Key factors for a successful start-up of a joint business

Contents:

• Associates or Allies: The Dangers of Oral Agreements as Traps Instead of Protection
• Defining Key Aspects When Starting a Business in a Threesome: Roles, Shares, and Interaction Scenarios
• How to Prevent Potential Conflicts in Advance with the Right Questions?
• The Main Factors Contributing to the Destruction of a Structure

The author of this article is Vitaly Vetrov, managing partner of the law firm "Vetrov and Partners".

A joint business for three seems tempting. One partner is full of inspiration and ideas, another has sales skills, and the third is responsible for programming. All participants sincerely believe in their product, exchange handshakes and invest their resources - both time and money. However, after six months, the atmosphere begins to heat up: tension and hints arise, and someone decides to take a break. As a result, clients switch to one of the partners, the product ends up with another, and a third is left perplexed, unsure what happened. The idea continues to exist, but the team falls apart.

Often, the reason for such a breakup is not the business activity itself, but disagreements between the co-founders. They may initially reach an agreement on a friendly note, but over time, each of them develops their own understanding of fairness.

In this article, prepared for the Skillbox Media "Business" editorial team, I will share my thoughts on the following:

• Oral agreements often prove unreliable for several reasons. Firstly, the lack of written terms leads to the parties being able to interpret the agreement differently, which creates the risk of misunderstanding. Secondly, if a dispute arises, it is more difficult to prove that the agreement actually existed and what its terms were, since there is no documentary evidence. Furthermore, verbal agreements can be easily challenged by one of the parties, making them less stable and secure than formal contracts. Finally, in some jurisdictions, certain types of agreements must be in writing to be legally binding, which further highlights the vulnerability of verbal agreements.
• When starting a joint project with a team of three, it is essential to document several key points. First, it is necessary to define the roles of each participant to avoid confusion and misunderstandings in the future. Second, it is important to agree on the common goals and objectives you intend to achieve so that everyone is on the same page. Third, setting deadlines will help organize the workflow and monitor progress. It is also worth documenting communication rules and methods of interaction to maintain effective dialogue. Finally, it is useful to document any decisions made so that you can refer to them later if necessary.
• What questions can help avoid conflicts in the future?
• There are many factors that contribute to business failure. First of all, one of the main reasons is a lack of financial resources. If a company doesn't have sufficient capital to cover operating expenses or invest in growth, it risks facing serious difficulties.

  Furthermore, poor management can also lead to failure. Ineffective strategies, a lack of a clear plan, and inexperienced management often lead to tragic consequences. Failure to adapt to market changes and ignoring customer needs also play a significant role in business failure.

  Competition is another important reason. If a company cannot offer something unique or more valuable than its competitors, it risks losing customers. It is also worth noting that problems with marketing and promoting products or services can significantly reduce their visibility in the market.

  Legal aspects should not be forgotten either - failure to comply with legal regulations can lead to fines and other sanctions, which undermines the financial stability of the company. Thus, a combination of several factors, such as financial problems, poor management, lack of competitiveness, and legal risks, often leads to the collapse of a business.

Allies or associates: the dangers of verbal agreements as traps instead of protection

Starting a business within a friendly relationship may seem like an ideal solution, where trust plays a key role. However, in practice, this trust often becomes an obstacle. It replaces clear agreements with the hope that everything will go well. When you trust someone, you generally don't seek to control them. And if the thought of putting the terms in writing comes up, it can create tension and lead to the question: "Why do you doubt my integrity?"

In practice, drawing up legal documents is not associated with mistrust. It is a measure to ensure security, even in situations where the business does not live up to expectations, someone drops out, or you simply decide to go your separate ways. The key is to ensure that everyone retains their share, and preferably, that good relations are maintained.

What do the statistics show? Although various sources offer different information, the general trend is this: more than 50% of business partnerships dissolve within the first five years. This does not at all mean that one of the partners is a "loser."

It indicates that the created structure has its own fragility. No one realized that internal relationships within an organization are a unique system, reminiscent of an architectural structure with supporting elements, loads, and connections. These connections are not based on simple enthusiasm, but, on the contrary, require clearly established and pre-agreed rules.

