Forming a partnership can be positive for a business. Acting as partners allows individuals to share finances, creative ideas, workload, and facilities. The question is, is having a partnership a bad idea? There is a lot of legality to a partnership, and if it is not written up carefully and agreed upon, then it can create an opportunity for conflict. Unfortunately, precise-sounding legal language can conceal serious disagreements if the partners haven't discussed their arrangements in sufficient details.
There are always some unavoidable ambiguities even in the most detailed contracts. This can lead to big trouble if the partners haven't bought in to the agreement on an emotional level. This happened to a group of five very experienced business people who could not quite agree on how they would share ownership of their new company. Each person brought something different to the table. One has been a CEO of a large company, another had a legal background, another had significant money to invest, and another had national prominence. Due to the differences in the roles that each individual would play, setting a value on each partner's contribution was especially difficult.
The partners wanted to wind up with a percentage of the ownership that would satisfy their own sense of self-worth. After difficult negotiations, they finally agreed on percentages. Legal documents specified their equity shares, along with their positions, titles, and compensations. A year into the partnership, the CEO and the investor partners went to the other three and said that they now know enough to establish percentages that are more equitable for everyone. They decided that revisiting the percentages was something they had all agreed to do. Two of the other partners didn't recall that agreement.
The fifth partner, who was the chairman of the board, tried to stay neutral, although he probably would have sided with the CEO partner in a crunch. The two partners who insisted on following the original agreement, had the right to do so, because there was nothing on paper that said anything about adjusting the percentages. The CEO partner could have thrown those two partners out of the company, that was his right as CEO, but he didn't have the legal authority to make any changes in the way the equity was divided up. All five partners understood that if this ended up in litigation that their fortunes and futures would be at risk. They decided that they would seek mediation for their differences. In my opinion, partnerships can have a tremendous impact on a business.
Whether the business is going well or bad there is bound to be a difference of opinion on how the equity should be divided at any given time. This is why when setting up the partnership you need to be brutally honest on how you feel as far as your worth to the company and what is owed to you. Probably the best thing when establishing a partnership is to have a mediator. This third party is neutral and can negotiate without the emotional attachment.
If this is done in the beginning, it is possible to avoid most of the major conflicts that may arise down the road.