Just as marriages start out rosy and full of excitement, many new business owners start out excited and with a picture-perfect view of the road ahead. However, just like spouses in a marriage can have times when it is difficult to get along, those new business owners may eventually become disillusioned about their relationship. Very often, one owner will develop feelings that he or she is carrying a disproportionate share of the work load, is contributing a disproportionate share of the financial or other resources needed to run the business, or is the victim of a power or equity imbalance. Most new business owners do not foresee future conflicts and do not prepare for them, but should.
As with most things, it is better to address the potential problems at the beginning of the new relationship rather than at the end when emotions run high and things are said that make it difficult, if not impossible, for the owners to salvage their relationship. A properly prepared written agreement that sets out the details of the new owners’ business relationship can prevent or minimize problems, or at least make the resolution of the problems a bit more pleasant.
A good business “prenup” agreement will address issues such as the following:
What are the overall goals of the owners and what are their visions for the business;
The equity interests to be owned by the owners;
Whether and how an owner can increase or decrease his or her equity interest;
Are the equity interests subject to a vesting schedule, and, if so, does the vesting schedule reflect objective measures as opposed to subjective measures;
What will be the role of each owner within the company, and how will those roles be divided;
What titles will the owners have;
Will the owners be employees responsible for day-to-day operations or simply investment partners;
Will the owners be compensated through salaries, distributions, perks, or otherwise, what will that compensation be, and can it be increased or decreased for any reason;
What time, workload, and monetary commitments are expected of each owner, and what terms will govern monetary contributions;
Will the owners be limited with respect to outside business interests and particularly competing interests;
How will key, as well as day-to-day, decisions be made;
How will decisions on whether to admit additional owners be handled;
How will an eventual sale or marketing of the business be decided; and
How will the owners handle disputes, including situations where one owner believes another is not meeting expectations?
All of the above, and more, should be considered when two or more owners start a new business regardless of whether it is a partnership, corporation, or limited liability company. Situations and relationships change over time, but a solid agreement provides a framework for addressing issues that might arise. This is one area where astute business lawyers will inform their clients that paying a little at the start of the new venture to have such an agreement prepared is a lot less expensive than a “business divorce.”