Business Partnerships 101: 5 Tips for a Good Founder's Agreement - 45

Law and Wit Episode 45: Business Partnerships 101: The 5 Tips You Need for a Good Founders Agreement. Welcome to Law and Wit, Creative Counsel for Entrepreneurs. I'm your host, Brittany Rettell, mother of 4, entrepreneur, naptime lawyer, and attorney for creative entrepreneurs. I'm here to share inspiration and action so that you can tackle your business blocks and confidently own your business in every sense of the word. Thank you so much for being here. Hello and welcome back everyone to Lawn Wit. I feel like we need a more creative name than that. I feel like that's a little bit of a disservice and I know I set the bar high by catering to a creative industry and so frankly you guys expect more and I should be delivering more. So if you could think of a better, more creative name, clever name for my audience members, Lawn Witters, Legitters, something, I don't know. It doesn't have to rhyme. I don't know why I'm stuck on there. This is not Dr. Seuss. Bring it to my attention, please send me a DM or, uh, or send me an email, whatever. Um, get my attention, flag me down, I'd love to hear it. Um, but thanks so much for being here, guys, audience members, listeners, creatives, content creators, influencers, bloggers, vloggers, graphic designers, web designers, interior designers, all the different kinds of designers, photographers, and everyone else in between— makers, illustrators, authors. I think that's covering a whole big swath of you. Um, I'm excited and humbled to have your time and your attention, for you to be here, to be taking steps to intentionally work on your business, especially the unsexy part of your business. But that's just, that's just a rumor on the street, and we're going to change some of that mindsets, and we do that here at Long Whit Creative Council for Entrepreneurs. So I'm Brittany Rettell, I'm your host, and, um, I gotta give my standard disclaimer. I am an attorney, licensed attorney in Utah and Idaho, but I am not your attorney unless you want me to be, and then we talk about what that relationship looks like, you sign an engagement letter and I talk about what I could do for you and fees and timing and confidentiality and all of that good stuff. None of that is going on here so this is just for informational purposes only. If you have any questions about what it'd be like or just want to talk to me and see, you know, what does it look like working with a lawyer one-on-one, especially if you've never done that before, then book a free consult with me. I offer those at BrittanyRettell.com/services and I offer 20-minute free phone calls so we can talk about your business, about where you're at, about where you want to go and how I can help and how legal can help give that a really strong foundation and help you scale, grow, protect what you've built, and carry it through to where your dreams want to take them. I'm really excited about this episode today, so I'm jumping in soon. I just have a couple items of business. I did want to leave a review because I've been kind of forgetting to ask about reviews, and, and I know, I know it's kind of a lame thing when people on podcasts, you know, you know, say please leave a review. But here's the deal, guys, like, I, I gotta play this game, um, because I don't control the platform. I just put my podcast episodes out and I hope they get heard, and they are. But I know there's a lot more people out there who could benefit from this information and who I'm not reaching yet. And, um, you know, I'm in it for the long haul, so I'm not trying to play any gimmicks here. But one of the ways, a big way that people find this podcast is if they're searching for these terms, or they try to find me and that makes it harder if I don't have as many reviews because iTunes just doesn't think that I'm a legit podcast. So I'm going to read a review, and if you can take some steps right now after this review to pause and do it if you haven't done so, I would really, really appreciate it. It would be an amazing Fourth of July present to me. I know, not a traditional gift-giving holiday, but you know what, our loss. Let's celebrate America's birthday and give a review to Brittany. Okay, so this is from Little Miss Green, and she wrote, one of my favorite podcasts. Brittany's podcast helped me to feel more confident owning my business and helps me clarify where I need to grow. She takes a topic that can normally feel dry and intimidating and makes it both entertaining and approachable. I recommend this podcast to every creative entrepreneur and small business owner that I know. Thank you so much for sharing that. I, I appreciate these so much. Um, they're a little pick-me-up on days that are long or quiet or stressed or where I'm wondering Am I like, is this, this is totally crazy that I'm sitting here at a microphone? And why am I taking the time to do this? And I should be doing real work, like real lawyer work, where I'm turning on my billable hour timer or whatnot, or I'm sitting in the trademark database doing my thing. Um, but I also have really strong feelings that this, this is important, and that it's important to be doing outreach and education and to be offering tips and tricks and strategy, um, to those folks that I know it can help them, enlighten them, um, to inspire them to take a little bit of the edge off what can I know feel like a really overwhelming subject and part of their business, which is dealing with legal and dealing with the growing pains that come from a business. And they can be so exciting to be able to hire and to scale and to get into licensing and bigger contracts and collaborations and partnerships, um, and that's what we're going to be talking about today. Um, but with those come another side of stuff that you have to think about, you know, new level, new devil. And I want to make that new devil not so scary, okay? Um, so, and I know we've took a little break the last couple weeks, so thanks for your patience. I did a trip down to Utah with my kiddos right after school got out, and school getting out was crazy. I mean, I think the Maycember thing is, um, is a totally real thing in terms of the recitals and the talent shows and the mommy-daughter teas and the dances and just all, all the things that we have to do to all celebrate our little kiddos. And, um, I always think of The Incredibles— it's not a graduation, he's moving from the first grade to the second grade. It's psychotic. Um, And it's not actually— kindergarten graduation was adorable. I don't regret that in the least bit. But you know what I'm saying, you guys have— who are parents who have a sense of humor about all, all of this stuff. Um, but anyway, I took a couple weeks off, and— but I'm here and I'm really excited about this episode. And it is all about getting business married. Marry me! Okay, for all my Arrested Development fans out there. Um, and I'm not the one who made up this analogy in terms of that being in a partnership, a business partnership with someone, is a lot like another partnership that's a legally binding where you're sharing a lot and things can go really great, or they can go spectacularly dumpster fire. And either way, whatever way it's going to go, I mean, it's going to go, um, it's really, really smart and a really, really great idea to talk about that founders agreement, that operating agreement, it's called all those things, a partnership agreement. They're all those words are interchangeable. Okay, so if you hear one and you're like, wait, do I have the right agreement? Is this the right thing? Yes, all of those words mean the same thing. It's an agreement that talks about how are you going to run this business. This is your internal, your private document between you and your partners, however many you have, about the lay of the land. This is your business prenup, and this document is so, so important because it's this conversation that you have around this document and what you decide and the vision and the strength and the growth that comes out of these conversations that can just give such power to your business and can thwart off so many headaches. So many headaches. I can't even, can't even tell you how many headaches. I mean, I can't because we're going to talk about it here today. So, so we're going to start. I'm going to give you a little pep