How to Distribute Partnership in a New Business?

How to Distribute Partnership in a New Business?

Recently I received a question from one of my friends who wants to start a new venture to decide about the percentage of partnership for their business. Partnership percentage distributions is one of the most important and critical decision which one has to make. People are more willing to start a new venture where partnership is divided equally. Everybody wants a 50-50% partnership and they often think that this is the global standard and thus think that 50-50 partnership is fair….

50-50 Partnership is fair… What a Mistake?

50-50 percent partnership has become national as well as international commitment. And, i hate people when they justify that its fair to have a 50-50% partnership because we are putting in money, time and efforts. One with the money one without money, one with sales abilities other with execution abilities… blah blah blah and thus 50-50 is fair. We are brothers, childhood friends, lovers and we trust each other and so on .. We will figure it out and make the decisions together and thus 50/50 partnership is justified… Is it so?

No way.. Its a huge mistake.

Look guys, there is nobody to decide in case of a deadlock if you are going for 50% partnership. At some point of time somebody is going to make a decision which other won’t like like, than what? If there is a deadlock in 50-50% partnership, law and courts cannot interfere. In that situation sale of assets is only viable option.

Lets check it out a real example, Marriage is a 50-50 partnership and do you know what is the current divorce rate. More than 53% of marriages break. And this is an average divorce rate in every developed country. Critics even feel that divorce rate is increasing sharply because of  the realization of 50-50% partnership. If we cannot keep that together at 50-50,  forget it that we can keep business relationship together at 50-50.

Somebody has to take control and somebody has to be the deal breaker.  Somebody has to make the decisions. It has nothing to do  with trust, nothing to do with fairness and it is all about smartness.

My advice is young entrepreneurs is to go for following kinds of partnership percentages distribution.

  1. If only two persons are involved, go for 51-49 at last if both are equally capable with same knowledge, power, skills etc else distribute percentages based on factors likes skills, knowledge, projections, roles etc. In this case the guy with 51% has the Vito power and thus can override any rules, regulations, decisions, anything and can always make the decisions  which will accepted by the boards and the boards members.
  2. If more than 2 people are involved say 3 people, something like this will do. 49-49-2 . In this case majority of the people who vote is accepted. It is always advised that this 2% member should be a very senior and knowledgeable person with good knowledge of business operations.

Shares distribution is the first step of starting any business, and so its is very important to think about everything before hand. I personally never recommend 50-50 partnership as 50/50 partnerships can be hugely unstable – even if you have been close friends since high school. Even if you think you know your partners, people change. One person gets more risk averse, the other has more risk appetite. One person gets married or has kids and starts to de – prioritize the business. One person loses the passion for what you do or  you have disagreements about strategy, recruiting, funding, etc.

Therefore, there should be someone to take control, some to make decisions without leaving company in the deadlock. All the best with your new venture. Leave your questions/comments about the post below.

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