Partnerships vs Solopreneurship and Partnership Do’s and Don’ts
I had someone reach out to me recently and ask if I’d written anything on this topic and I don’t believe I have since my first book, The 7 Day Startup, where I talked a lot about the importance of finding a co-founder.
In the years since, all of my business partnerships have ultimately broken down. As you can expect, that has changed my view somewhat.
Having a business relationship is very much like having a romantic relationship. You can be life partners and best mates one minute, but once it’s done, you can be mortal enemies. It’s very sad, but it is true.
In my first 7 years of being a founder, I worked for myself, and I ultimately came to the conclusion that I couldn’t do it alone, and I needed a co-founder.
For the next 3 years with WP Curve I was in a partnership which started to break down, but we held it together long enough to achieve a pretty great exit (credit to my co-founder Alex for that one).
Related: GoDaddy Buys WordPress Services Startup WP Curve.
For the following 6 years with Black Hops, I was back in a partnership, that also ultimately broke down, and I walked away with nothing. Hopefully the other guys do well out of it, I would like a good outcome for everyone involved, especially investors.
I learned some lessons through all of those experiences which I’ll share below. Firstly I’ll share when to consider being solo vs entering into a partnership. Then I’ll share some tips to consider if you are going to enter into a partnership.
Solo vs partnership
I started my career as a solo founder, got burned out and decided that partnerships were better. Ultimately those failed, and I find myself now happily working for myself.
Related: The appeal of the diversified solo founder
So what is ultimately better? Well it depends. Here are 4 things I’d consider.
Can you actually do it alone?
Finance
In many cases it’s not realistic for you to do it alone. In my case with WP Curve I couldn‘t afford to hire someone on the other side of the world, and I’d started a business that provided 24 / 7 support. Having a co-founder was really the only option.
Finance often comes into it. Many small businesses operate with founders who don’t get paid market rates for a long time, because the business can’t afford it. If you want to start a business like that, you are going to need a co-founder.
Business type
There are some businesses which are almost impossible to start by yourself. A startup for example that goes through the traditional startup ecosystem is extremely difficult to do by yourself. Not many incubators will allow solo founders in, not many investors will invest in solo founders. Some businesses require this type of ecosystem to get started, and it’s close to impossible to pull that off if you are a solo founder.
Motivation
Motivation is another huge factor. There’s no doubt about it, when you start a business it can be extremely difficult, and doing it as a partnership can help a lot with motivation. If you honestly don’t think you can be self motivated enough to start, run and grow a business, then a co-founder could help in this regard for sure.
Time in your career / risk profile
I would think about where you are at in your career and whether a partnership makes sense. When you are young you are free to take big risks and there’s not much downside. But when you are older, you start to think a lot more about protecting what you already have, and that can have a big impact on business partnerships.
If you don’t own much and you aren’t putting much on the line, and you have the potential to build something really significant with co-founders, it makes sense to go down that path. Buf if you are established and you are putting it all on the line, with co-founders who aren’t, that’s a really bad situation. In my case, I’ve been in that situation and I will never put myself back there again. From now on, I’m not taking on personal risk for a partnership, when I can’t fully control the outcome.
Business aspirations
You need to think about what kind of business you ideally want to build. I’ve had stages in my career where I was just happy to ‘work for myself’ and not have a traditional job. And I’ve had other stages where I was prepared to put everything I’d ever earned on the line to make a big idea work. You really need to think about this, because it’s true that most really impactful, disruptive, big ideas can’t be done by one person. If you want to chase this then that’s cool, but if you are like me and you end up coming back to a point where that’s not as important to you, then you might not want to enter a partnership.
Personal goals
Personal goals are a big part of it as well. If you want freedom, don’t enter a partnership. If you are prepared to put it all on the line and go into battle with your mates, a partnership could be good. But keep in mind that personal goals change, and once you are in a partnership, it’s very hard to get out of it
With all of that in mind, there is really no right or wrong answers, it just depends on where you are at. There are however some very important things to think about if you are going into a partnership. Let’s get into those.
Partnership do’s and don’ts
If you’ve decided to get into a partnership, here are some things to consider.
Consider your exit options
Even before you get into the partnership you should consider what happens if it goes bad. Partnerships are all fun and games when things are going well, but people change drastically when things aren’t going well anymore. Most partnerships fail, and most partnership breakups are very messy. Give this some thought before you start. Think about what happens if it goes to shit, because it probably will.
Think of it like your past relationships. For every minute up until the breakup, the person was your number 1 fan, and they go from that to your number 1 enemy immediately. Business partners do the same thing. Once it’s clear the partnership won’t work, people will flip on a dime to someone you don’t even recognise. Have an exit in mind at the start, or a way to make sure you can remove your partners if you have to.
Have a constitution or shareholders agreement from day 1
If you ever enter into a partnership you absolutely must have a shareholder agreement or a Constitution, or something that explains exactly how it’s going to work. And it has to be something that every partner understands. Importantly, it has to outline how the company is controlled. As an example it might say that if you hold a certain % of equity (say 20%) that entitles you to 2 board seats, and if you hold say 10% that gives you 1 seat. If you hold less than 10%, no board seats. This tells you all you need to know about how the company is ultimately controlled, which will be important especially if things go to shit (which they almost always do).
Equity split
You hear all the time, never go 50:50. It’s true that 50:50 is probably a bad idea, although the amount of equity and the control of the company are 2 different things, so if your concern is about control that’s a separate issue (more on that below).
