Starting a business is a lot like falling in love. You become infatuated with your idea and if you’re starting the business with someone else you’re all walking on air. Life is good. Opportunity is knocking on your door. The possibilities are endless and success is yours for the taking.
It’s good to be passionate about your new venture. It’s your baby and your drive and enthusiasm are necessary ingredients for its success. At the same time, it’s necessary to keep your feet firmly planted on the ground if you want to avoid a lawsuit after you become insanely successful about who actually really has custody of this baby you’ve created.
When starting a new business venture it is always a good idea to memorialize who contributes what, who is responsible for what, and who owns what. That type of understanding is typically accomplished in a written partnership or operating agreement. It is also a best practice to negotiate such agreements during the inception, or the honeymoon stage, of the business when compromise and consensus is most likely to occur and the financial stakes relatively low.
A good partnership agreement addresses issues of management and control, the sharing of profit and loss, contributions to the business (money, labor, other assets such as equipment, patents, land, etc.), general rights and responsibilities, asset distributions, the process for admitting new partners, what happens when of the business partners dies or wants to withdraw from the business, among others.
Another important set of contracts every start-up should have in place involve protecting intellectual property rights through confidentiality and other employment agreements with employees. After all, you don’t want your employees walking off with developments they’ve created on your dime.
A case that illustrates these points involves Facebook.
Mark Zuckerberg, the founder of Facebook, was employed as a programmer at ConnectU while he was working on Facebook as a side project. ConnectU owners Cameron and Tyler Winklevoss sued Facebook and ultimately received a settlement of $65 million, a combination of case and Facebook stock. Better protection of property rights could have made ConnectU the household name instead of Facebook. Instead, it required an expensive lawsuit to make things right.
Shortly after the successful resolution of the Facebook case, however, the Winklevoss twins found themselves on the receiving end of a lawsuit from a Mr. Wayne Chang who claimed he had owned 15% of ConnectU and should be entitled to a portion of the Facebook settlement proceeds. Chang traced his ownership rights to a joint venture he formed with the twins called The Winklevoss Chang Group. It was a relationship between ConnectU and Chang’s i2hub.
Nothing ends a honeymoon faster than bickering about the “kids.” More clarity and better documentation about who owns what would have helped avoid the messy details surrounding the start-up of Facebook. With the proper planning you can make that honeymoon glow last.