Business Partners

Starting a business with other people is exciting. You bring complementary skills, share the workload, and can move faster than going solo. But shared ownership also introduces complexity that solo founders never face - competing visions, unequal contributions, disagreements about money, and the ever-present question of what happens when someone wants out.

The single most important thing you can do before launching with a partner or co-founder is to put your arrangement in writing. Not because you expect things to go wrong, but because clear agreements make good partnerships better. When everyone knows the rules - how profits are split, who makes which decisions, and how exits work - the business runs more smoothly and the relationship stays healthier.

The type of agreement you need depends on your business structure. Partnerships need a partnership agreement. Companies need a shareholders agreement. Startups with co-founders often need both a co-founder agreement and a shareholders agreement. This chapter walks through each one and helps you work out which you need.

If you are running a business as a partnership - two or more people carrying on business together with a view to profit - a partnership agreement is the document that governs your relationship. It sets out each partner's rights and obligations, how money flows, and what happens when things change.

Why You Need One

Australian law does not require a written partnership agreement. But without one, the default rules under the relevant state or territory Partnership Act apply - and those defaults are almost never what partners actually intend. Under the Partnership Act 1958 (VIC), for example, the default position is that all partners share profits and losses equally, regardless of who contributes more capital, time, or expertise. Every partner has equal say in management decisions, and no partner can be expelled by majority vote. Similar default provisions exist under the equivalent Acts in other states and territories.

What to Include

A well-drafted partnership agreement should cover the following areas at a minimum:

• Profit and loss sharing- the ratio for splitting income and losses, which does not have to be equal. It should reflect each partner's capital contribution, time commitment, and the value of their expertise.
• Capital contributions - how much each partner puts in upfront, whether further contributions can be required, and how capital is treated on exit (loan vs equity).
• Decision-making - which decisions require unanimous consent (admitting new partners, taking on debt, selling the business) and which can be made by majority or individually.
• Roles and responsibilities - who handles what. Even informal divisions of labour should be documented so expectations are clear.
• Drawings and remuneration - how much each partner can draw from the business, and whether any partner receives a salary for active management.
• Exit mechanisms- how a partner can leave, what notice period applies, how the departing partner's interest is valued, and how it gets paid out. This is the clause you will be most grateful for if you ever need it.
• Dispute resolution - a mandatory process (usually mediation, then arbitration) before anyone can go to court.
• Restraint of trade - whether a departing partner is restricted from competing with the business for a period after exit.

If you are going into business with a partner, get that agreement settled properly before money, customers, or IP start flowing through the business.

If your business operates as a company (Pty Ltd), the equivalent document is a shareholders agreement. While a company's constitution sets out basic governance rules, a shareholders agreement goes further - it is a private contract between shareholders that governs their relationship, protects minority interests, and addresses scenarios the constitution does not.

Key Provisions

• Pre-emptive rights - if a shareholder wants to sell their shares, existing shareholders get the first opportunity to buy them. This prevents unwanted third parties from joining the cap table.
• Drag-along rights - if shareholders holding a specified majority agree to sell the company, they can compel minority shareholders to sell on the same terms. This protects buyers who want 100% ownership and prevents minority hold-ups.
• Tag-along rights- the flip side of drag-along. If a majority shareholder sells their stake, minority shareholders can "tag along" and sell their shares on the same terms. This protects minorities from being left behind in a company they did not choose to partner with.
• Deadlock resolution - in a 50/50 company, or any structure where disagreement can paralyse decision-making, the agreement should include a mechanism to break deadlocks. Options include casting votes, independent chair appointments, or buy/sell (shotgun) clauses.
• Reserved matters- decisions that require unanimous or supermajority shareholder approval, such as issuing new shares, taking on significant debt, or changing the company's constitution.
• Dividend policy - how and when profits are distributed, and minimum distribution requirements.

If you are operating through a company, treat the shareholders agreement as one of the core documents to settle early rather than an optional extra.

The agreement you need depends on how your business is structured. Use the decision tree below to identify the right starting point.

