Think Twice Before Jumping Into Business With a Friend

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By Mary Ellen Slayter
Washington Post Staff Writer
Sunday, September 2, 2007

It sounds like a dream opportunity to Jack, a part-time musician -- the chance to trade his mundane day job for one in the music business, at an old friend's start-up.

The friend has venture funding lined up and has a product that Jack is confident will sell.

The promised pay is good, with room for advancement, and the work excites him.

But Jack is no fool -- he has two children. "I need to be confident that I'm entering into a well-thought-out plan with significant potential for success, especially so since I have a family and need to reduce the risk of signing on with a company that could implode within a few months," he said.

His field: risk management. (He spoke on condition that his last name not be used, since he hasn't decided whether to leave his employer.)

"What I'm weighing mostly is whether or not this company will at best provide a satisfying job in the music industry that will grow financially and at worst keep me at a stagnant salary with the opportunity to network," he said.

Objectively, he thinks the company should be successful. "What they're offering services a legitimate need that no one's really addressed. They've had success on a very small scale and are now looking to expand."

But he has never worked for a start-up, much less one that comes with the baggage of working for a friend. He wonders what he should ask the business partners, his friend -- and himself.

The investors are the easiest to deal with. They are, after all, mainly looking at the bottom line, and anyone thinking of working for a start-up should be, too. Ask to see the business plan, as well as an any contracts related to the funding. Inquire about their expectations; they should have objective benchmarks. Are they reasonable?

Leigh Moore, a career coach in Atlanta who also worked in the music business, said it's worth having a lawyer review the start-up's documents. Hire someone who specializes in small businesses.

Also, find out what the backup plan is. What if the company isn't self-sustaining by the time the funding runs out? Does the owner-friend have a backup source of money to keep things afloat? Will he expect employees to take a pay cut?

One of the most important questions should be about ownership. If Jack is taking on a risk by leaving a steady job, it's reasonable for him to expect compensation in the form of an equity stake.


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© 2007 The Washington Post Company

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