One question, three experts: Partnerships

In this regular blog feature, we address some of the challenges that startups face by asking three experts for their input on a different question each month—anything from marketing and financing guidance to advice on partnerships and mentors. Both the experts and question will change each month.

This month, we asked three experts to weigh in on the following question:

“What questions should entrepreneurs ask before entering into a partnership?”

Here are their answers.

Dr. Rafi Hofstein, president and CEO, MaRS Innovation

The first question to define is “partnership with whom?”

You will face very different issues when, for example, partnering with another founder to create a company together than you do when negotiating a relationship between a startup and a more established company.

If pursuing the latter type of partnership, the two most important points to examine are:

1. What level of commitment is the partner company making to your technology? What will happen if your visions for the technology diverge? Protect your company’s long-term interests through a pre-nup agreement.
2. Are your skill sets complementary? What does your partner bring to the table that you don’t have? Ideally, you should pursue partnerships where 1 + 1 equals 3 or more.

Lance Laking, MaRS entrepreneur-in-residence and advisor

I’ve tried to present a few key questions that every entrepreneur should ask before heading down the partnership path.

1. What is the “give and get” list for each partner? Think more about your ‘give’ and the partner’s ‘get’ – because you likely already have your greedy objectives from the partnership, and you need to be able to sell a clear “win-win.”
2. So you think you know your partner’s motivation, but have you tested it? Don’t assume that you know your partner’s business priorities, their development plans or their investment hurdle rates. Talk to them, listen to them and see if your ideas for cooperation “resonate” before you apply a lot of effort. I once did a deal with a major communications OEM (original equipment manufacturer) based in Shanghai. Despite the marketing cache, we learned – the hard way – that their real motivation was to sell their gear in all applications. The only time they included our product in a solution was in a “Hail Mary” situation: as a last-ditch attempt to try to win business they were destined to lose.

3. What is the hunger factor?If you’re an early-stage company, you are hungry by definition. If you are trying to partner with a giant, they have a full fridge and can afford to march to a different (much slower) drum, so beware of timing out and starving when trying to make a partnership happen.

4. What’s the end game? You should define both short- and long-term wins. A short-term win might be marketing buzz; a long-term win might be an acquisition. In between, there is ideally ramping sales success.

5. Strategic or tactical? Remember that the right number of strategic partners is not just one.

6. What are the risks and opportunity costs? Be honest and don’t expect sales to take off.

7. Where’s the meat? Is your business model sustainable within a partnership structure? How does each partner define (and measure) success? Agree on a common set of goals up front.

Susan Morais, business lawyer and strategist, MaRS legal clinic

As an entrepreneur, every decision you make should take into account the effective and efficient use of your resources, including your time, energy and money. That said, deciding to enter a partnership without a clear understanding of each partner’s rights and obligations could end up being a colossal waste of your resources.

Your ability to make decisions is dependent on the availability and quality of the information accessible to you.

When considering a partnership, ask yourself the following questions:

• What information do you expect from your partners?
• What information are you prepared to share?
• When is the information shared?

You must consider these questions at the outset because they feed directly into the partnership’s framework for decision-making, conflict resolution and termination.

In terms of conflict resolution, there are many questions to consider:

• Are decisions made by a simple or super majority?
• Which decisions must be unanimous?
• Does any one partner have a veto right? If so, in what circumstances?
• What happens when you cannot agree?
• If conflicts are resolved by mediation, who chooses the mediator? Who pays?
• Is the decision final or can it be appealed to the courts?

Having considered the possibility of unresolved conflicts, ask yourself:

• How do I get out?
• What do I take with me when I leave?
• Can I compete with the business after I have left?
• Do I answer these questions differently if it is another partner leaving?

Although these discussions may seem unpleasant at the outset (why discuss divorce if we just got engaged?), they offer an invaluable way to get to know your partner’s negotiation style as well as their priorities and vision for the partnership. Remember, your partner is observing you, too, so don’t ask for something you would never give. That is just not nice. Although your reputation is not a resource, per se, it is a valuable asset!