If you are a company with co-founders, you will likely need both a shareholders agreement and a co-founder agreement (or a single document that covers both). If you are structured as a partnership but planning to incorporate later, it is worth putting a partnership agreement in place now and converting to a shareholders agreement when you transition to a Pty Ltd.

A co-founder agreement is a specialised form of shareholders agreement designed for the early-stage reality of startups - where the business has more potential than revenue, founders are contributing sweat equity rather than cash, and roles are still evolving. It typically covers everything in a shareholders agreement plus provisions specific to the founding team.

Vesting Schedules

Vesting is how founders earn their equity over time rather than receiving it all upfront. A standard vesting schedule runs over three to four years with a 12-month cliff. If a co-founder leaves before the cliff, they forfeit all their equity. After the cliff, shares vest monthly or quarterly. Vesting protects the remaining founders from a co-founder who leaves early but retains a large equity stake in a business they are no longer contributing to.

IP Assignment

Any intellectual property that founders create for the business - code, designs, brand assets, inventions - should be formally assigned to the company. Without a written IP assignment, founders may retain personal ownership of work they created before or outside the company's formal engagement. This is one of the first things investors will check during due diligence. For more on IP protection, see our intellectual property chapter.

Roles and Responsibilities

Early-stage startups are fluid, but documenting who is responsible for what - even at a high level - prevents overlap, gaps, and resentment. The agreement should cover each founder's expected time commitment, functional responsibilities (product, sales, operations), and what constitutes a material breach of their obligations.

Disagreements between business partners are not a matter of if but when. The question is whether you resolve them quickly and constructively or let them escalate into expensive, relationship-ending legal battles. A good agreement builds in a structured escalation path that keeps disputes proportionate.

Mediation

The first step should be mediation - a confidential process where an independent mediator helps the parties find a resolution. Mediation is significantly cheaper and faster than court proceedings, and it preserves the working relationship better than adversarial processes. Most commercial disputes that go to mediation settle.

Arbitration

If mediation fails, the agreement should provide for arbitration - a binding determination by an independent arbitrator. Arbitration is private (unlike court proceedings), faster than litigation, and the decision is final and enforceable. It is the preferred fallback for commercial disputes in most partnership and shareholders agreements.

Buy-Sell Mechanisms

For deadlocks that cannot be resolved through mediation or arbitration, the agreement may include a buy-sell (or "shotgun") clause. One partner names a price at which they are willing to buy the other out. The other partner then chooses whether to buy or sell at that price. This mechanism forces fair pricing because the person setting the price does not know which side of the deal they will end up on.

Partner departures are inevitable over the life of a business. People move on, burn out, disagree, or simply want to pursue something different. The exit provisions in your agreement determine whether a departure is a manageable transition or a crisis.

Exit Provisions

Your agreement should specify how a partner can leave (voluntary resignation), the notice period required (typically three to six months for partnerships, less for shareholders who can simply sell), and whether the remaining partners have a right to buy the departing partner's interest before it can be offered to outsiders.

Valuation Methods

The most contentious aspect of any exit is the price. Your agreement should specify a valuation methodology - or at least a process for determining one. Common approaches include:

• Book value - the net asset value on the balance sheet. Simple but often understates the true value of a going concern.
• Market value - what a willing buyer would pay. More accurate but requires an independent valuation, which costs money and takes time.
• Formula-based - a multiple of revenue or earnings agreed upfront. Quick and predictable, but may not reflect market conditions at the time of exit.
• Independent valuer - the parties appoint a third party (usually an accountant) to determine fair market value. This is the most common approach for disputes.

Restraint of Trade

A restraint of trade clause restricts a departing partner from competing with the business or soliciting its clients for a specified period and within a defined geographic area. In Australia, restraints are enforceable only if they are reasonable in scope, duration, and geographic reach. Courts will strike down restraints that are broader than necessary to protect the business's legitimate interests. Typical restraints run for 12 to 24 months within a defined market or region.