Business Time (Part II)

by Tim
Fri, August 28, 2009 -- 18:16 UTC

This is the second installment of what I suspect will become a weekly series of articles on our adventures in starting our own company. If you haven’t read the last one, you might want to check it out here. Today’s topic is: The Partnership Agreement.

As you most likely know, incorporating is all about creating a collective legal body that represents your business, which can be convenient for a number of reasons. For one, this entity can acquire and own property, and can transfer it to other people. Secondly, it can represent a sort of a firewall against debt and lawsuits; a straw man that will burn in effigy for your mistakes. Lastly, it is immortal, in that it endures even when those that created it have passed on. You may have noticed that some of these qualities are shared by golems, robots, voodoo zombies, and Giant Robo. This is because they, too, are mindless automatons that possess no soul of their own*. They are surrogates that can only be operated by proxy.

You and your corporation!

You and your corporation!

When you incorporate, you are given your very own legal entity that you can use to do business with the world at large. The tricky question is who gets to control it, and under what circumstances. The answer lies in the Partnership Agreement, which is the subject of today’s post. When you found the company, you establish a contractual set of rules that govern the inner-workings of the corporation. These rules must be arrived-upon in advance, to resolve any number of hypothetical future disasters. Some examples of the kinds of questions the partnership agreement should attempt to answer:

  • When making major decisions, how should they be decided? An executive decision-maker? A vote? Consensus?
  • What happens when a new parter joins the company?
  • When the company makes money, who gets it, and how much?
  • Who decides what the company does and doesn’t spend its money on?
  • If someone puts more money in, should they get more money out, or get their money back first?
  • If someone leaves the company, do they get to take their contributions with them?
  • If someone dies or becomes permanently disabled, what happens to their share in the company?
  • What happens if someone stops showing up to work, or gets another job?
  • Involuntary termination: What happens if someone starts stealing from the company, commits a felony, goes insane (like, clinically insane)?
  • If a third party wants to buy someone’s share in the company, is that allowed?
  • If the sale is allowed, does that person become a decision-maker, or just a money-maker?

It took us a while to come to agreement on the answers that best matched our vision of the company. In particular, we opted for decision-by-consensus for all major decisions, such as bringing on a new partner, selling the company, etc… We also decided on an even-split on profits, with equal initial investment. Suffice to say, you will want to find a lawyer with whom you can discuss the best solutions people have found to answering these questions. The implications of these decisions are very serious, and there are some popular answers that do not play nice with consensus-run organizations.

It was interesting, having the three of us and our lawyer in a room, talking about the various common nightmare scenarios that come up when you set out to share decision-making power with other human beings whose vision, needs, and goals can never fully line up with your own. Looking around the room, you must force yourself to imagine how those that you most trust might some day be standing on the other side of a line you drew together in the sand. I imagine that this is similar to what it feels like to draft a pre-nuptial agreement. It was sobering, and it is my hope that I will never come face-to-face with the scenarios we so carefully shielded ourselves against in that document. Still, one cannot help but wonder what a post like this looks like when you return to it years later.

After a few serious meetings, we arrived at answers we were willing to stand by, with our lawyer taking on the task of drafting it into a legal document. It took a while to figure it all out, but there’s clearly a great deal of value in coming to an up-front legal agreement regarding your basic management and ownership assumptions. Going through this process showed us that there are a number of problems that are very hard to resolve if you do not decide on the answers to them in advance. That’s it for this installment, check in next week for Part III!

* = Except for Robo, who posesses a soul and learned long ago how to love.

2 Comments
Mon, August 31, 2009 -- 17:03 UTC

These posts are both encouraging and frightening. I’ve been toying with the idea of starting a game development studio here in Philly but you’re beginning to scare me! It looks like I’ll need money to get things rolling, but that’s the catch isn’t it? It’s unfortunate that I don’t have 10 or 20 grand to invest in an idea like this because I simply don’t make that kind of cash. Ah, maybe one day, companies like this are an inspiration to guys like me, keep it up!

kambrogi says...
Thu, September 3, 2009 -- 18:33 UTC

Fascinating. Lots of self-analysis required to get incorporated, apparently. That can’t be bad.

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