I recently explored a business partnership opportunity that was quite exciting.  I had met the possible partner a few years ago.  He has technical chops (a software developer) and runs a company in a sector I’m very interested in.  He had a SaaS application that had real traction–users, revenue.  It wasn’t profitable, but looked like it could be shortly.  If we could find a way to work together, I could own the technical side of things and let him focus on selling and marketing.

However, it didn’t end up working out.  No blowups, thankfully, just a failure to find an arrangement that worked for both parties.

It was quite the emotional roller coaster ride for me.  A business partnership is like marriage without the sex, and so we were both cautious, but it was very easy to get excited about working together and building a big business.  It was all the more exciting to me because he’d done this before.

Here’s what went right:

• We had open conversations about each of our financial needs.
• He built a budget and business plan.
• We used Skype for conversations so that non verbal cues were available.
• We worked together for a month before hand, which gave us some context.
• We checked references and had our spouses meet.
• We planned to get together and work face to face.
• We used Google docs, which was a great way to share spreadsheets and documents about the business.
• I reached out to a few mentors to get advice.  Every single person said: “write your expectations down”.  Every one.
• On the advice of one of the mentors, I read the Nolo books about LLCs, partnerships and business buyouts.  These were tremendous.  Not only did they lay out scenarios I had never considered (what if one of the members of the partnership is disabled?  what if you want to bring someone new in?  what if you want to give time rather than money in exchange for equity?  and many many more), they also give you sample agreements.
• We set deadlines, both for documents and for coming to a final decision.  We stuck to those.
• We parted amicably.

And here’s what went wrong:

• We put off explicitly valuing the existing company until late in the game.  Then it became clear we had pretty different numbers in mind.  We should have done this as soon as we were both interested.
• We didn’t really know each other, the month of working together notwithstanding.  Just as for investing, I am beginning to think that partnerships work best with lines, not points.
• The budget and business plan were limited in scope (one year out, then some major assumptions about future years).  Hard to make more detailed predictions about the future, especially since the plan called for major new products.
• I was in a different state than he was.  This would have made finding common service providers (CPA, mediator, etc) difficult.  No real fix for this, other than one of us moving.
• Valuing an ongoing, non profitable bootstrapped business is really hard, because most of the value of the business is in the future.  I found some articles, but didn’t find much about this particular scenario.
• We didn’t really nail down whether this was a partnership, a buy in to an existing business or a valued employee relationship.  Each of these have different equity implications.
• I didn’t sell myself as well as I should have.

All in all a great experience.  I learned a ton.  Of course, I would have been happier if we could have reached agreement, but I understand why we ended up where we did.