talk about why this matters in case you're not quite convinced yet. And here's the thing. If maybe you're on board with it, but you're not so sure your business partner or partners are and you'd like to have some talking points into, hey, here's why we, why we need to take care of this and why we need to listen to Brittany and why we need to take the next steps to make this happen. Okay, and then I have 5 different areas that we're going to look at inside the agreement, and I'm really— I'm going to run you through and give you all these questions. Okay, so this one's going to be like a lot of note-taking stuff. So if you're on the go and you're like, oh shoot, like I'm not going to be able to take notes for this, don't worry, I got you. This is all going to be in a freebie handout, okay, that I'm going to have at the end of the episode. Okay, all the best stuff from here. Okay. So let's get going. First of all, okay, so why, why do I need this? Okay, and here's the thing, that whether if you value the relationship, which you probably do, if you're doing business with someone, it's likely that you like them. And especially if you're doing business with someone who's in your family, someone who means a lot to you, that relationship is important and you want that to survive whether your business is going amazing or whether you guys are like abandoning the ship, scuttling it on the rocks and jumping off with just a shoddy little lifeboat. That's all that's left from it. You want to be on the same page, literally and figuratively, okay? You guys want to make sure that you have the same vision of what's going on. And the best time to do this is during the honeymoon period, okay? It's when you guys are twitterpated and you guys are excited and eager and you have the energy and the emotion and you're, oh, you're great and you've been looking on Pinterest and picking out the brand colors and talking about the names and what's— here's what you're going to do for the business and here's how we're going to grow it and do all this stuff. That's awesome. I love all of that energy. And this can be a natural part of that energy. It doesn't have to stop this energy. It can just be an effective channeling of this energy into a good area so that we're making sure we're capitalizing about all those good emotions that are happening at this stage of your business. Okay? And it's so much better to do it now than later. Okay? So like, now and later— if we're looking at those candies, this is a— this is a now. Okay? Not later. Later is off the table. Okay, now, just now, Candy. Okay, and because— and here's another tip. If you, if you like this person and you kind of just like and are hopeful that you guys are going to work together but you haven't had the opportunity to do that in real life, I would also suggest that you do a small project together before you maybe officially set up the LLC and take out the small business loan or get financing, or you make— take those larger steps in terms of investing in your business. So If you guys haven't hosted an event together or done a smaller project or whatnot, see if there's something like that you can kind of do a test case, a little run for each other to make sure that you guys work well together and that you are complementing each other. While it's good to have some things in common and common vision and ideas for the business and to be able to understand each other, you really probably do not want someone who is exactly like you, okay? Because you are not going to get the synergy, the symbiotic relationship, the, you know, the men are from Mars, women are from from Venus that you get when you have someone who has some opposite strengths, who does some things well that you do not do well. Okay, ideally you'd like someone who can really complement you, and then you guys can hone in together and make a really good— you know, the, the whole is better than the sum of the parts. Okay, um, and okay, and so we're gonna get into the questions in just a second. Um, but again, if you are trying to talk yourself or your partner into why this process matters, um, it's because questions are good. Conversations are good, and neither of these things are things to fear. If you're having fear and anxiety and resistance about this, you need to, first of all, remind yourself that you're just having thoughts. That a conversation and words are just words. Now, you may have thoughts about those words that may invoke and turn into different feelings, but all of those things that you can control. You need to be a little curious about that process and about what your brain is telling you, and it may be based on past experience. It may be things that are based in reality or things that are not. You know, perceived fears or emotions or harm that you think that this is too scary. And if you have a partner who has serious reservations, who is like super digging their heels and doesn't want to sign a partnership agreement of any kind or have a talk like this about these kinds of issues, that should be a red flag to you, okay? I'm not saying that like, you know, after you guys should talk it through and explain why you feel this way and here's what my vision is and how you want to do it. If someone after all of that is still like No, or I'm— I don't want to have those conversations, or I think that would be stupid or silly, or whatever excuse they might give you. Um, that's just— that, that's a red flag, guys. I'm sorry. They may be a lovely person, but they may not be the right person to start a business with, okay? Because you want someone who, um, is not— doesn't have that kind of too high of expectations, that they're naive, that doesn't think that these questions and concerns need to be dealt with first of all. Because that's probably— that's great, and that person's going to have certain elements of weakness that could be really challenging to work with. Or this person could be so flighty and kind of space cadet that they're changing their mind and they're all over the place and they can't lock down and actually have a good conversation about goals, about planning, about strategy, about making big decisions and little decisions and everything in between. They could be running on the adrenaline and the shiny object syndrome and whatnot. And not dealing with the real-world issues that come with being an adult and making adult decisions and moving forward with passion but also with purpose. And you need both of those. You want a partner who is curious. And even if after working through some of these questions you guys get to, "Well, I don't know," or, "I've never thought about that before," or, "Geez," some of those, those are all totally okay answers. I'm not saying that as we move through this questionnaire that every single one of these questions needs to be answered.. But what I am saying is that you should at least read through them. You should talk about them. You should try to address them and get as much down on paper as you can. Because it's a so much better place to be like, hmm, that's interesting, or I haven't thought about that more, or I'd like to think about that more. I'd like to do some more research. I'd like to do some more, you know, dwelling on this than I'm not willing to think about it. I don't want to go there. That makes me sad. That makes me angry. That makes me bored. That makes me doubt your sincerity because we're talking about leaving this business and I thought you were in this for the long haul. Well, yeah, we're also talking about the real world, people. And, you know, who do you know that stays and does the same business forever and ever and never does anything else and never thinks about doing any other projects or wanted to leave or their life situations change? Yeah, go ahead and raise your hands. No, it's crickets out there, guys. Okay, so all those things are just good, real, realistic things that we want to make sure that we have someone who's in— just a good, emotionally mature place that can handle all these intricacies, because that's going to make it so you have a really strong partnership. Okay, so let's get going into action, because I know you're like, all right, Brittany, I'm on board, let's go. Okay, so the first area we're going to talk about is strategy. Okay, so our questions here are: what goals does each of us have for the startup? Okay, what goals