Prenups for Startups
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If you’re going to start a business with a partner, make sure you talk through all of the big issues before you get into bed together.
By way of an example, let me share with you the story of a business owner we’ll call Judy, who is feuding with her partner, whom we’ll call Nigel. Judy wants to reinvest their resources into building a company they could sell in a few years, while Nigel wants to use the business as his personal piggy bank to fund his lifestyle today.
Their business started seven years ago as a project-based consultancy. This year, they will generate $2 million in revenue, with the help of seven full-time employees.
Judy would like to develop a scalable product that would allow them to sell the business in a few years. Nigel likes the idea of having a product, but he’s not willing to sacrifice cash flow today for a more valuable business tomorrow, because his day-to-day cash needs are greater. Nigel is the primary provider for his family of four. Judy, on the other hand, joined the partnership from a lucrative executive job at a large company, from which she left with a big package. Her husband works, and they have no kids. In short, she doesn’t need to pull much cash from the business to fund her day-to-day lifestyle.
Nigel keeps accepting consulting projects, which provide good cash flow but require custom solutions that eat up the partners’ time and take resources away from working on their product. The product remains unfinished and stalled. Both Judy and Nigel are miserable.
The cautionary tale of Judy and Nigel offers a moral for would-be partners:
Make sure your potential partner
maintains a lifestyle similar to yours.
If your partner drives a Mercedes and you’re still tooling around in your ’93 Civic, it could foreshadow a problem down the road. Talk about your day-to-day cash needs to fund your lifestyle and your exit goals before you agree to go into business together.