I didn't have a contract with my friend and my business tore us apart
startupsanonymous.com
startupsanonymous.com
This is why owners of small ventures think about "liquidity" events: until you have one your share of ownership is not something you can just "cash in" because you feel like it.
That's potentially a very dangerous admission if the relationship is -- as it seemed to be -- already falling apart. Absent the right kind of advance arrangements -- which clearly didn't exist -- its possible that could give the dissillusioned party the right to force dissolution.
In reading stories about how experts value shares of small businesses, suing for a buyout of a tiny software company doesn't seem rational. The suit itself will probably sink the company, resulting in zero returns for the minority shareholder. Even if the company survives the suit, the value of a share can be determined by company profits and distributions; it doesn't seem likely that the minority shareholder gets a claim on the company's operating capital. And it looks like courts may discount the value of a minority share, since it doesn't come with any control of the company.
If there were incorporation documents, then minority shareholders generally don't have the right to force liquidation, unless they're also creditors and the company is in violation of their credit agreement. But then, since there were no papers, there's no agreement there.
Basically all you've got is two guys who are bitter because their perspectives of work vs. reward are different.
Buzz, thanks for playing ;)
This depends on the state, and a lot of states have enacted UPA.
In california for example, you can create a partnership if you have two or more persons who carry on as co-owners of a business for profit[1]. Agreement is by conduct. No formalities or filings are necessary to end up with a partnership entity :)
In fact, this is the language in the uniform partnership act: ""The association of two or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not the persons intend to form a partnership."
If you have formed a partnership, as may very well be the case in the story here, the rest of what you say would be incorrect.
[1] To be ultra clear, this does not mean that there is an existing business they have agreed to co-own
If its not incorporated, and there is a legally binding agreement to share the business, then (even without a written contract), it likely, in many states, would be found to be a partnership, in which case, as I recall the default rule barring some contrary agreement, any of the partners could force dissolution at any time.
Would it be normal for a minority owner of a start-up to be able to legally force the majority to buy them out? I wouldn't have thought so.
The 30% owner could have sat on the shares and waited to see what happened. They were effectively free (in the sense that he didn't buy them and was apparently paid a reasonable salary as well).
The existential answer to this is "yes". THere are situations where you can do this.
For any practical answer, you'd need to instantiate it for some tuple of "state, corporation type, event occurrence"
:)
It would be rules in place which explicitly controlled this, so, no, it wouldn't be normal.
OTOH, with an agreement which specified ownership split and nothing else, it might be the case.
One of my best friends from high school was in a tight spot for rent (laid off, lost house, evicted, all with wife+2kids), so I loaned him 1.5 months worth of rent.
Result? I haven't gotten the money back after 3+ years. And it destroyed our friendship. It's not the money that really hurts. The worst thing is he won't even return phone/email. I know he's just avoiding because of the shame of not being able to pay back.
I regret loaning him the money, because the cost was far more costly than the $. It cost our friendship.
I know not situations will work out the way mine did, but I would advise against any significant financial transaction with 'friends' that you want to keep as 'friends'.
"Hey, I really regret loaning you that money. Hard lesson learned. Don't worry about paying me back. As far as I'm concerned we're back to square one; you don't owe me a penny. Our relationship is way more important than the money."
Easier said than done, but you'd probably get your friend back.
My general philosophy about that sort of thing is that, if the sum isn't materially significant to me, and I care about the person enough to help them out of a jam, it's far simpler to just give it without any expectation of return. If they are able to pay it back, and feel like they must, then that's fine. If not, that's also fine. If they can't pay it back, but still feel like they owe me something, and offer to do me a favor of some kind in the future, that's great too. But none of it is necessary, and I won't care either way, as long as I believe they appreciate the help.
Then it's not really a gift. It's still a big risk. How would you feel if you gifted a friend rent money and they blew it on something else?
After all it's better to give than receive.
I actually think it was the best thing that he could have done at the time.
If there were any hardship where I really needed money, I don't think that I would ask any close friends...their friendships are worth too much to risk over money.
Then I never, ever mention it again, not even in passing, not even jokingly. Never.
Not too mention, I wasn't exactly raking in the $...
I don't regret loaning him the money though, but in retrospect I would have rather it been very clear that I was giving it to him, if he had asked for that, I'd have probably done it anyways and written it off in beer.
If it fell apart over mere 1.5 months of rent, it was not a real friendship. And it's cost was not much more than 1.5 months of rent ;)
The point of the contract is to make sure these implicit assumptions are made explicit, so both parties know where they stand before agreeing to a deal.
Lesson: spend some up-front effort clarifying expectations, rights, obligations and walk-away provisions. Maybe write the stuff down and sign it.
If you have a brick and mortar business, like a restaurant, and you're the sole owner, you can't sell without a buyer. Same goes for a 30% owner. You can't even demand the profits since dividends have to be authorized by the majority (ie. not the guy with 30%).
What it comes down to is you didn't owe him shit (except the 30%), and he was being greedy and ignorant.
And yes, a proper contract, with a witness (or even better a lawyer) would have been a huge benefit to both of you, if for no other reason than tempering expectations.
Ownership is ownership. Maybe there's inherent responsibility, but you can't take away ownership.
If your friend was required to work to achieve his shares, it should have been set up as vestment.
Giving ownership may have been a mistake on your part, but once you gave it, it's my personal belief that you should keep true to your word.
This kind of thing has to be spelled out in contracts - they should have set up a company and issued stock at the start, in most countries that is fairly straightforward, and it makes the legal position crystal clear.
I'm not sure why he didn't simply say, "sorry, I don't have the means or desire to buy out your portion". When you own a part of a private company, you don't have any liquidity until you have a buyer. You can't force the existence of a buyer. In the absence of a contract stating otherwise, the majority owner is under zero obligation to be that buyer.
In the end, he got the other guy to agree to take a certain amount of money and go away. That may not be what the other guy expected when he thought he owned 1/3 of the company, but I personally don't believe he had any right to expect anything without further terms laid out in writing.
I'm just glad that it seems like the majority owner managed to get out of the situation without having to destroy the business.
For everyone siding with the friend, how fair is it that someone skims 30% off the top and the majority owner gets to liquidate and/or nothing?
That's having a senior lender, not a business partner.
As for a buyout, that's another matter.
But he did own 1/3 of the company. If it wasn't incorporated, then that person may have become liable for any debts.
To the poster: stop being an arsehole.
In a closely held company being a hardass negotiator with your partners poisons the long term personal relationships that such companies rely upon to maintain stability. That seventeen percent that the author won upfront with hardball is now a 33% burden two years later.
Unresolved resentment over being treated as a subordinate due to a weak negotiating position from the lack of a formal agreement is the context that makes "now you are working for me" legitimate. Things would not be worse if the author had gone fifty fifty and focused on growing the pie instead of victory.
This is why Spolsky advocates just having equal equity.
I agree that a minority partner is also a good solution. I'm not arguing against 45/45/10.
I am arguing against any proportion of initial equity that could lead to a 50/50 deadlock (which includes 25/25/25/25 with 4 founders).
And treating his third as a passive source of income is identical to the extra third the author won. Deciding equity based on work done in the past is a mistake. Equity should be decided based on sharing the work going forward into the future. That's why 50-50 is good - it is focused on the future.
What about abstentions?
I know failure...tasted it about 3-4 times. I guess I'm cold hearted, I would've pursued success and burnt the bridge with my friend, if I did all the footwork in the beginning till the end. I'm starting to learn, nice people get stomped on in business.