do we have for ourselves? Do we have the same level of commitment? Do we have the same why for the business? You know, that kind of goes back to those brand promises. So I went to Allison's Brand School and that's where I figured out my why. Now I'm a single-member LLC, so like I'm just a one-woman bandstand in my business. So while I can't speak to the personal experience of having to draw some of these conversations, obviously I counsel people through this process a lot. And so that's where I'm coming down to. And it may be that you don't have all of these, like I said, all fleshed out right now. You might not have your why totally pinned down, but if you guys at least started talking about it and worked on that process, um, Otherwise, the, you know, the business can quickly just turn into another job, okay? If you don't have the why behind it, or if you guys just want to make money, why are we doing this? Why are we not just both getting jobs at Costco? Okay, because if you want to make money, sometimes getting a job at Costco is a really great way to make money, and you just go in and you do your job and you can do a good job and then you can leave. Okay, so if that's not your deal, we want to do something different, then why? Okay, and we need to be able to answer that. Eventually, if not now, then soon. Okay, what is our respective timeline for these goals? Is our vision that we're going to hustle and this is going to happen in 1 year, 2 years, 5 years, 10 years? Let's talk about that. What's going to be our mission statement or culture around our, around our brand? Our— what's— what are our offerings going to be? Which industries are we going to work for? Um, are we going to be in? Who are we trying to reach? What is our, you know, the demographics or psychographics of our What are our revenue goals? How are we going to pay ourselves? Ooh, getting down to the brass tacks now. Yeah, money. Talking about money, honey. At what point are we going to put ourselves on salary? How much money are we going to leave in the business? Or how much money do we need to start making before we start paying ourselves? And at what percentage? I would highly recommend the book Profit First if you have not read that. It's a really great money strategy book that kind of flips the traditional accounting method on its head for small businesses and walks you through exactly how you can set up kind of an envelope system for your business to make sure that you are taking a profit from day one, okay? Day one. And I know you guys are gonna have like, oh, but that doesn't happen in my business, or you don't understand, or we're bringing all this money and it's all gonna work out in the end. Like, unless you're a tech company, which is probably not it, 'cause that's usually not my audience demographic here, there's no reason why you can't have at least— I'm not saying it has to be a huge profit, but you should plan on profit from the beginning. Profit for you, profit for your partner, and plan that in. How are you going to pay for your taxes? How are you going to pay for your expenses? Are you guys watching that, or are you just letting it go and then you hope there's some breadcrumbs left over for you? Okay, that is not a plan. That is just letting someone else decide, you know, the world. You are just watching your business unfold. You are a spectator. You are not in the arena. Okay, Get in the arena. So profit first. What's, you know, what is your strategy for any conflict or difference of opinion that you have? Are you guys going to talk it out? Are you going to have like a regular date where you sit in like a team meeting or a partnership meeting? This would be a great idea to have and start out the ball rolling with this conversation right now that you're going to have about working through these questions. Say, hey, can we put one of, you know, a time on the calendar to work through these questions? And then revisit and make sure there's, you know, are you guys going to check in every week, every month, every quarter? What's the expectation there? And it's so much easier if there's already a time on the calendar and it's not like, hey, can we talk now? And it's like, well, what's going on? You know, like that sounds reactionary and people can get defensive. Or but when it's already on the calendar, it's just, oh, this is when we check in and we make sure that we're both on the same page. Our needs are being met, that our vision is being met, that if there's any problems or ruffling of the feathers that's happening in the business, that we can work that out. What is your guys' work ethic? What type of hours are you guys going to work? Is this going to be a part-time thing? Is this going to be more than 40 hours? Is this going to be a sprint because you really want to get this thing going and you want each of you to be devoting as much time as possible? Are there other stressors or other demands on your time that you guys need to talk about? Okay. If you have demands in terms of caretaking roles, if you have people with young children or parents, aging parents who need help, if you have life situations, partner situations, moving situations, these are things let's talk about and have it on the table. Again, not that any of these are deal-breakers at all, but let's be okay with talking about it. They're just words, so let's not be afraid of them. Let's be realistic about what you guys can survive on based on your lifestyle and your obligations. If you guys are saying, oh, you know, we're really going to invest everything back in the business, and each of you has a mortgage and 4 kids, well, that sounds like that's going to be, uh, pretty harrowing. That's going to be a really tight fit. Um, do you guys— have you talked about that? And make sure that each other's spouses are on board with that, you know, their partners, um, life partners, because that, um, that, that's a recipe for disaster, is that you guys have a different understanding than what the reality, the real situation with would seem in terms of what you can give, what's reasonable. Is everyone on the same page here about how much energy we're going to put into this business? And if you, you know, what are each other's financial situations? I'm not saying you have to see each other's tax returns, but it wouldn't hurt. You know, are there short-term needs that could affect your larger business plan? If your business partner is saddled under some serious debt, that's something that you need to know about because that can affect the kind of choices they make because guess what? They're going to want to have some money quicker rather than maybe being— they're going to want to play the hare game instead of the tortoise. We all know that the tortoise wins the race but you have to have things set up so you can be patient for that tortoise to come in, for that longship to come in. If someone has credit card debt that's piling up or they have to make these payments, they have student debt, they have a mortgage again that they need to make, they have other lifestyle obligations, That's something that you need to know about and that needs to be in the clear. So if, if you guys haven't had some real talk about numbers, then let's have that. Are you guys on the same page and do you, do you trust each other? Do you have integrity? Have— is that trust that you feel based on real data and past behavior, or is it based on an emotional connection? And I know that one might be hard to untangle because you're like, well, but it's both, or it's because I know them and because I trust them, but If you haven't had the chance to work with them yet or to see their work ethic in place in terms of professional situations, then look, you know, ask for some references. Ask to talk to people who've worked with them or worked for them. Make sure that they've been able to walk the walk and not just talk the talk. Does this person consistently meet their commitments, your partner, big and small? Okay, because the decisions you make, the little ones, are basically how you're going to live your life. Will they do what's right even if it's not convenient or profitable? How do they act when no one is watching? What do they do with their time? What do they do with the resources? How do they treat the people that are closest to them? How do they treat people who are below them or seen above