Here’s the scenario: you have sugar and cinnamon, your other neighbor has flour and butter, and another neighbor has plenty of apples — that sounds like the dream apple pie-baking joint venture.
As silly as it sounds, that is a sound example of how joint ventures come together; different parties have different skills and resources that, when combined, can make a delicious apple pie. Joint ventures are essentially a partnership.
One difference between joint ventures and partnerships is that joint ventures typically bring the parties together for a set duration or specific objective, and then the parties part ways. In contrast, most traditional partnerships typically are planned for longer durations, sometimes indefinitely.
Even if you are not going to be part of your apple pie-baking dream team indefinitely, there still are some things that you should and should not do in a joint venture. Here are a few do’s and don’ts:
At the end of the day, a joint venture is a partnership. Like with any partner, you want to know who they are, what they're about, what they bring to the table, how you will work together, and more. While you don't necessarily have to be friends, you do want to ensure that you can carry on a strong working relationship with each other that is primed to ensure you can achieve your aims and objectives.
You’ll likely be spending a good amount of time and resources with your co-joint venturers, so you want to be confident that you’ll be able to derive the value that you’re seeking. With that, you also want to make sure the skills and resources that they bring to the venture are complementary to your own. To figure this out, you need to talk with them, get to know them, and vet them.
You can use the Howey Test, among other things, to determine if an asset you’re selling is a security. If you are selling a security, you must register or have an exemption from registration.
Many people are under the impression that if your structure is called a joint venture, you do not have to worry about registration or exemptions. This is incorrect. The SEC doesn’t get bogged down in semantics. Rules about registration or exemptions for selling securities apply even if you call it a joint venture.
A quick, non-comprehensive test to determine if you are selling a security or if you should be worried that you might be selling a security is this: Are “joint venturers” sending you their money with an expectation that you will do all (or the bulk of) the work to increase the value of their investment? If so, regardless of whether the joint venturers can vote on matters, it is likely that you are selling a security.
A security by any other name is still a security. So, whether you call it a joint venture or something else, make sure you are following the appropriate securities regulations.
Who’s on first and what’s on second? That sounds like confusion! To set your joint venture up for success, ask who is doing what, and by when. The only way to find that out is to talk it through with your co-joint venturer. Ask yourselves:
Talk through all of these types of questions and more. Understand how you’ll make material decisions and how you plan to move forward with the project.
Most importantly, all joint venturers should understand what their individual responsibilities are and what the other joint venturers’ responsibilities are. You should not assume anything. Instead, have a conversation and iron out the specifics of all the responsibilities.
After you discuss goals, objectives, and responsibilities, put your agreement in writing. Some joint ventures may have a joint venture agreement between the parties, some may create a business entity to operate the joint venture through, and others may have different agreements or structures. Whatever the case, put your agreement in writing.
Putting the agreement in writing helps better clarify the parties’ mutual understanding. Many times, litigation comes simply from parties being confused about what they actually agreed to. Putting the agreement in writing helps mitigate opportunities for confusion.
Again, write it down! While it is true that in most cases oral agreements are enforceable, if you have a written agreement, only what is written down is part of the agreement. Even if the parties verbally agreed to something, if that verbal agreement was not memorialized in the written agreement, the verbal agreement is unenforceable.
But what if you have a recording of the verbal agreement? That doesn't matter and will not help you. There is a legal principle called parol evidence which essentially says that evidence outside of a written contract is not admissible.
This means that even if you have the clearest proof that you verbally agreed to something, if that verbal agreement is not written down, it is not part of the contract, and the court will not even look at any evidence that you attempt to submit to prove the verbal agreement.
If it is not part of the written contract, it is not part of the agreement, so make sure that your written agreement includes all the terms that you agreed to.
Hopefully, you will take the previous tip and discuss goals, objectives, and responsibilities with your joint venturers. However, occasionally there may be unpredictable scenarios where true legal standing is murky.
The first thing to do is to communicate. Talk through whatever issues you are having. Listen to the other's perspective with an open mind. Do not assume ill intent. If you followed the first tip — vetting your joint venture partners — then hopefully you know them and can assume that they are not trying to hurt you or take advantage of you.
Sometimes there indeed are misunderstandings or things that go wrong that might not specifically be anyone’s fault. If there are issues, assuming we have two reasonable parties that act in good faith, communication can often resolve issues without having to engage in litigation.
Vet your joint venture partner, discuss goals and objectives, and put your agreement in writing. Don’t violate securities laws, don’t jump to litigation quickly, and don’t have unwritten agreements. Following these tips will help make sure your joint venture bakes up something as sweet as apple pie. Happy joint venturing!
About the Author:
Nic McGrue is a tenured professor of law and the founder of Polymath Legal PC. At Polymath Legal PC, Nic helps real estate investors lawfully raise capital allowing them to generate passive income while creating generational wealth.
Disclaimer:
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.