Seting up a business with a friend

[L_Aventurier]

Hi,

I’m in the process of starting a business with a friend of mine, we both have left our job and are already working on it and we plan to register the company in a couple of weeks.

From a share perspective, it’s gonna be 50/50.

One thing I wonder is about how to split tasks/responsibility and how to make sure it works well especially since we have the same kind of background, both rather technical and we won’t do “mister A in charge of technical development, mister B in charge of commercial/business development”.

Any idea, experience, links about how to make it smooth?

Also, from a more legal perspective, how much would you point into the registration document in terms of describing how things will work with two people in a legally binding fashion? Like
-alternate management, 1 year MisterA, 1 year misterB?
-% on sales?
-roles?
-etc
...that sort of things, will see a lawyer but before that I want to make sure I do my homework first, any pointer would be great!

Thanks in advance!

L’Aventurier

 

[Philip Hoyle]

What I've done with a few clients which seems to work well is to ask them to individually & independently prepare a simple A4 sheet, outlining in just a few bullet points, what they want to put into the business in terms of money, time, contacts, etc., and what they want to get out of it in terms of drawings, profit shares, then where they realistically see the business growing, i.e. timescales for development, ie premises, employees, etc., and then finally the exit route, i.e. retirement or sale, timescales, sale proceeds, etc. etc.

When you put these together, it highlights any glaring differences, i.e. Person A wanting to wind down just 10 hours per week in 5 years whereas Person B wants to work full time for another 10 years, etc., but it also forms a brilliant base for preparing the business plan and partnership agreement. Most partnerships break up due to a breakdown between the partners, most often caused by imbalances and perceived unfairness, i.e. "I do all the work, but he gets half the profits" - whatever you can do to help prevent this has to be a good thing.

 

[obscure]

From a share perspective, it’s gonna be 50/50.

Oh oh that's bad. Still at least you aren't starting the company with a "friend".... oh wait

Seriously just make sure you have signed agreements in place over what happens if one of you wants to leave (re sale of shares) how disputes are settled (50/50 means a casting vote is needed) etc. Read back on the many many threads here from people who set up a 50/50 business with a friend and then fell out. The pressure of running a business is one of the top killers of friendships.

 

[HFE Signs]

You are putting your friendship at risk and the best advice I can say is you
MUST document who is responsible for what, then if you disagree the one has the final say. Too many people fail in business because they fall out, so talk about this now so you both know where you stand or have a 60/40 split.. good luck to you both

 

[KM-Tiger]

I’m in the process of starting a business with a friend of mine

There is an old saying:

"The closer the friend, the tighter the contract."

 

[Parrot Hosting]

I agree with Helper, when you go into business with people you are friends with its best to consider that once the relationship changes its no longer just a friendship and the friendship part often does not survive. The best advice from personal experience is don't do it, but its probably not an option for you so as mentioned above - get the whole thing documented and use your friendship to cover every last nitty detail, specifically who does what and what conditions should be set for meeting obligations and most importantly (and this is important) agree HOW to dissolve the partnership or one leave or buy out the other and make sure THAT part of the agreement is legally binding.

Be brutally honest with each other and equally brutally fair because once your business starts you will see it all change and you will need to fallback on any agreements that you have to keep things on an even keel.

If your friendship survives working together in business, then that is a great achievement.

Good luck!

Les

 

[L_Aventurier]

Thanks for all your replies, I appreciate, sorry for replying late but I was reading as much as I can on the topic.

First I understand your concerns and I have got them as well, it would be sad to lose both the friendship and the business but I guess that's just the way life is: to make anything worthwhile happen, you must get into all sorts of fragile commitment that regularly don't work... but what's the alternative?

If I have to choose between:

• risking some money and a friendship in an adventure that might turn good or bad
• Go back to a corporate job

I choose the first option

Then I'm aware of some of the pitfalls, I 'm willing to have a proper "articles of association" and "shareholder agreement", even if it costs £1k, with the right amendments from the "model articles" version:

• Protection from director removal
• 2 signatures on company cheque beyond a certain amount
• Pre-emption provisions on shares allotment/transfer/transmission
• Detailing what happens when someone want to leave
• Etc, any more idea?

But at the end of the day, it will still depends on the good will of both of us since those additional amendments protect but also make potential deadlock more frequent.

Equal shareholders + Equal directors + Joint "CEOs employees"... I take any advice from a "day to day" management perspective...

By the way, the business is software-related, requires no investment, just programming on our computers in our bedrooms for a couple of month, then starting selling and contracting. Do we need to be "employees" with a wage for those first months? What is the best way to go about that?

Other points:

• Philip Hoyle: Yes we will definitely do that tomorrow, I have got a "how to run a limited company" book that provides a long list of such "level of commitment" questions
• Obscure: Yes, will do
• Helper: assuming I want to convince him to go 60/40 instead of 50/50, how would you convince someone to agree with that?
• Parrot Hosting, we will be honest and hopefully agree on those cases, thanks!

To go back to the general discussion, 50/50 or not, I would say that If I have to choose between:

• Starting it 50/50 with my friend with all the pros and cons
• Starting it ALONE, working on my own in my bedroom for 8 months before anything happen, with no business experience

I go for option 1
...There are nightmare stories about 50/50 companies but there are also many stories of such partnerships actually working! Time will tell I guess....

Thanks!