By now, we should all be aware that money has the power to change people. But why is this the case? While money primarily serves as a store of value and medium for exchange within our society, it also has the power to affect the minds and hearts of those fortunate enough to be given ample opportunity to seize it for themselves.
See: gambling addition, politicians, American Greed (MSNBC), Wall Street
If money is simply a resource or “thing” we all require, then why has it become such a difficult subject to talk about? And why are ‘money issues’ so often the root cause of the dissolution of otherwise great relationships?
See: Family Inheritance Disputes, Divorces, Band Breakups
My objective in this article is to highlight a few common risk factors to watch out for when entering into any business relationship, especially one with a close friend or family member.
(Think of a time you lent a close friend or family member a considerable sum of money; did you experience any change in the relationship? If so, was it a positive or negative one?)
I would like to begin with a story I recently heard from a mentor of mine, a former serial entrepreneur turned VC partner, about a colleague of his that started a business with a close friend, whom he both knew and trusted for a long time. Though he received fair warning of the risks associated with doing business with friends or family, he shrugged it off, citing his relationship as more authentic and time-tested than others he felt the admonition should apply to. As a consequence, he neglected to investigate the following:
-His friend’s principal motivations for entering into the business;
-his overall financial health (i.e. savings, disposable income);
-and his standard of living and spending habits.
He basically thought, ‘what had happened to all those other naïve entrepreneurs couldn’t possibly happen to me.’
He was wrong. Once the business received funding and started to take off, his ‘close friend’ absconded with $500K of funding in-tow and fled the country, never to be heard from again.
Of course, not all friendships are created equal and I suspect you may believe that something like this will never happen to you. You’re probably right. However, in matters of business, it’s always better to be safe than sorry.
Whenever I wear my ‘lawyer’ hat, I advise my clients to ‘err on the side of caution’ and take reasonable preventative measures for any foreseeable outcome, no matter how dismal or improbable it may seem. Simply put, you never know what the future may hold.
Here are some common risk factors you should always be on the lookout for when entering into a new business partnership:
#1 — Persistent Self-Serving Behavior: does your partner tend to put his or her own interests over that of others within the company or over the company itself?
#2 — Perceived Unfair Treatment: does your partner feel that he or she is not being fairly treated or compensated within the company?
#3 — Large Capital Contributions: did your partner contribute a large sum of personal capital to the business that was neither repaid nor redressed in a manner that was deemed satisfactory to him or her?
#4 — Financial Hardship: does your partner suffer from financial hardships that affect his or her judgment or ability to make sound business decisions?
#5 — Other ‘Red Flags’ to Consider: gambling habits, unhealthy addictions, outstanding debts, poor credit, or excessive spending habits.
We @ The Resolution Co believe the best preventative measure against future ‘money problems’ is to have difficult conversations about money and personal finances as early as possible.
A few example topics you can start the conversation with:
‘What is the minimum level of income you require to maintain your current standard of living?’
‘What are your financial goals, both now and in the foreseeable future?’ (i.e. one-year & five-year plan)
‘Are you satisfied with the amount of money you are currently earning or projected to earn in this business?’
‘Is there anything else I should know about your present financial situation?’ (i.e. debt, dependents, future plans, etc)
Even with close friends or family, you may not truly understand how another person reacts to financial stress or ‘money issues’ until you enter into a business relationship with them. As a company continues to grow, latent ‘money issues’ can become greatly magnified. This is especially true when financial compensation becomes linked to one’s own sense of self-worth or identity and is used as a competitive basis for comparison.
At The Resolution Co, we understand that it is never easy nor comfortable for business partners to talk about issues revolving around money and finances. To address this clear pain-point, we offer affordable service packages that are designed to make these difficult, yet crucial, conversations as manageable and constructive as possible.
We offer both a highly-structured Founders’ Agreement Process and an immersive Founders’ 360 program. Both of these packages are guaranteedto improve the communication transparency and depth of mutualunderstanding within your team!
Let us help clear the air, so your team can move forward with confidence and resolve to progress with what truly matters, growing your business!
Co-Founder @ The Resolution Co.