What you need to know before starting a joint venture

Contents:

• Friends or partners: why verbal agreements are not protection, but a trap
• What you need to record if you are starting a three-person project: a structure of roles, shares, and scenarios
• What questions will save you from future conflict (if asked in time)
• Where the structure breaks down: common reasons for failure

The article was written by Vitaly Vetrov, managing partner of the law firm "Vetrov and Partners".

A business for three may seem tempting. One partner brings an idea, another is responsible for sales, and a third is engaged in development. All participants believe in the product's success, enter into an agreement, and invest their resources—time and money. However, after six months, the situation may change: tension and misunderstandings arise, and someone decides to take a break. As a result, clients remain with one participant, the product moves to another, and the third is left unaware of what has happened. The idea survives, but the team disintegrates. This scenario highlights the importance of clear roles and communication within the partnership. Often, the cause of a failed business is miscommunication between the co-founders, not the business itself. If the co-founders fail to establish clear agreements or rely on informal ones, this can lead to conflicts. As a result, each partner develops their own understanding of fairness, which creates tension and hinders the successful development of the project. To avoid such situations, it's important to define roles, responsibilities, and rules of engagement between co-founders in advance.

In this article for Skillbox Media's "Business" editorial team, I'll share key aspects that will help you better understand current business trends. We'll examine important strategies that facilitate company growth and development, as well as analyze effective methods of resource management and process optimization. I'll also touch on the implementation of innovative technologies and their impact on competitiveness. This article will be useful for both aspiring entrepreneurs and experienced executives seeking to improve their business performance.

• Why verbal agreements don't protect;
• What should be clearly stated when starting a three-person business;
• What questions can prevent future conflict;
• What are the most common reasons why businesses fail?

Friends or Partners: Why Verbal Agreements Are a Trap, Not a Protection

Starting a business based on friendship can create the illusion that trust solves all problems. However, in practice, this trust can become an obstacle. It replaces clear agreements with vague hope. When you trust a person, you tend to not control their actions. When trying to record terms on paper, tension and the question, "Don't you trust me?" may arise. This can complicate interactions and reduce the effectiveness of cooperation. Therefore, it is important to find a balance between trust and formalizing relationships to avoid misunderstandings and strengthen business ties.

Legal registration is not associated with mistrust, but rather a necessary security measure. Even if the business does not meet expectations, if one of the partners decides to leave, or if you simply choose different paths, it is important that everyone retains their share. This will help maintain not only financial stability but also good relations between partners. Proper legal registration will ensure the protection of the interests of all parties and minimize future risks.

Statistics show that more than half of all partnerships end within the first five years. These figures may vary depending on the source, but the main conclusion remains the same: relationship problems are not always related to the qualities of one of the partners. Often, the cause of a breakdown can be external factors, a lack of communication, or a mismatch of expectations. Understanding these aspects can help create stronger and more sustainable relationships.

The established structure is fragile. Relationships within a company should be viewed as a separate architecture, where load-bearing elements, pressures, and connections are essential. They are not based on enthusiasm, but are formed based on pre-agreed rules and norms. Effective teamwork requires a clear understanding of these rules to ensure sustainability and productivity.

What you need to document if you're starting with three people: a structure of roles, shares, and scenarios

Starting a business with partners as a limited liability company (LLC) with three participants is one of the most common solutions. However, this option has its pitfalls. Three participants can easily make unanimous decisions, but they can also face situations where two find themselves against one. In the event of a tie and the absence of pre-established rules for conflict resolution, any dispute can lead to paralysis of the company's operations. Therefore, when creating an LLC with several participants, it is important to think through the governance and dispute resolution mechanisms in advance to ensure the effective functioning of the business.

It is important to discuss and record key points in advance. This will avoid misunderstandings and ensure more effective interaction. Transparent communication and clear documentation will help all project participants better understand their tasks and responsibilities, which will ultimately increase overall productivity. Do not forget to pay attention to details to ensure the successful completion of all stages of the work.

• What processes (sales, product, finance, hiring) is each person responsible for;
• Who contributes what resources (money, expertise, connections);
• Who has what rights and restrictions;
• Who makes decisions and how.

