on September 1, 2014
by Burton Law

The Business Break Up

Envisioning a perfect joint venture with a co-founder that you carefully choose is a great vision to have but you also need to be realistic that not everything in life goes to plan. Planning for, or at least thinking through the potential split of a partner(s) is a critical responsibly that all founders must account for. Having a Plan B can be the essential difference between a comfortable transition and a complete financial crisis.

Here are a few pointers from the Burton Law Business team as you think through, and move past this common business obstacle.

Rule No. 1… Be Honest.

The number one rule to follow in the event of a business “break-up” is honesty. Being honest and candid with your former business partner can lead to a smoother transition and less hostility between both parties.

Admit your mistakes and expect the same from your partner. Don’t jump too quickly to conclusions and hear your partner’s side of the story without any judgment, viewing the situation from their perspective may open your eyes to new ideas. Giving your partner the benefit of doubt can only lead to good.  The first step is to find some common ground between the two of you; have a clear, concise idea of what you would like to present.

Sharing Shares? Where was that Kindergarten lesson?

Splitting the equity of the business is most likely going to be the next step, and one of the hardest in the “break-up” process.

The benefit of an even split is the ease of making that decision between the two partners. Ever wonder why people make a big deal over having 51% instead of an even 50/50? Imagine what would happen if you and your co-founder get into a disagreement over an important company decision.

This can be very problematic for early stage startups with an even number of co-founders since having even split equity there would be no tie breaker in decision making. You can prevent this from happening by maintaining your status as Majority Shareholder even as you bring on partners, or co-founders. Even though you might be best friends, or relatives with your partner, you must separate yourself and ask:

  • Who do you want making the final decisions when it comes down to your business… and in the end equity?
  • Who can you trust to take all business perspectives into account and make a decision that is best for the company?

Choose someone that will have a bit more equity, whether it’s you, or your rock-solid CFO. Allowing them to prevent a tie in the event of a spit decision. Even if the final decision wasn’t your choice, preventing the stagnation that can occur due to indecision will be beneficial in the long run.

Documentation, documentation, documentation.

Documentation is not just for developers, and customer service staff. When discussing equity, business decisions and the “break-up” itself, make sure you document everything that you communicate. This can prevent any blurred lines that may occur between business partners and prevent potential legal issues.

One way to assist in this is to develop  a proper founder’s agreement that specifies a vesting schedule, whereby each founder accumulates equity over time and if they leave the company, they only take with them the equity they’ve invested, making it possible for the company to use the remaining equity to recruit a replacement.

When your journey together is over.

In the end, how you and your partners decide to divide your startup’s equity is completely up to you and your co-founders, but it is a decision that should be carefully considered, properly documented and handled in a mature, professional and fair matter.

If you find yourself in a situation that has gotten out of hand, no longer makes sense, or just seems like your running in circles, it might be time to ask for help. Leaning on an experienced third party, such as a business attorney, or professional mediator can save you time, money, and often salvage the personal relationship you had with your partner before it’s too late.

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