JULY 23, 2004

By Christopher Kenton

A Hard Lesson in Trust and Contracts

Friendship is a wonderful thing, but never let it impair your judgment. When it comes to doing business, your best pal is an iron-tight agreement

I'm a big believer in serendipity. The universe seems designed to teach us almost anything we want to know -- the trick is knowing what to ask and how to ask it. When it comes to business, you can learn the basics for a tuition fee, like how to calculate risk and return and how to write a five-year plan. But in business, it's the lessons your parents tried to teach you when you were a kid that can really cost you.

Recently, I gained one of the most valuable lessons in business on the cheap -- it only cost me a few hundred hours of labor, some intellectual property, and my belief in my own ability to identify worthwhile partners. And the truth is I asked to learn this lesson.

"BUSINESS IS SEPARATE." When I first met this friend -- let's call him Benedict -- he was on a steep climb with a venture on track for an IPO, a paper millionaire. He was also friendly and intelligent, with an aggressive talent for making deals. Over the course of a few years, we repeatedly came in and out of each other's orbit. My partners and I briefly considered buying his consultancy, and when the dot-com bomb exploded, each of us helped the other cope with hard times. We shared hobbies. In short, Ben was both a friend and a business associate.

My wife, whose family comes from Portugal, was born with a genetic code containing all of the accrued folk wisdom of her ancestors, which can be baffling when it's advice like "Stand between two open windows and you'll go crazy." But these days, one saying of hers needs no explanation: Amigos, Amigos. Negocios aparte. Friends are friends. Business is separate.

That has been a difficult concept for me to master. In my life, relationships are far more valuable than money, and I'm now realizing that I've often misapplied the metrics of trust and friendship when building business partnerships. Mistakenly, I assumed that those I count as friends valued the same priorities and thought the same way. Unfortunately, when it came to Ben, my faith in friendship led me to be far too trusting.

CHEAP WORDS. Unless you have a passion for the arcana of marketing, the nuts and bolts of the project that became the rock on which our friendship came to grief are beside the point. For the purposes of this column, it's enough to know that I came up with an innovation and we decided, in that informal, shake-of-the-hand sort of way, to team up and develop its potential.

We often discussed a written contract, but we didn't let that get in the way of moving our project forward. Why should friends let some legal fine print slow them down? Later, when Ben tried to shoehorn a third party into the agreement at my expense, we did explore partnership ideas more intensely, but my attempts to forge a formal partnership contract kept faltering. At one meeting, I asked Ben point-blank if I could trust him. I saw integrity in his response. He said he was tired of being driven solely by business and really wanted a partnership he could invest in. That was enough for me and the project moved on.

A PLAGUE OF LAWYERS? As we neared the first major project deadline, we still had no contract on the table. I started pushing aggressively for a resolution, which is when the tide really turned. Suddenly Ben insisted his friend was a partner, making it a three-way split. He called it an equal division of equity, even while two-thirds would be under one roof. I refused. In a last ditch effort to salvage the deal, I suggested a joint-development agreement that would see us work together as separate entities, each holding equal ownership over intellectual property.

Ben refused. I walked away. He removed me from his Christmas mailing list. Friends say I should take legal action, but it's amazing what a black hole that becomes. You stew your mind in anger and revenge and spend more time looking backward than forward. Besides, this lesson was worth far more than the cost. I learned that friendship should never be allowed to trump good business sense when you forge a partnership. Friends worth having will understand the need to do business by the numbers. If they can't or won't, walk away knowing there's neither good business nor good friendship to be had.