How to review a partnership agreement

A partnership agreement answers three questions: who owns what, who decides what, and what happens when someone leaves. Most disputes come from what the agreement doesn't say. Get all three in writing while you still like each other.

First: what structure are you signing?

Partnership agreements sit under different names depending on the entity: partnership agreement (general/limited partnership), shareholders' agreement (corporation), operating agreement (LLC), joint venture agreement (JV). The clauses to check are largely the same. If you're structuring a startup with co-founders, you'll usually have an incorporation plus a shareholders' agreement or a Founder's Stock Purchase Agreement with vesting.

The 9 clauses that matter

1. Equity split and capital contributions

Who owns what percentage, and what each partner contributed to earn it (cash, sweat equity, IP, existing customers). Ambiguity here is where partnerships die. Write it down.

2. Vesting

Founder equity should vest just like employee equity. Standard: 4 years with a 1-year cliff. If a co-founder leaves after 6 months, they don't walk away with their full share. Founders sometimes resist vesting themselves; investors will insist on it later.

3. Roles, responsibilities, and titles

Who does what. Who's CEO. Who signs contracts. Who can hire. Ambiguity leads to duplicated work and blocked decisions. Even if you'll figure it out as you go, write down the starting split.

4. Decision rights

Which decisions need which level of approval. Day-to-day operations: usually the CEO or managing partner. Major decisions (fundraising, hiring key roles, taking on debt, selling the company): usually require partner consent or a board vote. Define the thresholds now.

5. Deadlock

What happens when partners can't agree on something major. Options: a defined tiebreaker, mandatory buyout, shotgun clause (one partner names a price, the other must buy or sell at that price), or dissolution. Without a deadlock clause, disputes can freeze the business.

6. Transfer restrictions

Can a partner sell their equity to a stranger? Standard: no, without partner consent. A right of first refusal (ROFR) gives existing partners the first chance to buy any equity being sold. Permitted transfers (to family, trusts, estate planning) usually carved out.

7. Drag-along and tag-along

Drag-along: majority can force minority to sell along with them if the whole company is being sold. Tag-along: minority can join the sale on the same terms. Both are standard. A partnership agreement missing either is unfriendly to whoever it's missing for.

8. Departure and buyout

What happens when a partner leaves: voluntarily, on death, on disability, or is removed for cause? Standard: their vested equity is bought out at a formula price (book value, appraised value, or a defined multiple). Unvested equity is usually forfeited. Payment terms often over 3-5 years to protect cash flow.

9. Dispute resolution

Arbitration, mediation, or litigation? Which state or jurisdiction? Between partners, arbitration is often faster and more private. For high-stakes disputes, litigation gives more procedural rights. Pick one on purpose.

Clauses hiding in "general terms"

The 60-second checklist

• Is the equity split clear and documented?
• Is there founder vesting (4 years, 1-year cliff)?
• Are roles and titles defined?
• Are decision rights and thresholds defined?
• Is there a deadlock mechanism?
• Are transfer restrictions (ROFR) in place?
• Are drag-along and tag-along both present?
• Is the departure buyout formula reasonable?
• Do amendments require unanimous consent?