All too often when the great idea hits, new entrepreneurs jump into business with friends and colleagues, invest their assets and their time, without pausing to consider how disagreements and business breakups will be resolved.
Perhaps principals are too busy to slow down. Perhaps the conversation is uncomfortable among people who trust one another, or perhaps it feels foolish to use limited resources on “what-if” scenarios. However, in our experience working with startups and even well established businesses, one of the most common reasons for failure is disputes among founders without a pre-existing roadmap for resolution. With this in mind, whether it is memorialized in an LLC operating agreement or a corporate shareholders agreement, the following are the top thirteen that need to be answered at the outset.
- What decisions will be delegated to managers?
- What decisions must be approved by a partner?
- What decisions must be brought to a vote of all partners?
- What decisions require majority, supermajority, or unanimity of the partners?
- How will deadlock be addressed?
- How will death, incapacity of a member be addressed?
- What happens if a member wishes to leave the enterprise?
- What happens if one of the partners is not pulling his or her weight? Can they be forced to leave, if so, how?
- What happens if one of the partners is acting against the interests of the Company? Can they be removed and if so, how?
- How will sale of minority stakes be handled? Will the majority holders have a right of first refusal or approval rights?
- How will desired sale of majority stakes be handled? Will there be drag-along/tag-along rights?
- If a capital infusion is needed how will that be handled? Can contributions be forced? Will dilution or subordination be permitted?
- Is there any property that belongs to one party or is everything developed shared by the enterprise?
While addressing and memorializing the answers to these questions will not guarantee ultimate success, in our experience, companies that take the time to negotiate these key points while everyone is on the same side often weather disputes without falling prey to them.