Defining key aspects when starting a business with three people: roles, shares, and interaction scenarios

The most common form of joint business among partners is a limited liability company consisting of three participants. However, this structure is fraught with certain risks. On the one hand, three people can make unanimous decisions, but on the other, a situation may arise where two participants find themselves against the third. If opinions are divided equally and clear rules for conflict resolution are not established, this can lead to a blocking of the company's activities.

Therefore, it is necessary to discuss and record in advance:

• Each member is responsible for specific aspects of the business. In sales, they focus on increasing sales and interacting with customers. Product specialists focus on developing and improving products or services, ensuring they meet market demands. The finance department oversees cash flow, budget planning, and financial reports, ensuring the company's sustainability. As for recruitment issues, this area is the responsibility of HR specialists, who are involved in the search and selection of personnel, as well as their development within the organization.
• Who provides what resources, including funds, expertise, and contact networks?
• Who is the subject of rights and what restrictions or privileges are there?
• Who exactly makes decisions and how does this happen?

Special attention should be paid to a proper charter and corporate agreement. Often, these documents are postponed indefinitely under the pretext that "everything is fine with us anyway." However, this is irrational, since they are the ones who establish:

• the procedure for a participant's withdrawal and determining the size of his share;
• the right to transfer one's share to other participants or third parties;
• ways to overcome hopeless situations;
• restrictions on competition - to prevent a person from leaving and creating a similar business.

It should be noted that the distribution of shares in the business does not necessarily have to be equal, since the partners often have different roles and degrees of involvement. One of them may work full-time, another may contribute financial resources, and the third has the necessary knowledge and experience. You should not be afraid to openly discuss this issue and agree in advance on how the shares will be distributed between the participants.

How to prevent possible conflicts in advance with the right questions?

One evening can save you from having to spend dozens of hours in court proceedings or experience months of negative emotions. Here's an informal but solid list of questions to discuss at the outset:

• What happens if someone leaves the team? For example, if they get sick, take a different job, or simply lose motivation. Who will take over their responsibilities? How will tasks and compensation be redistributed in such a situation?
• How will we make key decisions? Will we strive for unanimity, or will we have an appointed person with the deciding vote? It's important to establish a clear logic. Without it, the team risks running into difficulties at every stage.
• How are financials accounted for? Does this include dividends, reinvestments, expenses, and wages? Who makes the final decisions regarding budget allocation? Who monitors cash flow?
• What happens if someone decides to leave the joint venture? Can they sell their stake to third parties? Do the other participants have a pre-emptive right to buy? How is the price determined, and what conditions will apply?
• Is it possible to launch a business that will compete with the current one later? This is especially relevant in situations where the partner leaving the company has access to valuable knowledge, a client base, and business connections. In this context, not only the existence of a ban, but also the methods for enforcing and monitoring it are no less important.
• How can we take into account the contribution of each participant? This is especially true when it comes to intangible aspects, such as the concept, product, or team. It is necessary to spell out in detail the name in which, for example, intellectual property rights will be registered, who owns domain names, accounts, and software code.

While discussing these issues may cause discomfort, they are the aspects that distinguish a mature start from the naive confidence that “everything will work out as we go.” If you have managed to discuss all these points and come to an agreement, you are one step closer to creating a stable business than most teams.

The Main Factors Contributing to the Destruction of a Structure

There are three common reasons why even the most promising partnerships can fail.

There is a lack of clear division of roles and responsibilities. Some participants join meetings, but at the same time claim that they "cannot do anything at the moment." Others offer their expertise, but do not take on specific tasks. After three months, a dilemma arises: "Why is he entitled to a third of the company?"

There is no way out of this situation. One of the partners may leave the project, while formally remaining a partner. Or he leaves and takes some of the clients with him. There is also a possibility that he will interfere with the deal with the investor. And this is quite possible if an appropriate agreement has not been reached between you.

Different ideas about the goals of working together. One partner is focused on creating a product, another is focused on quick profits, and a third is focused on co-founder status. One wants to develop and expand the business, while the other two would prefer to maintain the status quo. Despite sincere efforts, they are moving in different directions.

All of these situations share one common thread: the idea that "everything will somehow work itself out." This illusion is shattered when faced with serious difficulties. The result is problems related to lawyers, nervous tension, emotional exhaustion, and the destruction of a business that could still be saved.

Strong teams initiate discussions from the outset to avoid future conflicts. They establish agreements upfront to avoid having to deal with the consequences. Discuss difficult issues to avoid encountering insurmountable obstacles in the future.

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