Consulting 101- Partners

Consulting 101: Partners

Last updated: 7/2/2002; 7:37:01 AM

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Consulting 101: Partners

Depending on how you count them, I've had six or seven different business partners over the years. Some have worked, some have not but I've been lucky enough to learn from all of them. Of the partners that I've had, my current partner, Gretchen, is the best of the lot – but that's because we really worked at it (and it doesn't hurt that she's really, really cool). The rest of this essay describes common errors people make with business partners and how to avoid them.

Disclaimers : IANAL / IANAA / IAJP (I am not a lawyer / I am not an accountant / I am just practical). Free advice is worth what you pay for it. The advice of a good attorney and accountant for your business is always good.

Mistake 1: NOT Making the Equity Split Equal

50 / 50 Is Good!

To me the biggest mistake people make with partners is valuing one over the other. This always, always, always leads to problems down the road. It creates a power dynamic that is just plain bad. In my opinion it just doesn't matter what the parties bring to the table at the start of the partnership – what matters is what happens over the course of the partnership. If one party is bringing additional physical assets such as cash or equipment to the partnership then treat it as a scale of equipment to the business that is paid for, with interest, over the next few years. Just don't try and say "Well my Partner is only worth 30% of what I am", etc. That never works. It just doesn't work.

If you are doing the sale of equipment thing then put it in writing at the time of the sale. Why? Because the IRS tends to look negatively on the selling assets to the business for original purchase value – 5 years later. Do the paperwork at startup time so it's all kosher and the debt is attached to your tax returns every year.

Comment: Yes, of the partnerships of mine that have worked out, we did this. And, what of the ones that didn't work out? All but 1 didn't work (and that one might have worked if the equity split had NOT been equal which goes to show that absolute rules can also be wrong).

Mistake 2: Picking a Partner Just Like You

Pick a Partner that Complements Your Weaknesses

We all like people like ourselves. Programmers want to hang out with other programmers, sales folk with other sales folk and so on. This is exactly what you DO NOT want in a partner. Sure they're cool to hang with but that's going to hurt you later. But first a little but more background … I actually like having a partner. I don't think there is anything lonelier than being the only person running the business. Even if you have staff, being the sole owner is just plain lonely. Some people actually like this – they like the feeling of sole control and power. Not me. To me, a partner makes the whole process just a lot more fun, more worthwhile. But… What you do not want in a partner is a clone of yourself. For example, if you are a programmer, a serious alpha geek, you do not want another superstar in this area. The best partner complements your weaknesses; they provide the yin to your yang. In our situation, I am very strong along the technical, marketing and strategic dimensions.

Gretchen, on the other hand, is a great designer (I make butt ugly web pages), wonderfully organized (I loathe paperwork far more than you'll ever know), an outstanding networker and, surprisingly, a fantastic sales person (although she made me promise to never, ever make her a business card with "Sales" in the title). Not only do our differences complement each other, but we're able to help teach each other different skills.

When I've had partners that were too close to my own skill set, we tended to conflict with each other over fairly stupid issues – different approaches to the same problem. And that's actually pretty common. We also lacked critical skills

Mistake 3: Picking Partners You Haven't Known Long Enough

Know thy partner well Young Luke, Know them well
or the dark side will overtake you both

I'm fond of saying that, in some ways, a business partner is a closer relationship than a spouse. The way I look at it is that there are 168 hours in the week. I've never seen a startup business work less than 60 hours per week, at least in the beginning, a period that is often, but unfortunately, measured in years. That leaves 108 hours in the week. Most people sleep 8 hours per night or 56 hours per week total. This leaves 52 hours per week of waking time to do everything else – see your spouse, play with the kids, pet the cat, shower, shave, etc. You almost certainly really do spend more time with your partner than you do with your spouse. This makes for a close relationship. And the only way that you will survive this is to know them well. If you've been able to maintain a relationship with someone for a long time then you are a lot more likely to be able to be partners with him or her. I've always thought a lot of venture backed businesses fail because only a portion of the founding team had known each other long enough.

Comment: I knew my first partner for 8 years before we founded a company together. I knew Gretchen for more than 2 years before we started making $$$ together. And she and I shared one of those awful, painful bonding experiences that either draws you together or rips you apart. Yes, it was a dot com hell trip, complete with brutal, maniacal ivy league CEO.

Mistake 4: Make Sure the Vision is Shared - Macro and Micro

This is where you must agree.

When you start a business, it's really important to make sure that both forms of the vision for the business is consistent. And the vision isn't just the big picture (macro), it's also the little details (micro). For a macro vision it might be "Provide High Quality Consulting". This goal is usually really easy to agree on – it's what brought you together in the first place. What I've found is that the little details make all the difference. For example, one of you might want to raise capital while the other wants to grow at a slow and steady pace. Or one of you might want to have employees while the other person realizes
what a astonishing headache employees can be at times.

So the rule of thumb to use is: Share the Big Picture and Little Picture Visions.

Comment: Yup. We're totally on the same page here, both macro and micro.

Mistake 5: Not Trusting Your Partner

Without lots and lots of trust, the first time things get hard then the partnership breaks down.

Of the partners that I've had that actually worked, all of them have been people that I trusted 1000%. The next statement sounds obvious but I'll say it anyway:

If you don't trust your partner 100% then they shouldn't be your partner.

