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Issues in a 50-50 Equity Business Partnership

There are potential issues in a 50-50 equity business partnership.

Many startups start out essentially as a partnership. The partners agree on a few essential things and get started with enthusiasm. But things may work out better if they think through the following; with the help of an appropriate lawyer.

Business Plan

The partners need to agree on what service will be offered to what target market. But further they need to agree on how they will agree to evolve the strategy as they better understand the real core assets they bring to the market and better understand the needs of the market.  There will be numerous decisions in this realm.What if one wants to get into a new line of business? Or get out of a line of business?

Business model

Should we evolve more towards lower volume with higher profit or towards higher volume with lower profit margin? Should we be more or less capital intensive?

Outside investment

How will we agree on an investor’s offered funding? Desire to be on the Board? Our decreased or lost control?

Asset from one partner

So one partner brings in an asset. How will it be valued on “acquisition”? How will it be valued at the time of our financial exit? How will valuation be accomplished? How will its combined value with the inclusion of other corporate assets be considered?

Financial exit

The personal financial situation of each partner will likely have changed since formation. Is this the time to sell? If so how will an acquisition offer of cash stock and extended services of one partner be agreed. How will differing tax implications of an acquisition offer be addressed?Many exit deals are aborted because of differences of opinion.Share Capital or expensesSharing expenses is safer.Why are you partnering?Should one just be a contractor to the other?

Third Partner

The existence of a third partner; perhaps with a smaller partnership position can help resolve conflicts.

Access to company property

If one partner brings for example source code. It must be available to the others if he/she leaves.

Dispute resolution

A rapid dispute resolution process is required.

Compensation

Partners may have differing cash needs. How cash and assets will be withdrawn from the startup needs to be understood.  Partners may have differing cash needs.

Conclusion

There are numerous potential issues in a 50-50 Equity Business Partnership. Talk through these topics in detail. Then; are you ready to trust but verify?

References


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