You’ve done it! You’ve finally thought of your million-dollar idea. You’ve created the prototype for your product, the Kangaroo Pouch for People. It’s like a fanny pack, but bigger. You’re ready to start building your company, but you’re nervous and feeling inexperienced. So you do what most people do – you invite your best friend Bob to become a 50% partner in the company with you.
Unfortunately, not every partnership is always smooth sailing. You should have a plan for if or when things go south, just in case. There are many options you can choose from to ensure that if your partnership leads to a disagreement and you both share the same power, that decisions can be made amicably and hopefully without legal action!
Contact the experienced attorneys at Chidatma Law Group for assistance in making sure your business is taken care of, no matter who is involved.
Precautionary Steps to Take When Starting a Small Business in New York
If you rely on some other person to help with tiebreakers in your business:
- Appoint a custodian or provisional director or “rabbi” that you agree will act as a tie-breaker. This can be put in an operating agreement or bylaws.
- Hire a CEO who makes the larger company decisions, while still retaining equal, majority, and profitable ownership.
- Elect to form your partnership as a corporation and appoint at least three people on your board of directors, including the two partners, or another odd number.
- Create a 49/49/2 partnership. The 2% shareholder should be someone well-informed and trustworthy to make the tiebreaker decisions.
Issues can also be handled internally from the get-go:
- Assign partners 51/49 in decision making, but 50/50 in profits.
- Agree to have each person handle different departmental decision, or have one partner handle day-to-day issues and the other major decisions.
- Create an ad hoc board of directors that reviews and makes decisions on issues that owners can’t agree on.
- Include built-in mechanisms (similar to mutual assured destruction) in company documents that are bad for everyone so that it encourages each partner to avoid deadlock.
- Set a provision in the bylaws or operating agreement that provides for mediation or arbitration if the issue gets to that. This is typically the least amicable option and the con is this is like litigation.
- Provide for a buy/sell option in the operating agreement. There are multiple options available (see below).
What if you and Bob decide that you’re such tight besties, you didn’t take any of those precautionary steps? Several years later, you are making money hand over fist but there is a disagreement about something important – like selling the company or borrowing money. You still have some options!
Post-Disagreement Problem Solving – What Do We Do Next?
If you are having trouble making decisions about your company, some of the following tactics may be helpful:
- The simplest of decision-making tactics is often a coin flip! It may seem silly, but it’s certainly the fastest and the cheapest.
- Decide to take turns either by each decision or period of time.
- Although it may not be previously written in the company documents, you can decide to bring someone in to be the tiebreaker, like a neutral third partner who knows the company.
- Work out a buy/sell arrangement and allow for one partner to buy out the other. Some buy-sell agreement options include:
- Russian Roulette/Open Dutch Auction: Remember when you and your sibling would fight over a piece of cake and your parent said you should cut it in half? She lets you cut the cake, but tells you that your sibling gets to pick the slice. You try to cut the cake as evenly as possible because of the fear they’ll take the bigger piece. Same concept here. One partner sends notice to the other naming a price they believe is the value of their half interest, and the receiving partner can buy it for that price or sell to the other party at that same price. The other partner being able to flip it keeps them reasonable.
- Texas Shoot Out/Closed Dutch Auction: Both partners send sealed bids with a price they would be willing to sell their 50% for, to a third neutral party. The higher bid wins and they must buy the other partner’s share at the lower price.
- For example, let’s bring the cake slices back. You tell your mom you would give Sally your slice for $3, but Sally tells mom she would only sell hers to you for $5. Sally gets the cake and only has to pay you $3.
- Fair Market Offer: One partner sends notice to the other about executing a buy/sell option. A neutral third party decides a fair market price for half and the partners decide who will buy.
- Baseball Arbitration: Both parties submit an amount they believe the entire company is worth. The party closest to the arbitrator’s number wins and buys the other partner’s half for half of the Company price.
- Balanced Fair Market Value: Again, one partner sends notice, and the third party picks a fair market value for half. The partner who sent notice must buy the other partners shared at a premium of the FMV or sell their own at a discounted value. You agree to a 15% — or whatever – enhancer in advance.
At the end of the day, if you and Bob really can’t sort out your issues cleanly, expensive and time-consuming litigation may sadly have to be the road you take. As a last resort, if after that the company can’t function properly after the drama and the bickering, dissolving or selling the company may have to be considered, too. Mankind will have to live another day without their Kangaroo Pouches unfortunately.
Contact Chidatma Law Group Today
Conveniently located in New York City, our business lawyers will make you our priority and put your mind at ease. We will answer your questions, evaluate your circumstances, and discuss your options. Call us right away at 212-903-4546, or contact us confidentially online.