Here are some things to think about that can tell you whether or not you can trust your partner:

Could you trust them to take care of your child?
Could you trust them to take care of your pet? Or your plants?
Could you ask them to hold a wallet full of cash and not worry about it?
If you were traveling and you knew that there was a 50/50 chance that they might need files off your machine, would you have any problems if they saw things on your hard drive?
If you were traveling and you knew that there was a 50/50 chance that they might need files off your machine, are you ok givin them a house key ?
Would you feel ok giving them your Root password?
Would you feel ok giving them the password to all Internet domains (this is a huge trust level for me, even more so than root, since I always insist on controlling the domains, always!).

Now trust is definitely one of my repeated themes that I mention over and over. So you could argue that I'm perhaps blowing this out of proportion. I really don't think so. Trust is key with a business partner.

Comment: I don't have children or plants, at least indoor plants; on all the rest of these Gretchen has my complete trust.

Mistake 6: Not Making it Real and Official

I hate paperwork, hate it and even I think this is important.

It's very easy for two individuals to sit down and say "We're partners, let's make money together". This tends to be nebulous, intangible and unofficial – until you actually make it real. For whatever reason, taking the time to figure out the nitty gritty, nasty little details tends to make both parties realize that this really is a business and you need to work at it.

Here are some of those details that Gretchen and I went over:

Incorporation. That's right, we actually spent the $500 or so to incorporate via www.bizfilings.com. Although this is a pain, it's not a bad step to take. A formal structure can have some tax advantages, it also says to your clients that you are a little less fly by night.
Passwords. That's right – I turned all of my passwords over to Gretchen right after the incorporation. What? Huh? Well, think about it. We're in the business of doing projects and making money together. What if I got hit by a bus? Or if I fell off a ladder? There's lots of technical talent out there and, while I don't like to think about being replaced,
other talent could do at least some of my functions (albeit with the ability to write whacky early morning blog entries like this). But if Gretchen doesn't have my passwords this is a much bigger problem. Much bigger. So I disclosed all
my passwords including: Local Machine Passwords, SysAdmin Passwords, Email Passwords, Website Passwords
and so on. It was a pain in the neck to do but it was also the right thing to do – and not only for Gretchen – but also for our clients. Oh and did Gretchen tell me her passwords? She didn't need to – I already knew them anyway from helping her with systems administration tasks multiple times over the years. We also setup a process for handling any new passwords that get created so it's easy for each of us to know what passwords have been used. Finally we "hardened" Gretchen's approach to passwords so other folks that may have known hew password don't any longer.
Assignment of Rights. Given that I've been working in the field for a long time, I have lots and lots of intellectual property. We set up a legal structure so Gretchen has full access to it. For some obvious reasons, I don't want to get into how we handled this but it was setup so that it only becomes contingent on what is called "ADD" (accidental death or dismemberment). I think for Gretchen, when I did this, everything became much, much more real. I could actually see it in her eyes immediately after I signed the documents and gave them to her. It was an "Oh boy …" type reaction…

Comment: Both of us contributed differently to this one. I was big on passwords and assignment of rights while Gretchen correctly recognized that incorporation was important and took care of it.

Mistake 7: NOT Rewarding the Seller

Always remember: DEC never paid commissions to sales people. Where's DEC now?

In any small company there is rarely anything as important as actually selling. Whether you sell consulting services as we do, widgets you make in a small factory, software or something else, if you don't sell then you don't survive. And, the simple truth is that most of us don't like to sell. That's just a fact. The natural salesperson is a rare (but wonderful) beast. What you need to really do is make sales a part of the organization as a whole. And, the best way that I've found over the years to handle this, is pretty simple: Reward the Seller. After Gretchen and I started our very first big job, and got the required (see my Professionalism essay, #10) up front money, we decided on and implemented a commission structure and paid the seller a commission.

Comment: What's that you ask? Who got the commission? Given what I wrote in the 2nd main paragraph of Mistake #2, you can make a pretty good guess. Did this bother me? Not in the slightest. Gretchen had some qualms about this but it has always been my experience that if you want to build a culture around anything (and sales commissions are really, really important) then it starts at the beginning.

Mistake 8: Not Talking About Money

And if you don't want to bring up money? Tough. This is business. Money's a big part of it.

A lot of people don't like to talk about money. They even more don't like to admit to money issues. Bear in mind that money does make the world go round and that we all have varying amounts of it. Money becomes an issue in almost every situation so it makes sense to be upfront and deal with it right from the start.

Comment: One of the first things we talked about! And both of us brought it up.

Mistake 9: Not Talking About, Well, Everything

Get everything out in the open.

Remember when I described this as "closer than a spouse?" Well if that's true then the one thing that can really tank any spousal relationship is NOT being open and talking about things. The same goes for a partnership. If you have an issue with your partner then the worst thing that you can do is let it fester and make you angry. Don't do that to yourself or to your partner.

Comment: Not an issue between Gretchen and myself. We both err on the side of "brutal honesty".

Mistake 10: Ignoring Your Instincts, First Impressions and Feelings

Do not ignore your gut. Instincts are often right.

While I'm not a real touchy, feeling individual, I am a strong believer in both first impressions and gut instincts. Looking back over my career, the situations that ended badly were ones where I often disregarded one or both of these. To me a business partner either "feels right" or "feels wrong". And if it feels wrong, despite whatever other great attributes that partner has, it's just not going to work (IMHO).

Comment: Do I have to even make a comment? Clearly Gretchen met all these criteria for me.