For equity split, things can be difficult even if you avoid a 50:50 split. Me and Alex at WP Curve had a 51% (me) 49% (Alex) split. When the partnership started breaking down however, there wasn’t a simple solution. Clearly I would not leave a company I had started and had majority control over, however him leaving would have also been very challenging. I wouldn’t have to pay him a wage, but it was a strongly cash flow positive business and he would have been entitled to 49% of those profits. So I could have either had him work there for a wage plus a profit share, or not work there at all and still earn half the profits. Basically I would work and get paid and he would not work and get paid pretty much just as much. Not a good situation.
We had a good outcome but it was very lucky, it could have been a lot worse.
I think it’s better where one person clearly has a majority shareholding, especially in a business that is putting out a lot of cash.
Control
Control is a different issue to equity split. You always hear people talk about 51/49 being a controlling stake. But often company control isn’t only about equity. In many businesses, the Constitution will dictate who is on the Board, and the Board controls the company. For example the Constitution might say something like anyone with over 10% shareholding can have one board seat, and anyone with 20% or more can have 2 board seats. In that situation you could have 2 people with 15% equity and you might have 20%, but you don’t really have control of the company. To get changes approved you need at least one of the other people to agree.
Some companies have different classes of shares that give people different rights.
Some Constitutions will specify certain things that need to be voted on by a majority of investors and can’t be decided by the Board alone.
All of this is critical to understand because if you decide to take uneven amounts of risk for the business, you might find yourself in a situation where you can’t get agreement on something very important. You might have taken a bigger pay cut to be there, you might have put in way more money, but it doesn’t matter. You have no more control than the other Directors.
This is why I’m in favour of either everyone takes identical risk, or as much equality of risk as possible, and no one has control, or one person takes a much bigger risk and has ultimate control.
Don’t get into a partnership if you don’t want a job
A lot of people say they want their own business because they don’t want to work for someone else. But when you are in a partnership, it’s pretty much like having a job. In my last 3 partnerships, all 3 times I struggled with the issue of partners not putting in equal amounts into the business, and focusing on different things. When you are in partnership, you have to work full time, you can’t be running multiple businesses, you have to be accountable to your partners, much like having a job. But it’s much much harder to leave if you decide you don’t really like it. If you want freedom and flexibility, it’s going to be very difficult in a partnership.
Do not sign a Director’s guarantee unless you have full control of the company
This is a HUGE one. If you have a business that needs debt finance, often banks will require you to sign a personal guarantee to secure the debt. This can be fine if you have a good Balance Sheet and the debt is less than the assets of the company. In that situation you always have the fall back option of selling off the assets to pay back the debt.
However what if you sign a personal guarantee and you ultimately don’t have control over the company? And what if the company continues to get into more and more debt? This is an absolute nightmare scenario, trust me. You could be held personally responsible for loads of debt that you never approved. In situations like this, the bank won’t easily let you out of the guarantee either. More than likely they will require someone else to sign a personal guarantee to replace you, and have you give up all of your shares.
Imagine starting a business, putting more money in than other founders, taking more personal risk, and then ultimately just having to give away all of your equity to get out of a personal guarantee. Scary stuff.
Bottom line, don’t sign a Director’s Guarantee if you don’t have full control of the company.
Don’t get into a partnership with someone who is unstable or dishonest
This probably should go without saying but I’ve failed to do this before and it’s bitten me hard. You get excited about the possibility of launching something, and you skim over the fact that you know there is something not quite right about one or more of your partners. Dishonesty is a big problem. People who are dishonest about one thing, can’t be trusted with anything, and you’ll end up having a partnership where you have zero trust in the other person – not good.
Similarly if people are unstable in their current job or life situation, it will ultimately come out in the partnership. Regardless of how exciting it seems at the start, when things aren’t going well, the worst aspects of someone’s personality will come out.
Figure out a way to get paid market rates sooner rather than later
A lot of the challenge in partnerships is to do with perceived unequal contribution. When you start a business, you often need partners because you don’t have enough money to pay people a proper market rate. I worked in my last business for 6+ years and I was never paid a market rate for my role. When I left, the person who replaced me got paid almost twice as much. This is very normal, but to be honest it feels like a really stupid mistake now. The whole time I figured I had more equity and therefore more interest in growing the company and the value of my stake. But after leaving and giving up all of my equity, it seems like a crazy thing to have done.
The reality is that I was CEO of one of the fastest growing companies in the country, doing $16m annual turnover. I should have been paid a market rate in that role, or we should have hired a CEO and I did something else. Because I took on all the stress and challenge and personal sacrifice of the job, for less than I would get as a marketing manager for a similar sized company.
Ultimately I regret that. We should have raised enough money to pay everyone a market rate, fully outsourced the remuneration role to a consultancy or a board committee, and gotten back to work.
Overall
I hope this article hasn’t been too negative, I’ve tried to be realistic writing from the perspective of someone who has had many failed business partnerships. Hopefully my experience can help you avoid some of the same pitfalls.
Photo by krakenimages on Unsplash
- Selling my small Aussie hosting / WordPress business - April 22, 2024
- My viral latte art video, and my plan for finally getting on board with video Marketing - April 8, 2024
- Partnerships vs Solopreneurship and Partnership Do’s and Don’ts - March 15, 2024