You’re thinking about joining an existing partnership, and you’re wondering how the hookup works.
Ask these questions for starters:
- What are you bringing me into the partnership to do?
- What goals do I need to accomplish in order to earn my share?
- Over what time do I need to accomplish them?
- What ownership of the company will I earn for achieving those goals on time?
- Will the ownership be expressed in terms of equity, voting, profits, or a mix?
- Will I achieve my ownership all at once, or vested over time?
- After that time frame, do I own my shares permanently, or am I in danger of losing them?
- If I leave the firm at that point, do I keep my shares, lose them altogether, or lose them partially over a time span?
Then, build a written document together that recaps the answers so everybody’s on the same page.
Be specific about tasks and timelines.
Be specific about tasks. For example, “managing employees” can mean everything from setting a vision, designing products, doing HR tasks like payroll and taxes, or even making sure employees don’t get busted doing something stupid. You want a measurable list of big-picture tasks.
Be specific about dates. Some tasks have a finish line, like bring in $1mm of consulting revenue. Other tasks are never-ending, like “keep consultants 80% billable.” If you’re only granted equity after completing a goal, and the goal can never be permanently completed, then you’re getting screwed – you’re an employee. This combines with the “after that time frame” question – if someone tells you that you’ve got X% equity as long as you keep the consultants Y% billable, then you’ll never actually get paid, and you can never change your job. You’re a slave to the manager’s whims.
Be specific about what ownership and profits mean. You want to know how you’re going to get paid. For example, when we started our company, we assigned an even split of voting, ownership, and profit rights, but we agreed that nobody would get paid profits for 3-5 years, because we wanted to build up a safety fund in the business. Then, we also agreed that we wanted to keep at least 6 months of operating expenses in the bank, and we’d only pay ourselves profits above and beyond that. Then, the partners can also agree to tackle projects like a web site redesign or hiring new staff – which affect the 6 months of operating expenses. You don’t want to be in a position where you want to take cash out of the business, but you can’t because the other partners keep deciding to tackle big projects that diminish savings and eliminate your ability to get paid.
Be specific about what happens after you leave. For example, I worked at a startup that had non-competes built into their contracts. If you left, in theory you could keep your ownership equity, but if you did anything even remotely competitive, you lost your ownership equity. (Plus, some people had signed on for equity terms that didn’t have timelines, so as soon as they weren’t keeping the consultants 80% billable, they lost their equity no matter how long they’d worked.) You want to have a goalpost where you can say, “At this point, I own what I own, and I can go do something else if the company’s future goals aren’t lining up with my own.” They may write in something along the lines of gradual phase-out of your ownership if you leave – for example, when you stop contributing 40 hours per week on the business, your ownership vesting drops by 10% per quarter.
These questions will produce disagreements.
Talking about money, ownership, and what happens when things don’t work out – these conversations will produce friction. It’s gonna be awkward.
When you ask these tough questions, it reduces the likelihood that you’ll actually join the partnership. These questions surface disagreements, and more often than not, you’ll come to an agreement that the partnership isn’t a good fit for you or them.
That’s a good thing. That’s a great thing. While it can temporarily feel bad that you missed out on something, the reality is that you missed out on years of friction and pain.
If the partnership does actually pan out, you’ll have a closer bond with partners who are on exactly the same page. When the time comes to separate the partnership, you’ll have a nice, clean, easy discussion because you’ve already set the ground rules in play. (And yes, Jeremiah, Kendra, and I had these discussions years ago, and that made our company changes a lot easier.)