them or above them? All those things are important considerations. And lastly, make sure that you can trust but verify. Okay, we're gonna throw a Reaganism in here. It's actually based on a Russian proverb which I think is which is super ironic because, of course, he used this during the Cold War. But trust someone but verify. Do your homework, okay? Ask around, make sure that you are getting into the situation with eyes wide open, and then you can feel and be an open book with the same. Have good reciprocity there so you can feel like your partner is also getting the benefit of the doubt and that they're making sure they have a complete and whole picture of who you are and what you're bringing to the table. If someone says that they have high-value connections, Maybe do a little digging. What exactly does that mean? Okay, because sometimes people can think like, oh yeah, I know, I know lots of people with money and that we're going to have an easy time and the money's just going to be flowing in. And does that mean that someone, you know, that they have— they send someone a Christmas card? Or does that mean that they have a viable connection that could actually turn into capital or mentorship or advice or a partnership with your industry? You know, a vendor relationship. If they say that they have good standing in the community and that everyone loves them and Of course, everyone, as soon as we open our doors, we're just going to be flooded and everyone's going to come to my shop because they all said I could come to my shop. Okay, that sounds great. Have we done any surveys? Do we have any market data that supports that? Or is it just people, nice people saying nice things? Okay, because your friends tend to be pretty positive and that's great. That's what makes them wonderful friends. It doesn't mean that they're good customers. It doesn't mean that they're audience members. It doesn't mean that they're a reliable indicator of whether this is a minimal— you have a minimal viable product and that whether this is a sound business idea and a sound business direction. Okay, okay, so that's strategy. Okay, the next section that I want to talk about is ownership structure. Okay, so this is like technically of who gets what. Okay, and this is probably what most people think about in the owner's agreement, and some people just start here and they just make these couple decisions. But you'll notice that we had that whole section before that had a lot to do with more of the psychology and the woo-woo and the strategy of the business that I think really needs to be developed and delved to before you get to this section. Okay, so who gets what percentage of the company? And keep in mind that you are not— you don't necessarily have to set it up that you guys have the same ownership structure and you get the same percentage of profits or revenue, okay? But usually profits, okay? You know, it's obviously common, a lot of people do 50/50. Here's the problem with 50/50. It sounds great and egalitarian in practice— I mean, in theory. In practice, it can be deadlock. One of you wants to do something, the other person wants to do another thing. Great. Now where does that leave you? That leaves you just stuck staring at each other like chicken race with your forklifts. Okay? So if there's any way that you can talk or reason through having someone having a larger percentage, that could be a really great way to avoid some of that deadlock and to have someone kind of being the one who ultimately the buck stops with them. And just to be, just be really thoughtful and intentional if you're going to do 50/50, because I'd say it's a lot rarer in practice than what people actually think, that there's a complete even split of 50/50 between the two partners. Okay, so think about what each of you will contribute to the company. Okay, think about your duties. Your job descriptions, your hour commitments, the roles and responsibilities. Is someone on the hook for— because they're putting in more money or putting in more sweat equity, or they have their, you know, their billable rate is a lot higher? You know, someone's like a consultant executive to, you know, C-level suite, and someone's a, you know, beginning graphic design artist. They're not putting in the same, you know, sweat equity. They're not. Their time is not valued the same. The market would not value them the same. So So, something that I'd highly recommend, if you have a— especially if you have a multi-person founding agreement, you know, a business, especially with more than 2 people, I would highly suggest you look at Slicing Pie by Mike Moyer. All these links I'll put in the show notes. But he has a great book and a website and some resources that are all about establishing dynamic equity models. And these are really cool. It's basically the premise is that you keep track of the work that you do for your company and that your share of the company, your share of the pie, thus the name, is based on what you contribute and it keeps everything really fair and he says it's really the only fair way to do it. He says basically anything else that's a fixed share where you guys just put it on paper, yep, you get 50% and I get 50% or everyone gets their 25% with their 4 partners, you're just guessing and ultimately it's going to be unfair. It's very difficult and very unusual that people will put in equal levels, especially at all timetable throughout the business. So what he suggests is— and he has some resources of how you do this, of how you value your time and you track your time. And then you're able to basically say up to this point or whatever milestone we reach, this is how many slices of the pie you'll get. And the more work you do, the more slices of the pie you get, which is really fair. And it incentivizes people to work and to not shirk, to stay committed, to stay excited and energized about the project. And then we don't get the awful situations where you feel like you're doing all the work and you are not getting the commensurate increase in your, your pay. And then when your payday boat comes in, whether you really hit your revenue goals or whether you get bought out or whatever your exit strategy is, um, that it's not fair. And now you have fights, um, you have resentment, you have a lot of ugliness that can happen. I will say, um, if you're going to use a dynamic equity model like that, um, the 3 things you want to keep in mind is you have to have a trustworthy leader, which again, should be standard. I mean, if you don't trust your leader, then that's not a very good leader. Don't go into business with those people, um, because they will be the one responsible for tracking and keeping everything clean. They kind of have to handle the bookkeeping of that. So, um, and then they will say how equity is going to be issued on the cap table. So if you don't trust someone in that role, then, um, this is not going to be a good solution for you. The second is make sure you assign a relative value to those inputs, and those are going to be based on your experience, your background, job responsibility, It could be— your input could be time, cash, loans, ideas, intellectual property, equipment, supplies, strategic relationships, or office space. So those are all different kinds of things that people contribute to a business, which I think it's really great because it's recognizing that it's not just time or money. There are a lot of other ways that you can contribute and help, you know, fertilize your little business garden and help it grow. And all of those should be recognized and given a slice based on what they're contributing to the whole. And at the end, you calculate your shares, and that's how you get the slice of the pie. Okay, so that's kind of the process. So yeah, definitely go take a look at that. I've had some— I've set some of these up for people, and it's been a really fun process to work out. And I know that the, um, the owners have loved being able to have these discussions about what's the expectation of who's doing what, and to really delve into, um, all of this and keep it a lot cleaner and a lot fairer responsibility Okay, um, so in that vein, how much capital is everyone contributing to the business and for what? Is this pegged to something? Do we already have an idea of how we're going to spend this? Um, uh, how much debt are you guys