There are about 3 areas to consider in all of this.
1) Vet the friend and what they’re asking of you and why they need your contribution.
2) Vet the idea and whether or not the proposal is realistic and makes you money
3)Exit strategy, when it’s time to get out, what does that look like?
11 times out of 10 it’s a horrible idea, but as I said before, everyone should try it once so you have the real world experience of why it’s a terrible idea generally. I knew better and got involved in a partnership recently that ended up being a masterclass in why not to do it.
Take aways from my recent experience: in the partnership agreement that an unbiased lawyer drafts for you there should be 2 poison pills.
1) Either partner can buy out the company for $1 more than the other partners offer ( or something to that effect .)
2) A liquidated damages clause. Basically if you or your partner do anything sketchy or illegal (layout out verbage to cover ways your partner could screw you) There is a financial penalty that they agree to that you can sue them for that makes it worth hiring a lawyer if they misbehaved. I ran into a situation where I could have taken him to court very easily and it was black and white. But the value of the case was less than the cost of litigation. Having a “don’t be an asshole” clause for $50k might of kept him in line a little more, or would have made it more satisfying to exercise my legal rights.
The friendship part of all of this is about 10% of the consideration. If this is your first rodeo, rule number 1 is “don’t risk anything you’re not prepared to lose”
