The Deed Nobody Drafted: How Unwritten Terms Break Partnerships, LLPs and Founder Teams

Partners start on trust and a handshake. Years later they fight over questions nobody asked when asking was easy. Advisers can change that on day one.

By Aashok Kumar Sharma Founder, Aashok F&C Advisory For chartered accountants and finance professionals

In 1924 two brothers began making shoes in their mother's laundry room in Herzogenaurach, a small German town. Adolf and Rudolf Dassler built a thriving firm together.

By 1948, after years of bitter personal conflict, they parted. Adolf founded Adidas; Rudolf founded Puma. The town was said to split along brand lines for decades.

The brothers didn't separate because the business failed. They separated because the relationship did.

Ambiguity, not losses, breaks partners

Most partnerships start with a handshake - two friends, two siblings, an ex-colleague who's "like family." One brings the idea, the other the money, the contacts or the technical skill.

Nobody wants lawyers involved; it feels unfriendly. "We trust each other." "We'll sort it out when it comes up."

It always comes up.

In hard times, partners usually pull together; survival is a shared enemy. The real tests arrive later:

• One partner works twelve-hour days; the other drops in twice a week.
• The firm finally makes money and partners disagree on using it.
• One wants to expand; the other wants drawings.
• A spouse, sibling or investor enters the picture.
• One partner wants out.

None of this is unusual. All of it is predictable. The bitter truth: nearly every partnership dispute turns on a question that could have been settled on day one, while everyone was still friends.

Agreements are cheapest to write when nobody needs them - and priceless once somebody does.

What the research shows

Noam Wasserman of Harvard Business School studied thousands of founders for The Founder's Dilemmas (2012). A clear finding: many teams split equity quickly and equally, often within the first month, before anyone understands what each person will actually contribute - and those early, unexamined choices frequently cause tension later.

The pattern is global - Silicon Valley startups, Indian family firms, African partnerships, Gulf trading houses.

Lesson from history: partnership contracts are ancient

Disputes between partners are as old as commerce. Mesopotamian merchants recorded partnership terms on clay tablets. Medieval Islamic and Italian traders developed detailed forms - the mudaraba and the commenda - stating who supplied capital, who supplied labour and how profits and losses would be shared.

They didn't write these out of mistrust. They wrote them because they'd seen what happens when nothing is written.

The Seven Hard Questions

Before money and emotion get involved, every partnership should answer seven questions in writing. Remember them as SPLIT-UP.

S - Shares: who owns what, and how is it earned?

Equal splits feel fair at the start and often become unfair later. If one founder leaves after eight months, should they keep half of a company the other builds for ten years?

Clause to draft: vesting - ownership earned over time; a common startup pattern is four years with a one-year cliff. In partnership firms and LLPs, tie profit-sharing ratios to defined roles and capital, with scheduled reviews.

P - Power: who decides what?

"We'll decide together" works until two partners disagree.

Clause to draft: reserved matters needing unanimous consent (borrowing, admitting partners, sale, guarantees); individual authority in each partner's area; and a deadlock mechanism - mediator, casting vote or buy-sell.

L - Labour and contribution: what does each partner bring?

Capital, time, skills, relationships, intellectual property.

Clause to draft: capital contributions, expected time commitment, roles, and any partner remuneration - with its tax treatment considered.

I - Intellectual property: who owns the assets?

Code written before incorporation, a brand registered in a partner's own name, a customer list on a personal laptop.

Clause to draft: assignment of all business IP to the firm or company; trademarks registered in the entity's name.

T - Termination: how does someone leave?

The clause partners avoid most and need most.

Clause to draft: good-leaver and bad-leaver terms, an agreed valuation method, a right of first refusal for remaining partners, and reasonable non-compete and non-solicit terms within what local law permits.

U - Unexpected events: death, disability, divorce, dispute

Uncomfortable, but certain given enough time.

Clause to draft: whether interests pass to heirs or must be bought back; key-person or partnership insurance to fund buyouts; dispute resolution - mediation first, then arbitration.

P - Profits: how will money be used?

Reinvest versus distribute is one of the commonest flashpoints.

Clause to draft: a default policy - a share retained for working capital and growth, with distributions only after statutory dues and loan commitments are met.

In a nutshell

Essence: answer SPLIT-UP in writing while relations are good, and most future disputes become procedures rather than battles.

Where the answers should live

Depending on structure and country, the answers belong in a partnership deed, an LLP agreement, a shareholders' agreement, a founders' agreement or the articles of association. The label matters less than the content.

An internet template beats nothing - but only just. A template doesn't know that one partner is contributing land, another runs a side business, or a relative holds a stake on someone's behalf. The document must describe this partnership, not a generic one.

The documents must also agree with each other. A shareholders' agreement that contradicts the articles, or a will that contradicts both, breeds litigation instead of preventing it.