taking on in your business? Um, and is then, you know, who's gonna be— whose name is it gonna be on the loan? Is it gonna be both of you? Are you going to personally guarantee it? Okay, this is a very big deal. This means that it's not just the the LLC, the business that is saying that we're taking on this money, but that you guys are personally saying that if the business fails and flops and can't pay your debts, that now the bank can come after you for their debt. So, and depending on how big of a loan you're getting and what your credit is like and what kind of business, you know, all kinds of factors that your banker can go over, um, you may have to personally guarantee it, one or both of you. So that's something that you just, you need to be aware of. If your, um, if the business goes under because you feel like your partner is making really poor decisions, um, and now you're on the hook for the debt. Um, is the percentage ownership going to be subject to any vesting? Okay, so vesting is a fancy word for, um, you got to do some work before your shares come in. Same. And a lot of times in tech companies, it's really common that they have like these 4-year schedules. Basically, they say you, you're— you get a percentage based as time goes on, um, and it's over 4 years. And like like in the first year, if you hustle and then leave in that first year, you usually get nothing, you know, and you get a little bit more your second year and you get some more shares your third year, and then after 4 years you're fully vested. And, um, it's, you know, it's recognizing that there's a big risk in the beginning of people working and leaving, um, and that there could be a, you know, there's, this is a high ratio of difference between people hustling and then also there's not a lot of value in the company because that's the way a lot of tech companies go. You know, they're working on an app there, it takes, you know, that takes a lot of money and capital to get going. There's not a lot of money coming in, but it could really hit it. And when it hit it, it's going to be amazing, and it's going to be, you know, money gun all over the place. Um, and in recognition of that, we want to make sure that people are in it till we get to that phase and they don't get greedy and leave, and then like the business has to take on loans basically to buy them out. So, um, so that's dealing with like schedules and cliffs. So, um, and again, that, you know, that would only work, you know, that's if you want to do that static model, which is the traditional model in terms of shares. But I highly suggest looking at that dynamic equity. Go look at slicing pie, okay? It's worth, it's worth a look. Okay, let's get to our third section, management. Okay, the assistant to the regional manager, the assistant to him, Michael Scott style. Okay, so management is what we're saying in terms of who is actually making decisions at the company. So, and when you set up your LLC, you usually the state wants wants to know whether it is owner-managed, like member-managed, or it's an outside-managed. So those are kind of usually the two options. And the— or manager-managed, which is a lot of managing, frankly. I know it's most commonly for it to be member-managed, meaning the actual people who are the owners are the ones that are management. But sometimes you have people who are the owners of the business and they hire someone else who's, you know, their business manager to run it for them and be making decisions and to have that kind of authority. So that's obviously something you guys need to decide. So if you are going to be member-managed or either management, the manager is going to be responsible for the day-to-day decisions of the business. And you need to decide, do they need— can they do it solely on their own? Or with multiple managers, are we going to have a majority vote, a unanimous vote, or certain decisions solely going to be in the hands of the one CEO? How are you going to parse that out? What salaries, if any, are the founders entitled to? What and how can that be modified? Does everyone need to agree on that, or can just a majority of the owners agree on that to raise, to give themselves a raise? What happens if it takes longer than expected to get to the offering up and running to make the business profitable? Is that going to change anything in terms of how people are getting paid or how things are being managed? Can any of the members or owners launch other things while working on this project? Oh, and this is getting into, um, non-compete, non-solicitation, non-circumvention, um, you know, language, which basically is saying, are we going to restrict people's other options and employment opportunities, consulting opportunities, and say, hey, while you're working for here, while you— whether you're an owner, this is your only gig, um, or, uh, this is the only gig in this area, we really don't want you setting up competing businesses because that's a little weird, And then you also need to think about when someone leaves, are you going to have some language in place? And always remember that these things go two ways, okay? So you may think about like, well, yeah, I want to protect everyone else from screwing you. That's great, but what if you are the one who wants to leave? Are you making sure that you are willing to take your own medicine and that whatever options are left to you are going to be the ones that you want in terms of if it's you who feel like you need to leave the organization for whatever reason, and go into other opportunities. You know, if this is your area of expertise, you got to be careful and thoughtful that you don't lock yourself out, that you can't use the skills and know-how and experience that you have to be able to provide for yourself, to make reasonable living and whatever next projects you might be able to work on. Okay, okay. And then what, you know, if one of the founders is not living up to their expectations under the founders agreement, how can you fire a founder? How can you fire one of the owners and get rid of them? Again, is it unanimous? Is it majority shareholders? How are we going to decide that. You know, how would the situation be resolved if it turns out the business is not taking off and you guys decide to scuttle the whole thing? We're just gonna wrap it up. It's also sometimes called the winding down. It's a lovely way of saying we failed. No, because it's not always a failure. It's sometimes just a natural arc of a business and it's time to just finish it and to, you know, dissolve it and put the assets somewhere else. How are we going to do that? Can one of us take the ideas or the assets from the business and try again, or are we gonna kind close the chapter and say, no, this is the end, like, we're here. So again, that comes back to that non-compete language. How specific are we going to be about that? If we need to raise startup capital, where will it come from, and how much of the company are we willing to give in exchange for that startup capital? So, and that's a really, really thoughtful thing to think about. I think a lot of people, um, you know, I've listened to a lot of founders' stories and podcasts and stuff, and it's a really common thread, unfortunately, for people to regret taking on ownership, to take on investment into their company, because once you do, things change, okay? And that, you know, that's the whole point, in that you wanted more money, but what you probably didn't want is a board of people coming in and telling you that you're doing everything wrong, or firing the CEO, which happens a lot, and replacing them with someone else, or saying, oh, you know, you're spending too much on your— you know, we want to do with a lower quality vendor for your your goods because we think the cost of goods sold is too high. And you're like, wait, wait, wait, no, that's, that's their brand, is that we, we produce quality stuff. And so anyway, um, you know, there's, there's a whole host, a cemetery of people who've been ousted from their own companies because they took on investment and they maybe took it on too early. Um, and they certainly maybe took it on with people who they didn't really understand or completely vet. How do they, um, you know, how do they treat their companies? What is their goal? Do they want to just flip it and have, you know, an immediate return