Very often, I keep hearing the same old story over and over again. Wait, we are like brothers, we are the best buddies, we don't need a partnership agreement. We are happy just the way we are right now. My word of advice to cofounders is that being in a partnership while launching a startup is just like being in a marriage. If everything is OK, you won't mind signing an additional piece of paper. Right? The same applies to a startup partnership agreement. You can live and work happily ever after with your cofounder or cofounders with no need to ever use your partnership agreement you signed years ago, or you may be extremely grateful for a piece of paper that saved your investment and ownership. So, let's begin.
When it comes to the law itself, rest assured that all courts in the world just couldn't possibly care less about your partnership agreement's form, as long as it is properly signed and verified. This means that you can download a free template and adjust it to suit you. You can also hire a lawyer or a paralegal to do it for you. Or eventually, you can write it yourself from A to Z, the way you like it. Either way, it's all the same, your partnership agreement will do its job of protecting you regardless of its form. So, care less about the form and focus entirely on what you are going to put in your partnership agreement. A thing worth remembering!
The reason you are creating a partnership agreement with your cofounder in the first place is to protect the interests and ownership of both parties in case something goes wrong with your startup. You need to go through the worst-case scenario with your cofounder. Talk about it openly and without hesitation. There's no other way to do it. At the same time, this can be an excellent test for your future business partnership. Speaking openly about the potential problems can only strengthen your business relationship. So, don't worry about it. Just make sure you write clearly a set of paragraphs that are going to regulate fairly and transparently what's going to happen if one of the partners decides to terminate the partnership, or he becomes incapable of participating in a case of death or illnesses, or he works against the best interests of your startup, and similar.
The list of obligations and rights assigned to every cofounder is the heart and soul of your startup partnership agreement. In addition, this is the best way to prevent any future misunderstandings and conflicts between the business partners. The most common reason for a partnership to be jeopardized or terminated is the unclear situation regarding who is in charge of the certain line of work and duties, including the specific rights and obligations because no two startups are the same. Things may and will very likely change regarding your startup, and you may find yourself facing a problem who is doing what under the new circumstances. This section can also prevent unfair treatment where one cofounder has to do more work or invest more than other startup partner or partners.
Very often the cofounders forget that a startup can't exist without an agreement. Without it, we are talking about a friendship, rather than a serious business partnership with all legal and financial obligations and consequences. This means that your partnership can have some obligations reserved only to itself as a legal entity. This sounds a little bit confusing, but the important thing for you to remember is that there are responsibilities you can accept as a cofounder, and there are some responsibilities reserved exclusively for a startup, which can't be shared on a personal level. This is actually good news for you. Why? Well, you certainly don't want to be held responsible for some wrongdoings of your cofounder, do you? This section is supposed to protect you from these unwanted events.
You don't have to do it, but I strongly advise you to include these clauses in your partnership agreement. Why? Well, if one of the cofounders decides to leave a startup and wants to do some kind of a similar business in the future, this is the only way to protect the interests of the remaining cofounders. As simple as that. So, be careful about the time limit associated with these clauses and particularly the amounts you plan to include as compensation for your agreement's breaches.
These things should be a part of your list of obligations. However, as you might have guessed they are extremely important. Therefore, it is a wise choice to give them a special place in your partnership agreement. When it comes to important decisions that influence the very future of your startup, your situation with other cofounders has to be perfectly clear. Now, imagine a situation where more than two cofounders are involved. It makes the perfect sense to regulate the management and voting rights, doesn't it?
It's quite possible that at some point in time you will find new partners to join or new investors to support your startup. This eventuality has to be regulated properly with your partnership agreement. Discuss these scenarios with your cofounder. What will be the legal situation and position of new partners in your startup? Also, how the potential investment could influence your partnership? Either you will have to include this section in your existing agreement or create a new one when new partners or investors join.
Finally, you have to create a list of reasons that can lead to the termination of your startup. What are the consequences of termination for your legal and financial situation? What is going to happen with your assets, intellectual property, and similar? Very often in the IT world, the partners can be located in different countries and legal systems. That's why it is very important to decide which legal system and a court are going to be in charge of any potential dispute between you and your cofounder.
Remember that you need a partnership agreement if you want your startup to last and grow. Otherwise, from the legal point of view, you are nothing more than a couple of friends doing business together. It's definitely a better solution to have this piece of paper written and signed, just in case. Professional cofounders with good intentions will certainly have nothing against signing one. Right? Remember a marriage analogy from the beginning of my story? Startup "divorces" can be ugly and expensive. One simple piece of paper, you took for granted, can turn out to be a true life-saver.
Till success or failure (never) do your startup part, play smart!
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