[Video Available] Avoiding Two Dangers in Partnership Business: Partners

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The first type of person: Pure financial investors – Why can't they be partners?

Core contradiction: Capital LogicandEntrepreneurial LogicConflict.

• InvestorslogicWhat they pursue isFinancial returnsandInvestment efficiencyTheir portfolios may contain multiple projects, with the goal of rapidly increasing asset value and exiting at the right time (such as the next round of financing, company acquisition, or IPO) to maximize returns. They lack the long-term patience to "live and die" with a single project.
• EntrepreneurslogicYou treat the company as your "child" and pursue whatLong-term valueandCareer DreamThis requires continuous effort and time, and constant adjustments to strategies based on market changes; it is a long and uncertain process.

Detailed risk analysis:

1. Imbalance in equity structureAs mentioned, you contribute a small amount of money and all your energy, while the investor contributes a large amount of money but not their efforts. Initially, they may hold a large share, but as the company grows, the value of your labor, technology, and time investment (which can be regarded as "human capital") will increase, but the equity will be solidified by the early capital. This will lead to a lack of motivation in the later stages, making you feel like you are "working for someone else".
2. Strategic decision-making differencesConflicts arise when a company needs to reinvest profits to gain a larger market share, while investors want to distribute dividends as soon as possible; or when a company needs to proceed cautiously, while investors want to burn money on expansion in order to sell quickly. Investors with control may force through their decisions, deviating from your original entrepreneurial vision.
3. Elimination crisisIn subsequent funding rounds, your equity will be diluted. If investors join forces with other shareholders, or utilize special terms in the investment agreement (such as veto rights, lead-ahead rights, etc.), it is indeed possible for you to lose control of the company or even be ousted.

Correct approach:

• Clarify their identityHe is a "shareholder," not a "partner."Capital Increase AgreementThe goal is to regulate the relationship with him and clarify his rights and obligations, rather than involving him in daily operations.
• Adopting a "dynamic equity" adjustment mechanismThis is the best solution. It can be agreed that your labor input (e.g., serving as CEO) can be converted into a certain amount of "equity" (or options) each year, distributed from a reserved equity pool, or dynamically adjusted in conjunction with investors' equity. In this way, as your contribution increases, your equity percentage will increase accordingly, achieving fairness.

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The second type of person: those with resources and connections – why should they be extremely cautious?

Core contradiction: Expected valueandReal valueThe difference.

• The Illusion of ResourcesThe "resources" and "background" he mentioned might be:
  • Unable to be converted into cashHe knows a certain leader, but that leader is not in charge of your business area or cannot provide you with assistance in a legal and compliant manner.
  • Lack of conversion abilityHe has resources, but lacks the motivation or ability to convert those resources into actual orders and revenue for the company.
  • ExclusivityHis resources may only be useful for a certain stage in the early stages of your company, and will become ineffective later.

Detailed risk analysis:

1. "It's easy to invite a god, but difficult to send him away."Once shares are granted, the recipient becomes one of the company's legal owners. Even if it is later discovered that they have made no contribution, you cannot easily reclaim the shares. Buybacks would require a significant financial cost and could even involve legal action.
2. Inefficient decision-makingHe may not understand the business, but as a shareholder, he has legal rights to speak and vote on major decisions. This can lead the company into endless explanations and debates, causing it to miss market opportunities.
3. Resource hijackingHe may use his shareholder status to demand that the company allocate resources to a non-core business that benefits from his personal connections, thereby disrupting the company's overall strategy.

Correct approach:

• Using "phantom stock" or "performance-based earn-out options":
  • Dry shares (dividend shares)Clarify this portion of equity.They only have the right to receive dividends, but not ownership or voting rights.This incentivizes him to generate revenue for the company without diluting your control. The agreement should stipulate that the shares can be unconditionally reclaimed if he leaves or fails to meet performance targets.
  • Performance-based bettingAn agreement is signed stipulating that he needs to bring specific, quantifiable resources to the company (e.g., attracting orders/strategic partnerships worth no less than XXX million yuan within one year). Only after achieving the target will he receive corresponding shares or options.

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In-depth analysis of the three major locking mechanisms

These three locks form the "iron triangle" for building a solid partnership.

1. Lock-in time (exit mechanism)

• PurposeTo ensure the stability of the startup team and prevent them from "free-riding" and then leaving to cash out.
• Detailed Application:
  • Equity Vesting MechanismThis is a more professional way of putting it. It can be agreed that all shareholders' equity vests over four years, with 25% vesting each year. If a partner withdraws at the end of the second year, they can only take the vested 50% equity with them. The remaining 50% will be repurchased by the company at a very low cost (or even zero cost) and distributed to the other remaining partners. This is more refined and legally enforceable than a "leave with nothing."
  • Non-compete and confidentialityIt is linked to share buybacks. As mentioned in the article, if this is violated, the unreturned funds or shares will be confiscated.

2. Lock in profits (quantify contribution)

• PurposeThe goal is to transform intangible assets like "capabilities" into tangible assets like "cash flow" and "profits" that the company needs.
• Detailed Application:
  • Establish performance indicatorsFor technical or sales partners, equity should not be granted solely based on "strong technical skills" or "extensive network." Clear KPIs should be set, such as: technical partners must lead product development and pass market testing within one year; sales partners must achieve a certain sales target. Equity can only be gradually vested after these targets are met.
  • Distinguish between "shareholder dividends" and "job salary".As a core member, he may receive both a salary and profit sharing. This needs to be clarified to prevent him from "lying back" and relying solely on his early equity.

3. Lock in the price (repurchase rules)

• PurposeTo provide a clear and fair pricing basis for equity entry and exit, and to avoid future disputes.
• Detailed Application:
  • Exit when losses occurThe price can be calculated based on a discount to the original investment amount or the net asset valuation, and those who withdraw must share the incurred debts in proportion to their shareholding. This ensures the company's survival and the interests of other partners.
  • Exit when profitableThe price can be calculated using agreed-upon methods such as "net asset premium," "annual profit multiple (PE method)," or "revenue multiple (PS method)." Repurchase over multiple years is intended to protect the company's cash flow and prevent a one-time large-scale repurchase from impacting company operations.

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Indispensable legal documents

1. Shareholder Agreement:This isThe most importantThe document stipulates the rights and obligations of shareholders, shareholding ratios, methods of capital contribution, division of responsibilities, profit distribution, decision-making mechanisms, and all of the aforementioned "lock-in" and exit clauses.
2. Agreement on concerted actionTo ensure the founding team's control over the company, the core founders can sign this agreement, agreeing to maintain a unified stance and act in concert during shareholder or board meetings. This effectively prevents decision-making difficulties caused by dispersed shareholding or the company being picked off one by one by external investors.
3. Confidentiality Agreement and Non-Competition AgreementProtect the company's trade secrets, technology patents, and customer resources. Ensure that even after leaving the company, partners do not use core information acquired during their tenure to harm the company's interests.

Summarize:

Starting a business together is like a marathon, not a sprint. From the very beginning...Replace emotions with rules, and verbal promises with contracts.This isn't about distrusting your partners, but rather about taking the highest level of responsibility for each other's hard work and dreams. Always seek professional help before signing any documents.lawyerandaccountantWith their help, we ensure that these rules are both legally compliant and accurately implemented, safeguarding your business's steady and long-term development.

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