Several months ago, I discussed in this column the dangers of careless business communications. I cannot emphasize too strongly that business managers simply must be more disciplined in conversations and written correspondence to avoid the misunderstandings and perceived broken promises on which unnecessary and expensive lawsuits are often based.
Another obnoxious member of this immediate family of common business mistakes is the careless, often impulsive, selection of business partners and associates. All too many business owners sadly discover, usually after the opportunity for an easy and inexpensive solution has passed, that an individual who is making little or no contribution to the business is nevertheless inextricably attached to the business by roots deeply protruding into its ownership or management. Consider a fictional, although typical, example of one man's hapless selection of business associates.Bill, an inventive technical type, has developed a unique software program with wide-ranging commercial applications which he describes to Fred, his brother-in-law, at a family gathering. Fred, currently unemployed but having had a sufficiently broad range of short-term unrelated jobs over the past 10 years to qualify as a "business consultant" on his widely circulated resume, confirms that Bill's idea is a gold mine and enthusiastically informs Bill that he has the "connections" to make it all happen.
Fred introduces Bill to a former college roommate, George, whose parents recently sold the family business and are looking for a safe place to park their cash. Luckily, George also happens to be between jobs and is willing to contribute his marketing expertise - he has had five different commission selling jobs in the past five years - to the venture. Fred expects 29 percent of the stock in the new corporation, George wants 20 percent for financing the venture and expects that his parents will want 10 percent of the stock for putting up the money. Bill will retain a 41 percent interest.
Bill, George and Fred, along with their spouses and George's parents, meet in Bill's home on a Wednesday evening. The aroma of after-meeting refreshments baking in the kitchen sets a warm tone of congeniality. Fred leads the discussion and emotionally describes his vision of the business - a presentation that gets everyone focused on the "if we pull together to make it happen, no dream is beyond our reach" principle. Bill's wife asks some hard questions, but Fred and George, straining against impatience to feign respect for her insights, remind her that this is only a preliminary meeting. Fred covers the proposed stock ownership percentages, which he has previously persuaded Bill to accept. George's parents defer to their son who silently confirms with a confident college-educated nod that the proposed deal accurately reflects the way things are traditionally done. Charged with optimism and churning to get started, the new friends toast their new venture with hot apple pie and grape juice.
Bill obtains a home equity loan - none of the other partners owns a home - and contributes the proceeds to the venture. At this juncture, Bill, with the strong urging of his wife, seeks the help of his lawyer neighbor to formalize the deal. Not wanting to second-guess Bill's personal relationships with his new associates, the lawyer prepares all of the necessary corporate documents with very little discussion about the soundness of the equity composition, the implications of the financing and the talents of the management team.
I will trust you, the reader, drawing on your own experience and instincts, to finish the story. If you are honest with yourself, you cannot choose a happy ending unless you quickly get Bill some competent help. Even then, the fact will remain that Bill have given up voting control of the business and squandered substantial equity.My advice to anyone who happens to discover a new business idea or invention, or experiences the impulse to start a new business, is to follow the following three basic rules, even though they are admittedly harsh, before taking on a partner or otherwise forming an alliance with another individual:
1. Discuss the idea with a lawyer, CPA or business consultant who does not know you and routinely advises the type of business you are contemplating. You will get straight answers instead of the answers you want to hear and will learn which business form is appropriate for your venture (i.e., partnership, corporation or sole proprietorship).
2. Don't do business with anyone you can't fire or sue. If a party to your venture breaches promises, is dishonest or otherwise fails to perform, you have to be able to resort to your rights and remedies under the law. A defaulting friend, relative, fellow church member, etc., is essentially immune from being sued and the damaged relationship, regardless of whether legal action is ever taken, often becomes irreparable.
3. Don't take on partners or associates in the business to experience social validation. We all crave the company, validation and comfort of advisers, allies, sponsors, confidants and burden sharers, but unless you can foresee a person's measurable and meaningful contribution to the business itself, you must resist the urge to let someone into the business whose ownership roots will later be ensnaring and resented.
Val John Christensen is legal counsel for the Franklin International Institute.