12 Items You Should Never Forget To Include in a Partnership Agreement

Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.

What should you absolutely not forget to include in a business partnership agreement?

1. What Will Happen if it Doesn’t Work Out 

Sharam Fouladgar-MercerThis should be a given, but let’s talk about it for the sake of reiterating its importance. Any business partnership agreement should clearly outline what steps will be taken should the partnership go astray. People despise discussing this, but the reality is that we live in a world where disagreement happens and it’s best to have a plan in place in case it does occur.

– Sharam Fouladgar-MercerAirPR 

 

2. Equity Valuation and Buy-Sells 

Chris SmithNames, ownership equity, and how the business is going to be operated are always must-haves. However, most problems arise when there’s not a clear method for valuing the equity down the road, or when there’s no buy-sell agreement included. Always know how equity is valued should it need to be sold to or purchased by another partner, and don’t forget to properly fund your buy-sell agreement.

– Chris SmithSuperius Ventures, LLC and Smith Simmons, PLLC 

 

3. Legal Inclusions 

Peggy ShellWhile it’s important to include standard legal items, such as non-solicitation of your employees, confidentiality, and ownership of work product, one important thing to never forget is clarifying the business relationship. The Department of Labor errs against employers in situations where a business partner might be considered an employee, so including clarifying language is key.

– Peggy ShellCreative Alignments 

 

4. A Vesting Schedule 

Chris BrissonOne of the biggest mistakes I made in my company early on was the fact that my partners and I vested immediately. The was a problem after one year when my partner decided to stop working and took another job. I was left holding the bag to grow the company while he still had shares in the business. A typical vesting schedule has a four-year cliff. Be sure to set this up in the beginning.

– Chris BrissonCall Loop 

 

5. How a Buy-Out Will Be Paid 

Elle KaplanIn the event that a partner splits, it’s vital to determine how they’ll receive their fair share of the business. If this isn’t in writing, they could request all of their payout at once, and feasibly bankrupt the business. By determining a payout structure, you can ensure a clean, positive break-up.

– Elle KaplanLexION Capital 

 

6. Roles and Responsibilities 

Murray NewlandsRoles and responsibilities should be clearly delineated from the beginning and in writing so there is no confusion, and to minimize or even eliminate conflict. It keeps everyone on the same page from the start and lets each partner go out and get done what they need to without question.

– Murray NewlandsDue.com 

 

7. Operating Agreements 

Tommy MelloThis is the foundation of the business that handles everything from A to Z. In most agreements, you should discuss what happens if one partner has health issues or wants out. Also, take consideration of voting rights and who is on the hook for what. All the key elements should be discussed and documented in the operating agreement. This is the prenuptial agreement for business partners.

– Tommy MelloA1 Garage Door Service 

 

8. Expectations for Hours, Vacation and Company Budget 

James McDonoughEveryone has very different expectations for how many hours they should put in, how much vacation, and generally on what and where the precious company budget should be spent. Sit down with your partner and draw out what a year would look like for all expenses and time commitment with best/worst case scenarios. You will uncover some interesting discussion areas.

– James McDonoughSEE Forge creators of FAT FINGER 

 

9. How Costs Will Be Shared 

Cody McLainMost individuals enter into partnerships based on the fact that there could be a high return in the form of equity. Equity is fantastic, but the reality in accounting terms is that the individual who shoulders the most costs will in effect be the one with the greater equity. Cost sharing is an important part of equity sharing, and it informs how the pendulum of equity will swing over time.

– Cody McLainSupportNinja 

 

10. What if a Partner Is Injured or Dies? 

Cassandra BaileyYou have to think about a business partnership agreement as if it’s a prenuptial agreement. Even if you hope nothing bad will happen, you still have to prepare for the worst. Have steps in place in case an acquisition or a merger occurs. If a partner is injured or if the partner dies, there needs to be a solution in the agreement.

– Cassandra BaileySlice Communications 

 

11. Non-Compete / Non-Disparagement Clauses 

Kristopher JonesUnfortunately, business partnerships don’t always work out. In fact, sometimes business partnerships can go wrong and a former partner can abruptly quit only to start a competing business. The partner may also say nasty things about you or your business. Therefore, it’s very important to include a non-compete and non-disparagement clause in a partnership agreement to eliminate issues later.

– Kristopher JonesLSEO.com 

 

12. General Expectations 

Ismael WrixenUnexpressed expectations are equal to premeditated resentment. Although you can include conduct and expectations in a separate document, it should be a part of your partnership agreement. Otherwise, you could end up resenting your partner, and that’s not good for business. You need to be on the same page in terms of the goals you’re trying to achieve, even if you have your differences.

– Ismael WrixenFE International 

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Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world's most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.
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