Key aspects of the successful functioning of a company are the charter and corporate agreement. Many entrepreneurs put off drafting them, believing that the current situation in the organization is satisfactory. However, this can lead to serious problems in the future. The charter and corporate agreement play an important role in defining the rights and responsibilities of the participants, as well as regulating the company's internal structure and processes. These documents help avoid conflicts, facilitate decision-making, and create a clear framework for interaction between partners. Therefore, it is important to ensure their existence and update them promptly to reflect changes in the business.

• the procedure for a participant's exit and the assessment of their share;
• the possibility of alienating the share to third parties;
• a mechanism for resolving deadlocks;
• a ban on competition - to prevent someone from leaving and starting the same thing.

Shares in a business do not necessarily have to be equal, as partners may have different roles and levels of involvement. One may work full-time, another provides financing, and a third has the necessary expertise. It is important to openly discuss these aspects and establish share proportions in advance to avoid misunderstandings and conflicts in the future. An honest approach to distributing shares helps create a healthy atmosphere in the team and contributes to the successful development of the business.

What questions will save you from future conflict (if asked in time)

One evening can save you dozens of hours in court and relieve months of negative emotions. This text provides an informal but reliable checklist of questions that are important to discuss at the beginning of the process. These questions will help you better prepare and avoid potential problems down the road.

• What happens if one of us drops out of the process? Gets sick, goes hired, or simply burns out. Who picks up the slack? How are tasks and compensation redistributed?
• How will we make important decisions? Only unanimously, or does someone have the deciding vote? Clear logic is needed. Without it, the team will start to stall at every turn.
• How do we count money? Dividends, reinvestment, expenses, salaries. Who makes the final decisions on the budget? Who controls the flow of funds?
• What happens if one of us wants to leave? Can they sell their stake to someone else? Do others have the right to buy it? At what price? Under what conditions?
• Is it possible to open a competing business later? It's especially important to discuss this in cases where a departing partner could take knowledge, a database, or connections with them. It's not just a prohibition that's important here, but also a control mechanism.
• How do we capture everyone's contribution? Especially in intangible things: ideas, products, and teams. Among other things, we need to specify in whose name, for example, IP rights are registered, who owns domains, accounts, and code.

Discussing complex topics often causes discomfort, but this is precisely the sign of a mature approach to launching a business, as opposed to the illusion of "we'll figure it out as we go." If your team has been able to openly discuss all key aspects and come to an agreement, you are one step closer to creating a sustainable business than 90% of other teams. Effectively addressing these issues not only strengthens the internal structure but also increases the chances of successful development in the future.

Where the structure breaks down: common reasons for failure

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

The team lacks clearly defined roles and responsibilities. Some members participate in calls but are unable to make a real contribution at the moment. Others share their expert point of view, but do not take responsibility for completing tasks. After three months, a logical question arises: "Why does this person get a third of the company?" The need for clear roles and distribution of responsibilities becomes obvious to achieve effectiveness and fairness in the team.

Exiting a partnership is not provided for. One of the partners may leave the company while maintaining a formal status. In this case, they may take away some of the company's clients or block a deal with an investor. This is possible if a preliminary exit agreement has not been reached.

Partnerships often have different expectations. One partner strives to create a new product, another is focused on quick profits, and a third values ​​the status of co-owner of the business. One wants to develop and scale the project, while the others prefer to maintain the current state of affairs. Despite sincere intentions, such differences in goals can lead to conflicts and disunity within the team. An effective partnership requires a clear understanding of shared goals and aligned strategies to avoid a situation where participants move in different directions.

All these scenarios are united by the deceptive belief that "everything will work out on its own." This illusion collapses at the first serious tests. The result is problems with lawyers, stress, emotional burnout, and the destruction of a business that could have been saved. It's important to understand that without proper control and preparation, you can't count on success. You need to plan ahead and take measures to protect your business from potential crises.

Strong teams discuss important issues early on to avoid future conflicts. They agree on things in advance to avoid the consequences of misunderstandings. Transparent discussion of complex topics helps avoid situations where solutions become impossible.

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