in a year or two? For who they're answering to in terms of the venture capitalists? Or are they interested in, you know, giving you some money infusion but basically leaving you alone? So those are two way different types of investment and capital investment in your business, and you need to make sure that you are talking to the right type of people and that you guys are on— you have the right, correct vision. If you need money, there's lots of different ways to get money that don't involve selling off a piece of your company, okay? Do you can do, um, you know, a Kickstarter or Indiegogo, you know, especially for women, um, starters. That's a, that's a really awesome, like, a women Kickstarter, um, version. You can ask family and friends. You can do several rounds of family and friends. Um, you can go get a small business loan. Okay. Um, you can do, you know, work on pre-orders or pre-sales to try to get some infusion of capital. There's, you know, be creative and don't think that the only way that you can make it work is to get outside funding and to give up equity in your company. Because once those people in your company, they're there, and there's no way of getting rid of them really, unless you can buy them all out, which is unlikely. So just be thoughtful about it, okay? Don't want to poo-poo VC, but just be thoughtful about it, okay? Okay, and then the last kind of piece on this management is, are there going to be limits for spending for the owners and managers? Okay, are we going to say, hey, we all need to check in for something that's over 5 grand or 10 grand or 1 grand if you're just starting out? Who needs to sign off on those? Who has those check-writing authorities in the business? You don't want to send someone out for soda and they come back with a Tesla, okay, saying it's for the business. You don't want someone to be like, oh, I thought we wanted, you know, a top-of-the-line, you know, Mac, you know, computer and all the accessories and whatnot, and new iPads for everybody. So you just want to make sure that you guys are on the same page about the money, honey, in case someone goes Hollywood and starts spending money like crazy. And, um, you know, that's going to be difficult to rein in. And yeah, you could try to kick them out of the business, but all that's going to take time and money. Um, and so it'd be a whole lot easier if it was just written down and very clear in terms of, hey, if there's anything over this amount, um, we, we run these expenses by each other. If there's anything off of this or off of our pre-planned budget sheet, this is what we plan on playing you know, paying expenses for anything outside of this over a certain amount percentage, we just need to talk it over, make sure that we okay that. All right, okay. Number 4, intellectual property. This is a short one. You need to make sure the intellectual property we're talking about is your stuff, is the property, the intangible that you own. Sometimes it's tangible that you have, and that may be the work product that you are creating for the company. Company, and we need to talk about that and decide if the company is going to own that or if you are going to own that individually as individuals. And then kind of the options are basically you own it as individuals and kind of just let— give the company like a license to use it or lease it for a time, or you can transfer it outright to the company and now it is no longer yours. It's not Brittany's, um, you know, piece of artwork. It's now Brittany Rattail LLC owns it. So, um, which is what I usually recommend for people, and why I think what most attorneys would as well, is that the LLC owns it. Because that way we have everything all together, all the assets marshaled together for the business. And that way, if someone's buying the business, that's part of what they would be buying. And if someone is getting out of the business and wanting to value and get their value there for their fair share, those assets are going to be part of it. Um, but there could be some reasons that you want to retain individual ownership of those things, which is fine, but you need to work that out. It needs to be very clear. And if the expectation is that you guys are both creating work product—podcasts, blog posts, websites, copy, videos, all in and everything in between, sculptures, okay, books, ebooks, online courses—for this business, then you need to know whether the business really owns them or whether you do, okay? And you could do that by a simple transfer of copyright and, okay, an assignment or a release, all again called all called the same thing but all essentially doing the same object where it's, I created this but now I'm saying the business owns it, the LLC owns it, I don't own it, okay? And know that when you're filing for trademark or copyright, you need to make it clear who the owner is of the actual work. And so it's nice if you can get this all settled out before you start to take those steps. Can you do it after the fact? Yes, you can. It just involves some extra fees, okay? So if you want to avoid some of that or avoid you guys forgetting to do that, which sometimes happens, then it's good to make a decision from the get-go. How are we going to handle content and work product and IP? Is it going to be the standard that these are kind of all work for hire that we're creating for the business, and that if either of us walks away for any reason, we don't take these things with us? These belong to the business, okay? And that we are paid fairly for them, but they don't belong to us anymore. They're part of the business, okay? Okay. Um, and again, keep track of that, you know. Spreadsheets, whatever else you need to, to make sure that you guys are clear. Okay, the last one is exits, okay? Because, you know, bring in Whitney Houston for us, you know, "I will always love you, but if you must go," and sometimes you must go for those reasons, then you need to walk away and have as good as feelings as you can in that transition, okay? Because life happens, guys, okay? People have babies, people get married, people move, people die, people get sick, new opportunities come, things happen that you never thought would happen and they do. And so it's good to plan for if any of that happens or things are just going well or things are not going well and people are done and then tired and they want something new and they're bored, that someone is going to want to leave and how are you going to handle that, okay? In that category. I'd also make sure that you talk about what happens if one of the owners dies, what happens if one of them gets a divorce, particularly if you are in a community property state, okay? So for those of you, you know, Washington, California, Idaho, Nevada, if you're in a community property state, it means that your half of the business, say you have 50/50 owners, that your spouse owns 25% of the business. Business, because you have your half and they have half of that half. Okay, so not to get like too deep on math and you guys, um, so you need to talk about that. That's the default relationship unless you put something, um, in writing otherwise or make some other arrangements in terms of what happens if there's a divorce for, for someone in the business. Again, we talk about like what happens if there's just a disagreement. Are you guys gonna try to go and get like a mentor to try to resolve it? Are you going to go to mediation? Arbitration or something else besides having to go to like, you know, nickel fist-to-knuckles fighting or, heaven forbid, litigation, which could be expensive and embarrassing possibly to your brand. So what we talked about is like what circumstances can someone be removed as an employee of the business. If someone ceases to work for X amount of months, is it, you know, can you just kick them out? Do you have to pay them anything for the business? Can it be a reduced amount or are they just left in the lurch? And remember that these rules apply to you. To. Okay, if a founder leaves, does the company or the other founders have a right to buy back that founder's shares? And this is a really common right that we call, you know, the right of first refusal, which is basically giving— if someone wants out, then the first people we talk to are the people who want to stay in. And we say, we go to them and say, hey, Dave wants to