Red Flags in Partnership Agreements: Founders Beware

A bad partnership agreement can destroy businesses and friendships. Watch for these red flags before formalizing your partnership.

Equity and Control Red Flags

1. Unclear Ownership Percentages

Every partner's exact ownership must be documented. Verbal agreements create disputes.

2. No Vesting Schedule

If a partner leaves after 3 months with 50% equity, you're stuck. Vesting protects everyone.

3. Unequal Voting Rights Without Reason

If one partner has disproportionate control relative to ownership, understand why.

Decision-Making Red Flags

4. Unanimous Consent for Everything

Requiring 100% agreement on every decision creates gridlock.

5. No Deadlock Resolution

What happens when partners can't agree? Without a mechanism, the business stalls.

Financial Red Flags

6. No Capital Contribution Requirements

Can partners be required to contribute more capital? On what terms?

7. Unclear Distribution Policy

When and how are profits distributed? This should be explicit.

Exit Red Flags

8. No Buy-Sell Provisions

What happens if a partner wants out, dies, or becomes disabled?

9. Unfair Valuation Methods

Book value ignores goodwill. Fair market value should be the standard.

10. No Right of First Refusal

Can a partner sell to anyone without offering to existing partners first?

Competition and Commitment Red Flags

11. Weak Non-Compete During Partnership

Partners should be fully committed. Side businesses in the same space create conflicts.

12. No Minimum Time Commitment

Is this a full-time commitment? Part-time? Document expectations.