Early on decide shares, investment, and voting portions for each principle. Put it in writing. Form an LLC or better to make certain that no one is left holding the bag if someone else decides to abscond with company assets.
Can you elaborate on this a little? I'm a little in the dark about how to determine shares, voting portions, and board/executive decisions, and I'm not too clear on the benefits of an LLC vs an S vs a Partnership.[/QUOTE]
Unfortunately the differences depend on the state where the business is formed.
You guys can divvy the shares up however you like, but generally everyone figures out how much they are 'investing' in the business in terms of time and/or money, and then they are split according to how much people are investing.
For business stability, I've often recommended that one person - the person with the most to gain/lose - gets 51% of the company. This way there is a clear and obvious leader/owner, and if there are problems they are the one responsible. It may not be possible for you to do that, but it prevents people from ganging up against the others and taking control. It's not hard to convince one person to sell you their shares when they become a bit disaffected, and you can take control of the company by getting one other person on your side (if there are 5 involved, for instance) the other two people will be blindsided.
You'll also want to decide, and write down, whether there is a difference between ownership and voting shares. For instance, if someone quits and sells their shares to your competitor, does the competitor get a vote on your decisions from now on?
A recent business I've helped form (not part of it, just assisting) chose to give 51% to the majority owner, 30% to another partner, and 19% to the third partner. Further, they chose that should one's shares be sold, distributed (such as through death to one's heirs) then the ownership of those shares would go, but the voting would not. Voting would only be allowed by the majority of the remaining voters (by share) so that if the majority owner died, and each of their children got 17%, then they couldn't just start voting on company decisions, or fold the company even if they worked together as a 51% block - all they could do is sell, trade, buy their shares, and petition the other two owners for voting representation. Note that only 2 of their 6 heirs is needed to override the vote of either of the original remaining owners, so making sure the voting didn't go along with the shares was important, especially in the case that the heirs might be more interested in cash than the company, and choose to sell off portions of it for meager amounts of cash.
It's complicated, so it's worth talking it over (yourself) with someone that is knowledgeable about this, and also with the MBAs of your group.
Keep in mind that the MBAs automatically work to increase their profit/gain. they don't even realize that what they are doing may be unfair, and they may not be trying to bilk or use anyone else, but they are trained to keep an eye on the (and on their) bottom line. If you aren't aware of what non-voting shares and voting shares are, dilution, etc then you may find yourself in a very unfortunate position later on - sadder, but wiser.
Wise up now, and make sure you don't get all your information from your partners. Don't treat them as thieves, of course, but be aware and wary enough to protect your own interests, because no one else will.
-Adam
