As a business and technology lawyer, I represent ecommerce businesses that are owned by multiple individuals or other business entities. However, as a practical matter it rarely makes sense to co-own an Internet startup with anyone else (except a spouse if you have one). Whether it’s a true partnership, corporation, or a limited liability company, having more than one partner* is generally a recipe for disaster.
The primary problem with multiple Internet business owners
Because individuals are unique, it’s almost impossible to find two who are 100% on the same page, have the same commitment and the same goals for a new ecommerce company. Even the motives tend to be very different.
For example, one person sees the Internet startup as an escape from long hours at a hated job. Another is looking to create the next Google with the expectation of working 100+ hours per week to get there. One plans to bootstrap the venture to success through sweat equity. The other wants angel investors to foot the bill during the early years.
Disaster strikes and the Internet startup falls apart
Even if you and your Internet business partners are on the same page with a common work ethic, compatible skills and share a single vision for where you want to take your ecommerce venture, the odds are Murphy’s Law will kick in and screw up your plans.
What do I mean? Here are some common situations that mean the death of an Internet startup.
- One partner’s work ethic or priorities change when there is a divorce, death, or illness in the family.
- Cash flow isn’t sufficient to support two owners during the early stages of the venture so the partners start fighting over income or look for things to do outside the company to get paid (e.g. a new job or freelancing).
- One partner is addicted to chasing the bigger better deal (BBD), disappears to chase the next something-for-nothing get-rich-quick scheme, but still wants to get paid for doing nothing.
Don’t trade Internet business equity for skills
Although it can seem cheap at the time, in the long run it’s very expensive to part with a startup’s equity to someone who is providing tech, marketing, or other skills. If cash-strapped, it’s better to do the work yourself until you can afford to pay freelancers for their services as independent contractors (preferred) or hire employees (freelancers are often better for a startup’s early phases than hiring employees).
What to do if you insist on having Internet business partners
To increase your chances of success, there should be one decision-maker. And that reality should be documented in a signed written agreement between you and your partner. Input from others can be valued but ultimately you want to be the one calling the shots if there’s a difference of opinion on major decisions your ecommerce company must make.
In addition, you’ll want a written buy-sell agreement that describes when and how you and your partners will part ways in the future. For example, if your partner files for bankruptcy, is convicted of a crime, or simply decides it’s time to sell, you want a written roadmap in place that can be followed to ensure equity changes hands with minimal disruption to your ecommerce company. There are numerous ways this can be structured. The important thing is that the plan is agreed to by you and your partner and documented in a signed binding contract while you’re on good terms so that if things change, your Internet business can survive even if you’re no longer speaking to each other.
Do most Internet business partnerships fall apart?
Most companies, online and offline, disappear over the years for many different reasons. For Internet startups, it’s an uphill battle to grow a company when there are co-owners whose goals and circumstances change over time. For the Internet venture to survive, this often means someone has to leave. By putting the right legal protections in place, you increase the odds of surviving and thriving instead of ending up in court destroying the company because of a dispute with your partner.
* Because it’s common to do so in ecommerce, I refer in this article to multiple equity owners of an Internet business startup as “partners” even though they may actually be corporate shareholders or limited liability members instead of actual partners.