April 25, 2017

Preventing Co-Founder Fights

One of the most common, if not the most common, issue I’ve dealt with as a lawyer is what happens when the owners of a business stop being able to work together.  This can happen in any form of small business – a corporation, a partnership or a limited liability company.  It doesn’t matter.  I’ve seen numerous variations on this, but the basic idea and problem is the same: people start a business together and either don’t write down their understanding about how they will operate or, they write an agreement, stick it in a drawer and never think about whether it needs to be updated.

Why does this happen? In my experience, there are two basic reasons: either everyone is so focused on making the business a success and working super hard that there’s just no bandwidth left to think about an agreement governing the relationship between the owners, or there’s already some conflict lurking that no one really wants to talk about.  Sometimes, it’s a combination of both.

In either case, the lack of any governing document or an accurate governing document becomes a big problem when there’s a problem.  This can happen when an owner dies, wants to retire or is arrested.  (Yes, that happens.)  It can happen when the person who has always been considered the “junior partner,” is suddenly bringing in the most business and wants a bigger share of the business’ profits or when a partner is no longer contributing at a level commensurate with his compensation.  It can happen when the owners reach an impasse over a big personnel decision or how to move the business to the next level.

What happens? At some point, the issue comes to a head.  There’s a good deal of frustration and hard feelings between the owners who end up having to hire attorneys to work out the issues.  Not an ideal situation.  If you didn’t have the bandwidth to deal with these issues when you were starting a business, this isn’t any better.  f there was something no one wanted to talk about, you’re definitely going to have to talk about now, and it’s probably going to be even less pleasant because there’s been months or years of frustration and hard feelings added to the conflict.  Even worse, the owners can’t work out their issues and are stuck running a business together.  Obviously, that’s not good for the owners, employee morale, or the company’s bottom line.

If, having read this, you’re thinking that an agreement governing your business might be a good idea, what should you do?  Start by thinking about how you want your business and your relationship with the other owner(s) to work.  Ask yourself and the other owner(s) some questions:  Do all owners have an equal say in the management of the business? Do all owners receive an equal share of the profits (or losses) of the business? Could this change? Are there certain decisions that can be delegated to a subset of the owners and, if so, what are those issues? What’s the mechanism for resolving disputes?  How can a new person come into the business? What happens if you raise money? How does someone exit the business? What about if that person doesn’t want to leave?

Once you’ve done this, talk to a lawyer.