leave, are you guys interested in buying him out? Okay, and then, but the big question is, at what price? Okay, and Dave might throw out a number of what he thinks his price, his shares are worth, and the other founders may or may not agree with that number. They might think that that number is too high and they don't want to pay that. And then if they don't want to pay that, what are Dave's options? Can he go and shop to people outside of the company? Another really common provision, not super common, but one is basically that says that, so Dave gets out a number of what those prices are at. And actually, well, someone else in the company would give a number for what those prices are at. But that Dave also has the option of buying that person out and basically kicking them out of the company. So it's called like a— it's a Texas shotgun or holdover, I forget the— forget the Western reference anyway. But it basically keeps people honest. It's kind of like having someone split the cookie, you know, and then someone splits it and then the other person gets to decide which half Well, someone names the price and then the person gets to decide, well, do I want to sell my stuff for that, or do I want to buy yours for that price? And it keeps someone— it keeps someone from doing a really honest appraisal of the business because neither of them wants to get screwed. Okay, so, um, and that's one way to do that. Um, you can also just hire an outside appraiser. You— there are people who do this whose whole job is to come in and look at your books and look at your industry and ask a lot of questions and then set a really good value for what they think your business is. So, and/or there are some people who decide in their actual operating agreement, in this business agreement, to write in things like, we're going to value 2x, 3x, 5x. Um, the danger in that is what if it's going amazingly well, way more than that, than the value? Then you could be giving— you know, someone could be getting screwed when they leave, basically, because the business is worth way more than that. It could also go the opposite way, that someone could be getting a really great deal to walk away, and there's, you know, there's no way the business is worth that. And so you in fact are having to take on debt and get a loan to buy someone out for this business that's really like, you know, an abysmal business, but you just had to pay a heavy price tag to get your half back of it. So there's a little bit of a danger always in having just a pure outside valuation that's set from the beginning, especially in industries. Again, if you're in tech or something that's really variable and volatile, I wouldn't suggest this. If you're something else that's more of like a consumer good, you know, if you're in, you know, fashion or beauty, lifestyle goods or something that's a little bit more straight edge in terms of you can kind of predict what your profit margins are going to be and what your volume, you might be in a little safer position. But again, that's not your only option. We listed a bunch of other ones that you would have. So what happens if You know, one of us wants to sell the company, raise money, or to flat out, you know, dissolve the money, dissolve the company, kill the company outright. What happens if someone just becomes disabled? Okay, here's an interesting question. What if someone gets, you know, in a terrible car accident, you know, heaven forbid, and they're in a coma? They're not dead, but they also can't work in the company. Are there provisions in terms of what to do? Do you have to talk to their spouse? Can you just give them their share and move forward so that you can get help in your company and, and keep things viable and keep things moving forward? So Okay, so those are kind of the end of my questions. Okay, so hopefully I wasn't like a fire hose. I know that's a lot. It's a lot to take in, I know, guys. But here's the thing, you know, you just sometimes, and maybe after going through this whole exercise, you've decided that you don't want a partner, and that's totally okay, all right? I've seen great partnerships and people thrive and do wonderful things together, and I've seen partnerships that were not a good fit and someone should have just kept their company and buckled down and looked for other ways to get help. Whether that was help in time and freelancer, to get help and money. Again, there are a lot of different ways you can get capital if that's what you need to get going. Sometimes you just need a good person to help you with your business and then you want them to go home and you want to go home and you don't want to have to be responsible for other things. And sometimes that just means paying someone for their expertise, okay? If someone— if you really need a good graphic designer, then pay a good graphic designer. If you need someone to help you with the business side, can you hire an integrator? Can you hire a business manager, an office manager, or somebody else? So, you know, it's just— don't be too precious about the idea that it has to be a partnership if that— if when working through these questions and answering these and looking at these, it doesn't seem like that's a good fit for you guys, your personalities, the way that you work, and your vision for your company. So Always consider that you have options, okay? And be aware of those options and not be afraid to research those options and to make sure that you, you know, you pick one and you move forward, that you're not stuck in analysis paralysis either, knowing that, um, what's the best or what's the right decision, as if there was like some right decision out there. The best decision is the one that you make and then move forward, okay? Because that's always better than not doing it at all, than not starting the company, than not trying, okay? They're not being curious and going for it, whatever. But know that there's trade-offs, and so try to be smart about those trade-offs and make, you know, research, guess, pray, meditate about it, and then pick one and then go for it. Okay, know that with all this stuff, that communication is so critical. I hope that as you've listened to me talk about all these, you've just gotten a sense for there's how many things that you can and should be talking about, not only at the beginning, but these can be ongoing conversations. In fact, I I would love to see people take this and to have this as part of their yearly check-in, or maybe write it down and take some— half of these every 6 months to make sure that we're checking in of like, are we still feeling good about all these things? Are we still on the same page in terms of, um, how we're working, you know, why and what hours? And are we on the same page in terms of where we're going and where we've been? I also highly advise that you set up a organizational chart. I know this seems like a small thing where it's like, well, that's just easy, I do the photography and she does like the billing and stuff. Well, but I bet you there's other parts of the business that you guys do or are going to be doing once you get started. Sometimes it's easier to do this once you've kind of gotten some action and skin in the game, but it really helps to have it clarified, your roles and responsibilities in the company. These are also sometimes called position contracts, and these are talked about extensively in books like The E-Myth, which— that's another great business book that I highly recommend. If you haven't read that, The E-Myth Revisited, there's a newer updated edition, but it's been, you know, a best-selling business book and a standard of every MBA program, every business program for decades, for good reason. Another great one to listen to is Rocket Fuel. I'll have all these links in the show notes. So, but it's what's really helpful, and I would especially say this is really helpful for closely held businesses, for ones that have— especially if you're spouses or if you're family members that are in business together. You want to really prioritize that relationship. And the one of the ways that you can do that is by having your responsibilities clarified. Who is doing what? Okay, otherwise when you don't have that written down, what you have is people bugging each other and micromanaging each other and coming in and barging in and, I thought you were taking care