Starting up your own business venture is an exhilarating milestone. But while gazing toward the horizon of possibility with wide-eyed optimism, it’s easy to overlook setting important aspects of your foundation.
Like a young couple eagerly preparing for their firstborn, soon-to-be business partners often find themselves doughy-eyed in the incubation phase; dreaming up the perfect domain name, envisioning future successes and designing the digital nursery where their labour of love will take its first steps.
While certainly less glamorous than projecting your ROI for year two, legal documents like an operating agreement are actually far more critical to the health and livelihood of your company.
An operating agreement (or partnership agreement) outlines the rights, responsibilities, and resources for each individual involved in a joint venture. This includes the general weekly routine as well as what would happen in the unfortunate event of a death, or the full dissolution of the company.
The uncomfortable truth is that no relationship- in business or romance- is eternal and harmonious. This is the kind of unsavoury yet critical fact that most entrepreneurs want to avoid on startup, which leads to many unnecessarily painful, gruelling litigations down the line.
Before you pour your heart, time and hard-earned capital into a partnership, drafting an operating agreement is one of the key pillars you should have in place. So important, in fact, that they are even mandated by law in some places.
It’s not necessary to get a firm involved. You can save a bundle of cash by finding a solid template, building your own draft and hiring a freelance consultant to review and revise it. Each city has a local bar association, which will have a website where you may be able to find some samples to use as a starting framework.
When you and your partner(s) are ready to tackle the conversation, here are five basic clauses you will want to cover:
Get clear on how much each partner is investing on startup. What if that initial capital isn’t enough fuel to run the business long enough to net profit? Will you cut your losses, seek outside investment, put in more money yourselves?
It would be wise to state the role of each partner. Are they merely a wallet, or will they be working in the trenches? This makes it very clear as to what is expected of you, as well as what you can expect from your other partners.
2. Decision Making
What will be your process to go about making major decisions, especially when there is a disagreement? Some partners will choose to move forward only when they have reached a unanimous consensus, while others may choose to assign a partner the ultimate say in a particular domain of operations if they have unique expertise.
3. Salaries & Distributions
Reach an agreement on when/if you can take money out of the business. One of you may aspire to build a national brand, while another may be happy with a humble, grassroots operation that yields a small but steady salary. Your vision for growth will dictate exactly how long you’ll need to keep money in the business for.
Also, will the partners ever be compensated for their initial investments, and if so, when? Everyone needs to be in agreement about how the company’s funds will be allocated.
While you’re still on good terms, talk about what would happen if one of you wants out of the business at some point down the line. Sooner rather than later is the best time to talk about exit strategies to ensure minimal headache.
5. Death & Disability
Hopefully you will never need to review what you write in this clause, but random accidents and sudden tragedies happen every day. In the event that something happens to any one of the partners, they will need to have a wisely chosen beneficiary. This person would inherit their shares, make decisions on their behalf, and perhaps even have a say in the direction of the company.
Would you be prepared to continue running the business with your partner’s friend, spouse or family member? Address any relevant trusts, wills and insurance policies in this section.
Once this simple document is in place to provide more steady footing, you can pull your focus back to hustling and bringing your dreams to life.