• Startups
  • December 15, 2015

Working / Setting up a Business with Friends & Loved Ones

By Lawbite Team

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The problems lie not in the “friends / loved ones” bit at the end – but rather in the “working/ setting up a business” at the beginning.

The first reason FF (FF = friends, family, loved ones, neighbours etc) give for going into business with each other is that they trust them i.e. trust them with money, trust them to turn up, trust them to make good judgments, trust them to be consistent.

However this trust thing is quite “emotional” and really what we mean is that we expect the FF to be accountable, act responsibly and share similar priorities and approaches to things. There is nothing fundamentally better or worse about going into business with FF compared with anyone else. Businesses can fail for a multitude of reasons but (aside from unforeseeable external forces) the reasons generally fall into two categories, poor planning or poor implementation.

This applies to all businesses alike.

The problem for start up businesses (and perhaps all businesses - and perhaps all of society!) is mis-matched expectations i.e. what we want and expect from others or as Bob Dylan sang “do unto others and let other do for you”.

Now it doesn’t take a lawyer to draft a set of rules to set out those expectations so it strikes this lawyer as very odd that most FF’s setting up businesses fail to write down exactly what they expect each FF to bring to the party - and, just to continue the party analogy: - how much money does each FF contribute (FUNDING) - do all FF’s get to party or are some required to serve food, play music, take out the rubbish, provide door security etc (CONTRIBUTION AND EMPLOYMENT) - what leftovers does each FF get to take home (PROFITS AND DIVIDEND POLICY) - who chooses the theme - or changes it if it doesn’t work (RESERVED MATTERS REQUIRING CONSENT OF SHAREHOLDERS/DIRECTORS) - what if FF get bored and go to the party next door taking guests with them (NON- COMPETE, ANTI-POACHING ETC RESTRICTIVE COVENANTS) - what time does the party end and who decides (TERMINATION) - what happens if the police break it up early or Beyonce wants to buy the party or the house for millions (EXIT) .

The problem with FF start-ups is that these trickier questions are often answered by saying “I trust my FF” or “My FF and I will work it out as we go”. By comparison start ups with strangers or business acquaintances are more likely to try to answer these tough questions at the outset.

The size of the problem is illustrated by Joint Ventures between established companies where typically two companies agree (either contractually or by owning part of a special purpose company) to work together on a business venture.

The average expected length of a corporate JV is 7 years but in reality they tend to last for only 3 years on average. Similarly, I would say from my experience that a large majority of FF companies or partnerships that get into trouble early on and seek out professional help do not have a shareholders agreement and/or a bespoke set of articles of association (i.e. company rules) or a partnership agreement. Generally the parties explain that it all started on a trust basis but circumstances changed thus putting pressures on the original understandings between the parties. Optimism is a wonderful and essential component but so is good communication and planning.

Shareholders and partnership agreements are useful for two reasons (1) as an opportunity to flag up and discuss challenges and “what-if’s”, make a map and choose a route at the beginning, and (2) a cleaner way of dealing with problems and (to continue another analogy!) fixing the car or scrapping it down the road.

A good healthy argument in the early stages is sometimes a very good thing. Now shareholder agreements don’t anticipate or solve all conceivable problems but suffice to say they are a good starting point and, as to what goes into a good shareholder agreement, well, that is a discussion for another day.

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In closing

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

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