The Friends and Family Plan for Partnerships

Oil magnate John D. Rockefeller once said, “A friendship built on business can be glorious, while a business built on friendship can be murder.”

Business practices have changed significantly since Rockefeller’s day, and recent research has sought to test his claim. In his book, The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup, USC Professor Noam Wasserman examined close to 10,000 founders of technology and life sciences startups to find what types of partnerships work best.

Wasserman correlated each friendship in a founding team with a 28.6 percent increase in founder turnover. Wasserman also found that teams founded by friends were least stable in the teams he studied, including those that were started by virtual strangers.

Kavin Lam ’18

Against the evidence, however, as many as half of startups are co-founded by friends, family, or spouses. Engaged Community Directed Investments co-founder Kavin Lam (’18) advises aspiring entrepreneurs seeking partners, “Find your best friend to do it because you will spend endless time working on it with them, and that is something you won’t be able to forge anywhere else.” As Lam suggests, co-founders spend countless time working together on their project, and it makes sense to do so with people who can maintain a strong relationship.

There’s truth to both sides of the argument, but partnerships among friends undoubtedly present additional complications. What happens if a business dispute ruins a personal relationship?

Michael Seiben, CEO of the Y Combinator accelerator program and Socialcam co-founder, explains it is especially important for founding teams with personal ties to divide responsibility. Seiben writes, “You have to agree upfront which parts of the company you will be working on, and which your friend/co-founder will be working on. Most importantly, you have to be comfortable with that person getting the final say in those areas.”

The necessity of crafting a thoughtful partnership agreement with the help of a lawyer or accountant also rises when a founding team consists of friends or family. According to the Wall Street Journal’s guide to business partnerships, “Every agreement should address three crucial areas: compensation, exit clauses, and roles and responsibilities. Include who owns what percentage of the business, who is investing what, where the money is coming from, and how and when partners will be paid.”

Frances Dickens, co-founder of multimillion-dollar British media bartering company Astus, stresses the exit plan as the first item on the team’s to-do list. “A good exit plan should allow for different scenarios – from one of you wanting out to what happens if the business fails. I doubt many friendships survive a business going under, but having a clear exit strategy will make things less painful,” Dickens says.

While it’s difficult to get a definitive answer about mixing personal and business ties, taking these steps can make partnerships with friends and family much more amicable. If you believe Rockefeller, they may even save a life.

For E@D’s full coverage on partnerships, consult this page.