Five Ways to Handle Startup Founder Disputes
Conflicts with your business associate(s), particularly for start-ups, can be difficult. Most importantly, you want to address and resolve those conflicts before they interrupt your bottom line—building a successful company and promoting a solid venture.
It cannot be said enough:
Start-ups and any other business relationships should be grounded in written documentation.
If you have that documentation, you have a much clearer path toward dispute resolution. If you are in the early stages of building your business, consult legal counsel now to protect yourself, your ideas, and your business now and in the future.
Whether or not you have documentation in place, here are five things to remember when conflict arises with a business associate.
- Take a step back to get some perspective.
I have heard business relationships called “work marriages.” This is a fairly accurate description—both business associates and spouses will have good times and bad, celebrations and disagreements, and (hopefully brief) times when you can’t remember why in the world you are with this person.
Often, the best initial approach is to step away from the (literal or figurative) boardroom table and take some time to analyze the situation. Discussions that can resume later, with both parties returning with concessions and perspective, are apt to produce results that make the business relationship stronger. Often, significant disputes can be resolved by hybrid solutions, multi-faceted approaches, or even an agreement to consult outside advisors or mentors.
If your view is colored by what you perceive as your legal rights, strongly consider consulting an attorney at this stage. Many individuals, even if they can cite the appropriate statute or have studied the relevant contractual language, may still be unaware of the practical implications of enforcing that right.
Your legal rights are only the first part of the equation. Consider whether the cost and/or delay in enforcing those rights undermines your goals. A year’s delay for litigation may result in the failure of your business.
- Know your priorities; understand what’s at stake.
Ask yourself: What is the ideal outcome? What is an acceptable outcome? What outcome do you most want to avoid?
Try to remember: What made you partner with your business associate? Having two or more truly passionate, driven, capable people coming together to grow a startup can produce amazing results. Those same traits, however, can lead to bitter relationship disputes. Sometimes, the things that make a person an effective leader and innovator are also the things that make disputes difficult to resolve—a passion and dedication to a specific ideal or purpose. It is no coincidence that so many large companies go through a series of internal buyouts when they start to take off.
Consider your reality and flexibility. Can you resume a working relationship with this person after a conflict? If not, are you willing to sell your portion for the right price? Would you accept payments over time? Can one person hold a lesser role in operations to avoid future conflict? Is your best outcome to buy out the other person? Are you able to financially do so? If not, how long would it take for you to acquire the capital, and from where? What agreements would you need to secure from the other person to allow you to raise that capital (for example, a signed “buy-out” offer from your associate to provide to potential investors)? What laws might limit or dictate how you do so?
Again, ideally most of these issues will be mapped out between you and your associate(s) at the beginning of your venture—through operating and restricted ownership purchase agreements. Those documents can provide significant guidance in turbulent times.
Ultimately, a key component here, as in any dispute, is for you to have a clear idea of where you want to end up, what you want to avoid, and what you need to do to get there. If you don’t know the answers to those questions, talk to someone experienced that can help you work through them.
- Before burning bridges, lawyer up.
Lawyers wear many hats—from advisors, to litigators, to negotiators. When two or more parties have been engaged in a long-running or personally-fueled dispute, those parties may be too close to the conflict to create a resolution. Protracted negotiations become expensive quickly, damaging the company by destroying joint efforts and distracting from the business.
Again, it is highly advisable to consult legal counsel from the beginning—assuring that your company has the appropriate documentation in place. This also allows you to map out how to resolve disputes in writing from the beginning, when you and your business associate(s) have more aligned interests and purpose.
At any stage, however, legal counsel can help you pave the best path forward. At the conflict stage, competent legal counsel can lead to a faster, more knowledgeable resolution, clearly articulated in writing and enforceable through agreed-upon mechanisms to avoid future disputes. This can often be done without having to engage in formal litigation—a process that will increase the cost and time required for resolution.
- Seek resolution, not vindication.
Would you rather be “right” and have the company fail, or compromise and keep the company or preserve the value of your buyout? Viable startups can be torn apart by relationship disputes. These often occur over conflicts concerning who should be allowed to buy out whom, how much that buyout should be, or vindictive actions to prevent one relation from continuing operations without the other.
Understand that the value of a settlement or resolution is likely tied directly with the health and future viability of the company. Success of the company, throughout the dispute and negotiations, should be a primary goal for all parties.
It is not surprising that individuals passionate about the business may find it extremely difficult to separate business interests from passionate pursuit of their ideas and beliefs. Legal counsel can provide a buffer between relations, allowing for discussions that balance the interests of all parties and the business.
- Don’t get discouraged. Just prepare better next time.
Failure can be a painful teacher, but an excellent one. Where even one owner in a business refuses to seek a viable resolution, the business is often dragged down with the conflict, negating the value of further negotiation and drying up the capital available to fund a resolution. Without prior agreements, issues of who owns what part of an idea, a product, or a business model often can lead to a situation where the law—even through formal litigation—will have little likelihood of being able to separate those claims. As a result, such ideas and developments are stuck in a place where both parties own the intellectual property jointly or pieces of it individually—thus resulting in a situation where a failure to agree on how it is to be used means it cannot be used at all.
It’s not easy to walk away from a project you were passionate about, after devoting countless hours of work to bring it to life. But people who have successful businesses after initial failures far outnumber those who succeed on the first try.
Learn from your mistakes. Write a list of issues you encountered while they are still fresh in your mind. And when you are ready to launch a new venture, make sure you have thoroughly protected your company, your ideas, and yourself.
As discussed above, legal agreements play a key component in establishing the groundwork for your startup. Operating agreements, intellectual property assignments, and stock agreements take the guess work out of how your startup will operate—and what will happen if disputes arise.
Author Asa Garber has a practice focused on startups and helping businesses with litigation and appeals. His work and writing can also be seen here.