Rule #3: Compensation

When thinking about a friendship, both friends bring different qualities to the table. Some may have book smarts or street smarts. Some may bring humor or compassion or practical life skills. In a friendship, you do not value the friends based on what attributes they bring to the relationship but on your mutual affections.

In business it should be the exact opposite.

When entering into a business partnership with a friend, these lines get blurry. We tend to overvalue the qualities and skills found in those we consider friends. This often prevents us from doing a sober assessment of the value, specifically the dollar value of those qualities and skills.

Financial compensation should be in proportion to the financial value brought by each partner. This does not mean simply how much money each partner invests into the company, although that should be a factor. Rather, you and your potential partner should sit down and lay out specifically what work, talent, or resources they will be bringing to the business. The two of you should then work out a potential dollar value to those things.

This will require a good deal of research and calculation. It is important not to be too optimistic about the potential earnings of a partner. This may throw your business operational budget way off.

It is also important to differentiate the difference between start-up elements and long term ones. For example, a partner may bring a significant client base at the beginning when your business is started, but they may not add to it as your company grows. If that is the case, how will that be reflected in compensation?

Finally, the agreed to compensation should also include what happens if the partner does not live up to their earning potential. If your business depends on expanding sales or services and a partner does not deliver, then that should negatively effect compensation. Both of you need to agree to this right away. If not, you run the risk of one partner not pulling the necessary weight but still receiving compensation equal to the other one who is putting in the extra effort to keep the business afloat.

It may feel uncomfortable putting a dollar value to all of the qualities that you bring to your potential company. But remember, this isn’t friendship; it’s business.