and partnership is no more! In short it ends up being an ugly situation (for luck of a stronger word) that you wish you had never been part of!

So how does one avoid getting into such unpleasant situations? Well, here are some simple rules to abide by:
- Never ever enter into a business partnership based on a verbal agreement – handshake is great but paper is much, much better. Don’t feel embarrassed to ask your best friend to get the agreement in writing – you are not showing miss-trust, instead, you are showing that you value the friendship and don’t want to risk it over some business venture.
- Don’t assume anything – write down everything – remember, there is a reason your house insurance policy is 30 pages long (and yet there are still claims that end up in court)! It is not a bad idea to get a lawyer involved to do it right.
- Make sure that both the rights and responsibilities of each partner are clearly spelled out. - Establish clear tie-breakers – “we’ll decide together” does not work – a final authority should be established for each and every type of issue.
- Leave your ego at the door – you are in business to make money not to make a statement. If you want to make a statement go run for an office instead.
- Bring out any reservations you may have as early as possible – those rarely disappear by themselves; instead, the common tendency is for them to grow into big issues if left “un-attended”.

Someone once told me: “I will never get into another partnership again” – I say, partnerships can be great if done right!

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