It All Goes Wrong Eventually
I’ve started a few businesses in my life, and aside from a couple of umbrella companies and holdings, I’m no longer the owner of any of them. Some I sold, some I closed, and in some I handed over my share.
This week, I ran into two entrepreneur friends who were parting ways, with one leaving the company. From my perspective, it should be straightforward: grab the bylaws, settle up, and move on. If you’re a true pro, you give your departing partner a little more than the bare minimum—especially if you believe in your own ability to keep earning through the business after they’ve left. It’s a goodwill gesture that goes a long way in building your reputation.
Unsurprisingly, they hadn’t set up their bylaws properly. It was just a standard fill-in-the-blanks template from the Chamber of Commerce, never revisited after day one. Now that things are coming to a head, the agreements are vague and, frankly, not quite fair. It’s so easy to say, “Well, if I leave, I don’t really want anything,” when you’re just getting started and there’s nothing on the table. But of course, you do have the value of your shares—and how to determine that, who pays for them, and what to do if there’s a dispute can get very messy if you’ve never spelled it out.
Believe Me, It Will Go Wrong
I’ve been there. I’ve experienced it. The big question is: what does “wrong” actually look like? I’ve successfully sold two businesses at what turned out to be their peak valuation—great for me, less so for the buyer. But the “wrong” part was how we got to that sale. In one deal, a VC was involved, and they made sure all their ducks were in a row. As a single person with no legal army, you’re far less protected.
The best thing you can (and must) do is defend yourself from day one. Hire a lawyer from the start. Not after it’s gone wrong, but before it goes right or wrong. My own lawyer doesn’t love that approach because it can come across as defensive and inflexible, but my experience has taught me that it’s the only way to protect yourself. And trust me—it will go wrong at some point.
Where It Went Off the Rails
At one of my first companies, one of the shareholders backed out of a sale at the last possible moment. Everyone else had agreed on the sale, the price, and the (admittedly bad) terms. Timing was great, price was okay, terms were awful—but we all would have done it. Except for this one shareholder who had already managed to pocket what he wanted via another route.
Enter the strategic game: in your bylaws, you might have “drag-along and tag-along” rights, which outline who has the right (and obligation) to participate in a sale of some or all of the company’s shares, and under what conditions. If you start with two people at 50-50 ownership, 50% might sound reasonable. But if the shares later get divided, and say you two original founders only end up with a combined 40%, the dynamics change. You need to revise your bylaws every time ownership shifts. If you don’t, you’re being naïve.
The Other Time I Got Burned
Another business, started with two shareholders. One person puts in all the time; the other keeps their day job. That happens sometimes—maybe it’s convenient to have someone part-time at first. But what happens when one of you leaves, especially the one who wasn’t as deeply involved? You’d expect the active partner to buy them out fairly. Turns out, “fairly” is open to a lot of interpretation.
That’s why you always specify in your bylaws that active work must be compensated. It doesn’t matter if the company can’t afford it yet—at least have it on paper. You can set caps so debt doesn’t balloon, but protect yourself from the lazier side of the partnership. Otherwise, the active partner is effectively letting the other person learn for free. Next time, they won’t start a venture without that clause in place.
Why My Biggest Sale Was (Relatively) Smooth
My biggest sale went through fairly easily because everything was spelled out beforehand. Not everything favored us as the sellers, but we’d agreed to it, so we had to deal with it. We’d revised our bylaws multiple times, sometimes under pressure from funders, and at least somebody had thought things through. That makes the process less fun, but a whole lot simpler.
So, What Can You Do?
It’s pretty simple: sit down with your partners and draft terms that explicitly address all the worst-case scenarios. One of my first business partners once asked what would happen if he and his wife died and their children inherited his shares. “Who would we be running the company with?” he asked. Great question—nobody had thought of it, but it was easy enough to document once we knew it was an issue.
Entrepreneurs are often too busy with the day-to-day to set aside time for this stuff, but you’re doing a disservice to your future self if you don’t.
Parting Ways with Your Head Held High
My two friends are now separating under less-than-ideal circumstances. After years of working together, earning money, and sharing ups and downs, they’re walking away without being able to look each other in the eye. Avoid that fate: plan your exit before you ever need to use it.
Key Takeaways
- Spell Out Your Bylaws: Don’t rely on a template—revisit them whenever ownership changes.
- Protect Yourself Legally: Hire a lawyer early, not when it’s already too late.
- Compensate Active Partners: If you’re the one putting in the time, make sure it’s accounted for.
- Plan for the Worst: “Drag-along” and “tag-along” clauses matter. Think through every scenario.
- Update, Update, Update: Revisiting your agreements might not be fun, but it’ll save you heartache in the long run.
Remember: if you don’t plan for when it all goes wrong, you’ll have no idea what to do when it inevitably does.