Am I missing something here?
July 21, 2011 1:45 PM   Subscribe

Neighbor is hot to start a business with me. What precautions do I take?

My neighbor is a serial entrepreneur/consultant/all-around bullshitter. I mean that in the best way possible. I do like the guy. Our families have socialized together. We borrow each other's lawn implements. Have beers on the front porch. Etc. I consider him a mensch. So he wants me to start a company with him ...

1) He wants to collaborate on a business plan. He has business acumen and a track record of getting clients. I have the subject-matter skills.

2) He doesn't want any money from me. We're talking about, basically, a creative services company that would exist online and be run out of our homes. He is willing to pay for the web infrastructure and marketing.

3) We've talked about money and have decided that, assuming we can get clients, we have several possibilities but haven't settled on anything yet: a) If I want to keep him at arm's length, it can be his business for which I would be a 1099 contractor, and he would get an agreed-upon cut of any business that he brings in.

b) I could help foot the (not terribly high, but not nothing) ongoing bills -- server, some small-time ads and marketing.

c) Something else?

Wait, wait a minute, a voice in my head says. I'm the creative person. What do I need him for? Isn't he just volunteering to be my pimp? Well, sort of. Except I have been trying to market my creative services myself for two years, and have had very, very limited success. So, if neighbor thinks he can help me, what do I have to lose by seeing where this goes?

Anybody's hackles go up over this one? I guess I'm asking because I feel pretty comfortable and eyes-wide-open about this, but maybe I should be more skeptical?

Should we execute any sort of legal agreement now? Is that putting the cart before the horse?

posted by Buffaload to Work & Money (16 answers total) 1 user marked this as a favorite
Legal agreement now. Always always always legal agreement now.
posted by Jairus at 1:46 PM on July 21, 2011 [3 favorites]

He has business acumen and a track record of getting clients.
I'm the creative person. What do I need him for? Isn't he just volunteering to be my pimp?

What does he needs you for? IMHO the business needs him more than you. There are many people who can do something. There are few people who can sell.

And by the way, I would set up an LLC to do this but IANAL.
posted by yoyo_nyc at 1:52 PM on July 21, 2011

If the business goes sour, and feelings are hurt, what are you going to do, move away? Not saying this means you shouldn't do it, but you should think carefully about that question.

("It won't happen because we're both such great guys!" is not an answer.)
posted by BrashTech at 1:54 PM on July 21, 2011 [2 favorites]

Ah, yes, the old "he has sales ability, I'm a creative who would like to focus on creative work, please" scenario. In my experience, it NEVER ends well, and nobody is as good at selling an individual's creative services than the individual in question. I would invest more in yourself and your sales/business acumen and not bother with this guy, mensch or no.
posted by mynameisluka at 1:57 PM on July 21, 2011 [2 favorites]

I would invest more in yourself and your sales/business acumen and not bother with this guy, mensch or no.

Yes. But. Like I said, I've been trying to do exactly that for two years. You're saying it never works? That creative people are always the best salespeople? That seems unlikely to me. Anyone have any anecdotes, personal experiences with this kind of setup?
posted by Buffaload at 2:14 PM on July 21, 2011

I couldn't disagree more with mynameisluka. If you aren't the people-person/bull-shitter/sales-person you think he is, he will be more help to you than you can possibly imagine. Having someone who enjoys doing that stuff, and is naturally good at it, is key to running a successful business. Having a great product really doesn't matter if you aren't able to sell it to someone. Also, sometimes, just having a second person can be really motivating and inspiring - notice the fact that he is the one initiating some action here (this is what serial entrepreneurs do! and it rocks!)

I do, however, think you should be very careful getting involved with someone so close to you. There are benefits (working easily from home, without much argument as to who's house to work at) and downfalls (well, everything is fucked, and now you BOTH want ownership of the company) with this. It is really important (especially because he is your neighbor and you will have to deal with them if things go sour) that you establish a legal agreement before you start bringing in any clients or money. Write your business plan and once you know what you want to do, think about every worst case scenario possible. Imagine how you think the both of you could react to the situations and plan for them ahead of time. That way, if shit does go wrong (which is very likely could) you don't need to fight about it and the way to proceed has already been debated. I would recommend you get a lawyer or someone who knows how to write documents of this sort to help you with this.
posted by LZel at 2:18 PM on July 21, 2011

If you're mostly looking to get sales/marketing help from him, why not hire him as a consultant? You could either agree on a set fee, or he could get a % of future business for a defined period of time, or some other agreement. He would get to market your work and get paid for it, you retain your independance and don't have to bother with his "bullshitting" if it comes to that.
posted by OLechat at 2:19 PM on July 21, 2011 [1 favorite]

I agree with those above that

a) Always always get it in writing. And discuss everything that might be a problem up front. It can be slightly awkward, but I have never in my life regretted bringing something up and having an honest discussion. But I have regretted doing the opposite- not bringing things up and just hoping for the best- many times.

b) The best relationship is probably something like a "pimp" or agent. He finds business for you and he takes a cut, 10-15% maybe. This is great because there is almost no potential for conflict of interest. If he goofs off and doesn't find any work for you, you're not out anything. He will always be motivated to find you work, and always motivated to get you the best rate possible, because that means he makes more too.
posted by drjimmy11 at 2:26 PM on July 21, 2011 [1 favorite]

INYL, TINLA. There's lots of reasons this could work out well. He has skills you lack that could help bring people to your door. That's worth something. How much is between you two. If you decide to go forward, talk to an attorney about limiting your risk by starting out with the right business structure and also the appropriate agreement to make sure everyone knows what the deal is and what will happen if either of you decide you want to walk away. Be sure that all of the agreements are drafted by a competent attorney.
posted by Hylas at 2:28 PM on July 21, 2011

Wow much do you want to remain friendly neighbors?