For practitioners: what to check and draft

• Read the existing deed before the next return. Many deeds are decades old and silent on exit, valuation or remuneration; flag the gaps in writing.
• Align remuneration and interest clauses with tax rules. Partner salary and interest on capital must be authorised by the deed and within permitted limits for deduction - check the current provisions under the Income-tax Act, 2025.
• File and update LLP agreements on time. Changes in partners or contribution need timely filings with the registrar.
• Mirror shareholder rights in the articles. For companies, put transfer restrictions and reserved matters into the articles so they're reliably enforceable.
• Watch for nominee arrangements. Advise clients against holding interests in relatives' names; benami exposure and succession disputes follow.

Indicators of success

A good agreement shows up as calm, not paperwork:

• Disagreements end in decisions, not silence or delay.
• Money questions - drawings, salaries, reinvestment - are settled by the agreed formula, not monthly haggling.
• Every partner can describe the exit process in the same words.
• Review dates are kept - annually and after any major change.

Outlook: the coming decade

More ventures are being started by co-founders in different cities or countries, working part-time or bringing investors in early. That makes unwritten understandings even shakier. Digital signatures and shared documents make writing things down easier than ever - and pleading that nobody did harder. Future partnerships will survive on clarity, not closeness.

Immediate actions by role

• Each partner: privately write what you believe the agreement on ownership, roles and exit is; compare answers.
• Finance partner: list all money flows to partners over the last 12 months.
• Managing partner: book time with an adviser to turn the answers into a signed agreement.
• All partners: fix one date a year to review it together.

Illustration from a smaller enterprise

Take two illustrative friends who open a cafe with equal investment. One works there full-time; the other keeps a job and helps at weekends. Nothing is written.

Two years on, the cafe is profitable. The full-time partner believes she should be paid a salary before profits are split. The other believes profits should be shared equally because the investment was equal. Both positions are reasonable; neither is recorded.

Two hours with an adviser produces a one-page agreement: a market salary for the working partner, equal profit-sharing thereafter, a buyout formula based on a multiple of average profit and a rule that spending above Rs. 2 lakh needs both signatures. The friendship survives because the money questions finally have answers.

The objection we hear most - and our response

The objection: "Bringing this up suggests we don't trust each other. It'll damage the relationship before we've even begun."

The answer: The reverse is true. A partner who won't put fair terms in writing is telling you something important - early, while it's cheap to learn. Partners who agree clear terms can trust each other more, because the hardest conversations are already behind them. It's a seatbelt: wearing one doesn't mean you expect a crash; it means you respect everyone in the car.

Pitfalls for partners

• Holding shares or partnership interests in a relative's name for convenience - it creates legal, tax and inheritance complications and, in India, possible benami law issues.
• Verbal side deals such as "you take more salary, I'll take more dividend."
• Mixing personal loans between partners with business capital.
• One partner signing bank documents, guarantees and contracts without the others knowing.
• Signing an agreement and then ignoring it - a document that doesn't match reality protects nobody.

Practitioners' FAQ

"Do family partnerships really need written agreements?"

Even more so. Family ties make disputes more painful and harder to resolve without clear terms.

"What must a deed cover at minimum?"

Ownership, capital, roles, decision rights, profit-sharing and drawings, admission of partners, and exit and valuation rules.

"Can it be amended later?"

Yes, by mutual consent. Review it annually and after any major change.

Position as at October 2026: In India, partnership firms are governed by the Indian Partnership Act, 1932; LLPs by the Limited Liability Partnership Act, 2008 (where the LLP agreement must be filed); and companies by the Companies Act, 2013, where shareholder rights should be reflected in the articles of association to be reliably enforceable. Stamp duty, registration and enforceability rules vary by state and country - take local legal advice.

Half-hour action exercise

Sit with your partner somewhere calm - not the office - and each answer separately, on paper:

1. If one of us wanted to leave tomorrow, what should happen?

2. What would we do if we strongly disagreed on a major decision?

3. Is our ownership still fair given what each of us now contributes?

4. Who legally owns our brand, domain, software and customer data?

5. Do our spouses or families understand the arrangement?

Compare answers. Each difference is a future dispute you can settle today, free of charge.

Summary for busy professionals

• Partnerships seldom fail on losses; they fail on questions nobody answered at the start.
• Use SPLIT-UP: Shares and vesting, Power, Labour and contribution, Intellectual property, Termination, Unexpected events, Profits.
• Keep documents specific, mutually consistent and aligned with how the business really runs.
• Avoid nominee holdings, verbal side deals and unilateral signing authority.
• A written agreement doesn't weaken trust - it protects it.

Clarity isn't suspicion. It's respect - for your partner, your business and the friendship that started it.

References

• Noam Wasserman, The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup (Princeton University Press, 2012).
• Barbara Smit, Sneaker Wars: The Enemy Brothers Who Founded Adidas and Puma (2008).
• Indian Partnership Act, 1932; Limited Liability Partnership Act, 2008; Companies Act, 2013 (India).
• Brad Feld and Jason Mendelson, Venture Deals (Wiley; 4th edition, 2019) - on vesting and founder terms.