One of the most used concepts when talking about entrepreneurship, and specifically about the creation of startups, is the so-called 'partner pact' or 'partner agreement'. What is a partnership agreement and what is it for?
As its name suggests, it is a private document drawn up and signed by the partners of a company and which reflects some aspects related to both the company and the relationship between all the parties involved. For any business project involving two or more people, such writing can be written. Thanks to this tool, partners state their objectives and goals and consider what to do before potential future situations. In this way, they can anticipate possible conflicts and friction and avoid, as far as possible, conflicts.Some aspects that must be reflected are the functions and tasks of each of the partners, their dedication, their financial and non-financial contributions, defining the distribution of capital, etc. The more detailed it is, the better to keep everything clear.Generally, the partnership agreement must be made when the company is being incorporated and it's a kind of Bible to turn to when things start to blur or get complicated. However, it is not a static writing or one that remains unchanged. In fact, it is recommended that this document be updated with successive rounds of funding and the entry of new investors. Every time there is an injection of capital, it would be advisable to draft a new pact, since the startup will change its equity and also its objectives when it is in a new phase.
Clauses that can be found in a partnership agreement
In this sense, it is common for a partnership agreement to include some special clauses designed for capital increases and changes in its structure. In these cases, there are divestments and the founders may abandon themselves. These would be the most common:- Drag Along or right to drag- This clause is usually added to contemplate the departure of a partner and, above all, of a majority partner. It provides liquidity and the lower limit of the valuation is usually set. This option consists of the fact that if a third party makes an offer to buy the company for all of the share capital, the partner with the right of carry may force the rest to sell their shares to the potential buyer. Among the aspects that are usually included are the minimum price for which the partners are obliged to sell, the period of exercise of the right, the penalty clauses if there is a default and the option of the rest of the partners to be able to equalize the offer.- Tag Along- The Tag Along clause seeks to provide protection to minority partners. It does this by forcing everyone to sell their shares in a proportional or pro-rated manner. Thus, minority partners are shielded from the majority selling their shares and they are not selling anything. They may offer the interested third party their own shares with similar conditions and terms.- Preferred settlement- This tool seeks to preserve the value of a company over time. Thus, it protects the investor against a possible sale at a lower valuation.- Play to Play- It forces investors to go to the next round, since otherwise they would lose their preferred liquidation. Another clause that is often found in the shareholder agreement is the confidentiality clause, which requires employees not to reveal secrets of their modus operandi, technologies, etc., while in the company and perhaps at a certain time after leaving it.More related articles: How to consider the distribution of capital in a startup?How to negotiate your company's shares? How do you consider exit in a startup? Why is it important?
