What a partnership agreement should settle before the money arrives

A common situation: two people decide to start something together. One has the idea and the contacts, the other has the technical skill and some savings. They shake hands, open a bank account and get to work. For months, everything is fine. Then a large customer arrives, or an investor shows interest, or one of them takes a job offer elsewhere, and suddenly they discover they had very different ideas about who owned what.

A partnership agreement, sometimes called a founders' or shareholders' agreement depending on the structure, is a written record of how the people behind a business have agreed to work together. Its main value is that it is written before anyone has a reason to disagree.

Why the timing matters

Early on, everyone is optimistic and generous. Nobody wants to spoil the mood by asking what happens if things go wrong. But once money starts flowing, each person's view of what is fair tends to shift towards their own contribution. Agreeing the rules while the stakes are low is far easier than negotiating them in the middle of a dispute.

There is a second reason. Where partners have not agreed something in writing, the law of the place where the business is set up may fill the gap with default rules. Those defaults vary, and they may not match what any of the partners would have chosen.

The best time to agree how a partnership ends is while everyone still wants it to continue.

What the agreement should settle

Ownership and contributions

Who owns what share of the business, and why? Write down what each person is putting in, whether that is money, equipment, ideas, contacts or time. If someone is contributing work rather than cash, say how that work is valued and what happens if they stop.

Many founders use vesting, which means a person earns their share gradually over a period of time rather than receiving it all on day one. If they leave early, they keep only the part they have earned so far. It is a common way to protect everyone if one person walks away.

Decisions

• Which decisions can one partner make alone, and which need everyone's agreement?
• Is there a spending limit above which both partners must sign off?
• How is a deadlock broken if partners with equal shares disagree?

Money

How are profits shared, and when? Can partners draw a salary, and who decides how much? What happens if the business needs more money: is anyone obliged to put more in, and what happens to the ownership shares if only one partner does?

Exits

People leave businesses for many reasons: a new job, a move, illness, a falling-out. The agreement should say what happens to a departing partner's share. Can they sell it to anyone, or must they offer it to the remaining partners first? How is the price worked out? Does it matter whether they left on good terms?

It is also worth thinking about events nobody likes to discuss, such as a partner's death or long-term illness, and whether their family would inherit a say in the business.

Intellectual property

If one partner wrote code, designed a logo or developed a product before the business existed, who owns it now? Intellectual property means creations of the mind, such as designs, software, writing and brand names. Making sure it belongs to the business, rather than to an individual, avoids one of the most damaging disputes a young company can face.

Disputes and competition

How will disagreements be handled before anyone goes to court? Some agreements require mediation first, where a neutral person helps the partners reach a solution. You may also want to agree whether a partner can run a competing business, during the partnership or after leaving it. Rules on restricting competition vary considerably between places, so this clause in particular needs local advice.

A conversation, not just a document

Imagine the two founders from the start of this article sitting down to work through these questions before their first big customer arrives. Some answers would be easy. Others might reveal that one of them expected to be in charge, or that they had different ideas about selling the business one day. Finding that out early is not a failure. It is the point of the exercise.

Getting it written properly

What a partnership agreement can and cannot do depends on the type of business and the place it is formed. Once you have talked through the questions above, ArieFirm's ready-to-use partnership agreement gives you a structured starting point to complete yourself. If your arrangement is unusual, or the stakes are high, a lawyer can tailor the agreement to it.