of that and I was doing that and that's not the way I would do it. And what the problem is is that people are not given the freedom to own their projects and their work, which is frustrating. None of us like that. That. And so they can't own their successes and they can't own their problems, okay? In both ways, it can be bad for your business. So highly suggest getting those set up— organizational chart, position contracts, have your roles and responsibilities clarified. Don't cut corners on your bookkeeping, your finances, and your taxes, especially, especially— I mean, don't ever do that, but especially if you have other people who are owners, okay? Because there's just, there's more to lose now, guys. There's more players at the table, the stakes are higher. And you need to make sure that you have money set aside for taxes, that you are expensing what you should be expensing, and you're not making up expenses. You're not playing fast and loose with your accounting. You need to make sure that you understand what's going on in the business, okay? What I don't want to see is for someone to be, oh, they do all the numbers, they handle all of that, and you not having any way that you're checking in or being part of those decision-making processes, even if that's not your zone of genius, which it may not be. It's a mistake and short-sighted for you to completely cede that part of your business to someone else, just like you'd be short-sighted for them to not have and be checking in with what's happened on the content management side or the creative side or the sales side in terms of serving, you know, client services or whatever else you're doing in your business, okay? Again, you guys can have your zones of responsibility, but you also need to be checking in enough that you understand what's working, what's not working, what are our challenges that we're having now, how are we doing on meeting our goals that we've set out, and all of our other priorities. Okay, make sure that you plan on profit first, okay, and that you have some money for you and that that grows, okay, and that you've built that into your progression, that you are planning on growth and that you're planning on increasing that amount of profit, you're planning on increasing the salaries and what you guys get paid from the business and keeping those expenses lean and really only putting things in there that are justified. This is, you know, advice from Profit First, but it's a tendency in a lot of businesses, a lot of small businesses, that people are like, oh well, yeah, just expense it, as if that's giving you some money back. And in a way it seems like it because, you know, if you can deduct it, then it's, you know, it's that, that lowers your taxable threshold, the income that you have to pay tax on. So, but it's also just taking away one of your dollars. Okay, so we all have to pay taxes. There's no way around that. So it doesn't matter who you talk to, me or— if anyone says that you don't have to pay taxes, run away right now. Pull a Monty Python, run away. Okay, because they're a dirty liar and a cheat, and they're gonna put— and you, you and them end up in prison. And you need to make peace with it and understand that if you're not planning for profit first, and, you know, just spending money on stuff just to because you can deduct it is still a silly waste of your money, okay? Money thrown away is still money thrown away, even if you can deduct it, okay? So you should deduct the things that you can, obviously, yes, and go to the fullest extent. I appreciate and respect all and support all of that, but there's no reason to spend money on stuff that you don't need to spend money on, okay? That's just taking money away from yourself. Yourself. So, okay, so read Profit First and use it, okay? Use it or lose it. All right, guys, um, that's what I have for today. I want to remind you, um, that if you, um, if you haven't left a review, please leave a review. If you want to, um, sign up to and want to talk to me and maybe chat with me and see what working with me one-on-one would be like, you can do that at brittanyrotell.com/services, um, from your free 20-minute phone consult. Well, if you want a free legal checklist, if this or any of the other information that I've had has kind of whetted your appetite and you know there's a feeling in you, there's a voice in you that is calling out, we need to take care of this, we need to get legit, we need to get our ducks in a row, it's time to listen to Brittany, it's time, it's time, it's time, um, and you're like, okay, what do I do next? Other than booking that call, which is great, you can also download my free legal checklist at brittanyrittel.com/checklist, okay? And this is my one-page little checklist that talks about the main areas that you can start thinking about getting your business legit, okay? It's what— it's the intake form that I use when I start talking to any of my clients and working one-on-one with them. I'm giving you a preview of that totally free and as you start looking at that, you're going to have questions and have things come up and you can look at it and think, oh, I've done this, I've done this, we're good, I'm further along than I thought, which is sometimes really great news, and a lot of my people fall into that camp. Or I haven't thought about any of that, I should probably do some of that, which is also sometimes where my people are, which is great. Okay, I don't get mad at you. My intent is not to shame you or make you feel bad. You were doing the best you knew how. Okay, how can you expect to know something that you didn't know? That's just silly. Okay, um, so your job is to do what you do best. It's probably not legal, okay? That's probably why you're here. That's fine. That's my gig, guys. That's what I'm here for you, okay? So let me help you. Let's download this. Let's get going, okay? And let's not have another head-in-the-sand moment where we think that we don't have to worry about this or the stuff will get taken care of. Probably won't. Probably just need to do it, okay? Put on our big girl panties and make it happen. So make sure you connect with me on Instagram. That's where I love to hang out and give tips and tricks. And I do my legal lives every Tuesday night. We're trying to continue that through the, through the summer, except for a couple weeks that I'll be on vacation. But make sure you get the info on that. And you also get access to my newsletter, okay? When you sign up for that, get that free legal checklist, you'll get added to my newsletter if you want to. And it has great links and tips and tricks and stuff that you maybe missed on the gram because the way the algorithm is, and because I tend to give a lot of text in my posts because that's the name of my game, is I'm not here for peonies and unicorns and puppies, although I love all those things. Um, that's not my bag, baby. I'll leave that to you guys. Um, I'm here for the tips. I'm here for you and to help you be the business owner that you are inside, for you to feel like that and for you to be able to believe that and be able to own that, okay, from the inside out. All right, so thanks so much for joining me here. Um, and, uh, every time that you listen into Lom Whip, I really appreciate you. I want you to know that, and I really appreciate your time your support, your direct messages, you're sharing with other friends and business mentors and other people that you work with, that you come in contact with in your circles. I really, really appreciate all of you. Thank you, thank you a lot for all of it, all the support and love. It makes it so much easier to keep on putting good content out here, even though when it's a lot of work and money to do it. It makes it so like, yeah, there is, there's a, there's a really good return, and you see why it's worthwhile work to keep going. So thanks so much for being here, guys. I hope you have a fantastic Fourth of July. Hopefully this episode should come out before the Fourth, and, and are just enjoying your summer with yourself and your loved ones and enjoying everything about that season. So thanks so much, and we'll hear and hear from you next week. Make sure you're back. We've got some amazing interviews to share with you. And remember that you are a real business owner, okay? So let's own your business in every sense of the word.