The corollary to "Never go into business with a family member" is "Avoid business entanglements with neighbors".

And, honestly, if this guy is as big an entrepreneurial playa as you describe, my experience with such guys says you are gonna get hosed somehow. You're going to end-up doing a ton of shit work while he rakes-in the commission cash. He sees you as an exploitable commodity. I am, of course, jaundiced to his sort, so take that as you will.

But, as others have said, if you DO decide to do business with him, contract-up. And run it past YOUR lawyer before you sign. And, if he starts with the "What? You don't trust me?" stuff, find a way to let the deal die amicably. 'Cause, you don't want to piss-off a neighbor.
posted by Thorzdad at 2:42 PM on July 21, 2011

I think a legal agreement is certainly a good idea. Have confidence because if he is a good mensch and has plenty of entrepreneurial experience under his belt, he shouldn't mind some kind of agreement. In fact, if you bring it up you may come across as being rather savvy about these things. He just may think a legal agreement is a good idea already.

I'm trying to get my LLC up and running and as such I'm doing a fair amount of reading up on legal issues. Turns out, the legal default in many situations (that is the legal rights and preferences in the situation where no contract or legal agreement is signed before hand) is intentionally badly written with the intent of encouraging the two would-be litigants to get together before any work is done and make a legal agreement to hammer out any differences in understanding before anybody thinks about a law suit.

The idea for poorly written defaults is to get people together to agree on a contract a priori so there is no guesswork and no reason to sue later. If you don't know what the legal defaults are. . .get a legal agreement before work begins so there is no guessing and finger pointing later on. If he is a mensch, he'll understand and even support this kind of thinking.

And as I am finding out with my LLC, I can't do it alone. I need help. Sounds like you trust this guy which is essential in any business deal. Having said that, you may be able to make more money together rather than separately. And you could learn a thing or two from him on the marketing/leadership side in case you want to be the chief next time.
posted by Lord Fancy Pants at 2:47 PM on July 21, 2011

You're saying it never works? That creative people are always the best salespeople?

In my experience, it's never worked out that well. My real-world example: I co-own a small creative firm with a business partner. Over the years we have entered into a few types of relationships with people who have established sales experience and careers with a few different types of compensation (salary, percent of project, flat fee, commission, ongoing payment for referrals, etc.). They have always been much more of a pain than they were worth.

As a rule, the clients we did get from such relationships (note "did get"; of course there were proposed projects that didn't pan out) weren't usually as well-vetted or aware of the complexities of our work. For the most part, though, the salesperson who was not intimately involved in the actual details of the work just couldn't sell it as well as we could in a professional setting in which we gave a taste of the way we work and the working environment that would come along with our services.

Over the same period of time, we invested in a business coach and have been working HARD to learn how to sell our services. It's taken more than two years (more like almost five years - sigh), but it's paid off big-time and we're now both more confident and better salespeople on our own behalves. Given the time/energy/money investment, I no longer think it was worth it to work with the salesy outsiders. YMMV.
posted by mynameisluka at 3:58 PM on July 21, 2011

IANAL/TINLA. If you're content to be a 1099 contractor to his business, you don't need a legal agreement with him, beyond some variation of the usual project contract you should already have for client work and billing. OTOH, if you're going to be in some kind of joint equity situation, you do want to spend some time and money together, to work out the equity structure, and then have it formalized by an attorney in whatever form of business registration you agree upon. Part of that process ought to include a cessation/business succession agreement, so that if you two find you can't work together, that there is an agreed upon dissolution scenario, whereby one of you can buyout the other, or failing to develop a going concern, share dissolution costs.
posted by paulsc at 4:46 PM on July 21, 2011

I like the 1099-contractor-with-a-cherry-on-top concept. If you are comfortable with being shut out if the thing ever makes it big. Maybe he won't do that, but your trade off is to be cool with that eventuality.

There are other business setups to avoid bad feelings, like no questions asked cash outs (and maintaining the ready cash to do it), working for half cash and half equity (basically hedging, you half-win no matter what happens), setting up some kind of board of directors to help make decisions so that there never is a one on one fight to the death scenario.

Set yourself up to be the Woz, basically. If Mr. Sales Guy wants to fuck everything up, you can walk away comfortably.
posted by gjc at 5:37 PM on July 21, 2011

I wouldn't go into business with a neighbor in the same way I wouldn't get a SO a job at the same company I work at. You're too close, physical location wise. It's too easy for one to keep tabs on what the other is doing 24/7 and make judgments - say you want to grill some burgers the night you've got a big project to complete. You don't want your neighbor witnessing it over the fence and equating it with a lack of discipline. You won't be able to casually blow off steam together anymore, because there's going to be a time when one of you thinks the other should be working harder and whining less.

Maybe you could hire the neighbor as a consultant/job coach to teach you how to see the opportunities like he does, since he clearly has ideas.
posted by griselda at 5:42 PM on July 21, 2011

Please listen to Thorzdad. Don't do this, if you value the relationship with the neighbor. My experience is that the fact that someone seems like a "mensch" counts for pretty much nothing in determining how they will work out as a business associate. From my own painful experience, I've learned that it's best to have your business partners be arms-length people that you can walk away from without compunction. An existing relationship, like that with your neighbor, will make it much harder to make the shrewd and remorseless decisions that running a business requires.
posted by jayder at 6:00 PM on July 21, 2011

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