March 8, 2022
A good part of my practice involves disputes between company co-founders or co-owners. Although people seem to think I’m crazy when I say this, it’s a type of work I find particularly satisfying because it requires a combination of legal knowledge, problem-solving, and empathy.
As a result, I’m frequently asked for advice about what to do in this type of situation. While there’s no perfect answer, here are my top five tips:
One: If you have documents governing the company, you need to review them. Ideally, there’s a written document that says how the company and its owners are supposed to operate and that document addresses your circumstances.
If that’s not the case for you, don’t panic! This is very common. A lot of people never get around to documenting how a company is going to operate.
In the absence of a formal agreement signed by all of the company’s owners, there are some other sources that may clarify things. For starters, the law of the state where the company was formed may provide some guidance. In addition, emails, texts, and other communications between co-owners, as well as past practices, can also help fill in gaps.
Two: Recognize that even if you have straightforward and clear documents, there’s almost always a significant human element involved in resolving this kind of dispute. This means it’s important to be clear about what you want and what you’re willing to give up. For example, is your prime goal ousting a co-founder or co-owner? Or, are you more interested in reframing your relationship and setting up new lines of communication? Do you simply want to exit the business and move on from a relationship that has become toxic?
Three: Think about what you want to do if you can’t get your preferred outcome and develop a list of priorities.
Four: Consider the possible roadblocks to a resolution. Some are obvious — having enough money to buy out a co-founder or an operating agreement provision that requires unanimity. Others are less obvious. For example, are you concerned about letting go and moving on to the next thing? Is your co-owner someone who enjoys fighting?
Once you’ve identified these roadblocks, think about what you can do to remove them or lessen their impact.
Five: Work with a skilled professional or professionals. This can be a lawyer, but it can also be a mediator or a coach. The important point is that you have an outsider who can serve as a sounding board and suggest options and different strategies.
Please reach out if you have any questions.
April 25, 2017
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.
