Keys to sealing a good partnership agreement

José DutilhManaging Partner, LeQuid, The J.Dutilh Law Firm For Social Impact

Creating a start-up or a company is usually associated with an eager expectation to see a business idea triumph, building on torrent of hopes and dreams with the conviction of its success.

This exciting idea not only considers the development of an economic activity in a certain market that deserves full confidence; in turn it is projected on people whose worth and conditions we have decided to make our travelling companions. A previous friendship, past common projects, an identity of professional goals. Any of these factors can become the cornerstone to starting a joint business venture.

But while in principle this begins with good intentions, it is highly recommended to provide a mechanism to resolve conflicts and serves as guidance and protection, in the face of possible problematic situations that may arise.

1. What is a partnership agreement?

Within what is known as a partnership agreement, we are talking about the need to reflect on the terms that constitute the vocation of the members of the company, to provide them with the greatest possible legal security. It really acts as a private contract, with legal validity, voluntarily signed by the partners to regulate their rights and obligations and the operation of the company.

Without its registration in the Mercantile Registry being mandatory, it is recommended to translate it into a notarial deed and that its knowledge is recorded by the company in a general meeting, with minutes officially included.

To do this, it is important to have the participation of a lawyer specialising in Commercial Law, to ensure that the agreement covers all aspects related to the operation, organisation and activity of the company.

In particular, it is important for the partnership agreement to regulate the purpose of the agreement, the decision-making mechanisms, rights and especially the obligations of the partners, the remuneration system of the partners and the capitalisation of the company. These last two aspects often result in conflict.

The extent of the personal obligations that each partner assumes in the constitution of a company is precisely what makes it unquestionable for a good lawyer to be involved in creating this document.

Being a private contract, it is only effective among the intervening parties, thus excluding third parties of any kind. Although, effects against third parties and/or against the company itself are being recognised more and more via jurisprudence. If a partner in a start-up does not comply with the partnership agreement, he/she will be sanctioned as provided in the agreement itself, since that is the reason for it, the autonomous operation of the company.

While preparation of the partnership agreement may involve tensions when signing, it is better to face tough situations from the start, since the fear of facing them can have serious consequences for the business.

2. Stages of signing a partnership agreement

There are three stage in the life of a company in which a partnership agreement can fit perfectly:

  • Seed stage:the company is in the making and the agreement is used to regulate the fundamental aspects of the relations between the partners: percentages, functions, contributions, tasks, etc.
  • Early stage: the start-up has already taken on a certain trajectory and an opportunity arises to introduce new partners.
  • Growth stage: the start-up has acquired a strong position in the market but needs capital injection to shore up its positioning. In this case, a partnership agreement is used to regulate the fitting in of new investors

3. Required clauses in a partnership agreement

Considering the situations that most commonly occur in practice, the following are considered main clauses in a partnership agreement:

  • General clauses: purpose, statements of the interested parties, duration of the agreement and jurisdiction in charge of the resolution of possible conflicts.
  • Operation and organisation: those identifying the corporate structure, establishing the monetary contributions of the partners and delimiting positions and attributions, among others.
  • Related to the political and economic rights of the partners: aspects related to decision-making, operating system of the general board and agreements on the distribution of dividends.
  • Specific assumptions: assigning specific objectives to certain partners, stratifying the stages of start-up evolution, etc.
  • Protection clauses of the company and of each partner separately, among which we can mention those of permanence, confidentiality and anticipation of penalties in case of breach of the agreement contents.
  • Clause for exit or entry of partners, addressing the issue of the transfer of shares, drag along clauses and tag along clauses, etc.

An expert lawyer should be chosen and entrusted by the entrepreneurs to prepare its partnership agreement, who guides them through the consideration of the aforementioned points, to result in a written agreement that is satisfactory for all parties.

LeQuid Abogados

José M. Dutilh