5 Rules to Avoid Disputes Among Shareholders

Preface: The Typical Story

Founder buyouts due to disputes among shareholders are common, although this fact is often hushed up. When founding a startup, one usually doesn't want to deal with a potential negative outcome in advance. This is a big mistake – also from a legal perspective. When two shareholders argue, it often has dire consequences for the company. Moreover, employees feel the effects as well. To prevent this from happening, there are some basic rules that every entrepreneur should know.

1. Select Business Partners Very Consciously

Choosing the right business partner is essential. But which combination of two entrepreneurs is the right one? Does the saying "birds of a feather flock together" apply here, or is it "opposites attract"? Both are true in a certain way: Unequal partners have the advantage that new synergies arise from different perspectives.

Especially concerning the distribution of tasks, a creative mind paired with an analyst forms a coherent combination. The two are unlikely to argue about who is primarily responsible for competitive analysis and who is responsible for the next pitch with the agency looking for a new company logo. Moreover, the essential characteristics of the individuals in such a combination can form an exemplary unit.

It's a different story when two alpha wolves want to run the same company. Problems are already programmed here. Differences of opinion can only be resolved if the positions are clearly and contractually defined from the beginning, and both parties adhere to them in a highly professional manner.

Common Goals

Overall, choosing the right business partner is comparable to a marriage or partnership. Ultimately, it is nothing else – on a business and sometimes even on a friendly level. And what makes a good partnership among other things? Common goals. Translated into an economic goal, this is the company's orientation.

The question of the path to the goal and how to pursue it should definitely be answered jointly. For example, product or marketing strategy plays a significant role here. There should also be consensus on aspects such as resource allocation. Agreement on a later shared leadership style should also be clarified before hiring employees. Don't expect there never to be differences. But if your answers to the key questions align, the prerequisite for a long-term respectful and effective business relationship is definitely given.

2. Future-Oriented Contract Drafting

Fact: The more forward-thinking and honest both parties are during the discussion of individual contract points, the more efficiently the shareholder agreement in a corporation or the articles of association in a limited liability company can be designed. Take your time and consider all aspects that could lead to possible discrepancies later on. Draft clearly structured plans in advance and make sure to consider all eventualities.

Even if it may be difficult to think about it during the initial phase full of enthusiasm, definitely consider the worst-case scenario. Detail problem-solving and the individual responsibilities of the parties. The goal of an articles of association is to have it as a legal basis in the background when the worst-case scenario occurs.

3. Legally Capture Changed Situations Correctly

Building on point two, it is essential that the contract painstakingly drawn up at the founding of the company does not gather dust in the bottom drawer over the years. Be aware that discrepancies and disputes among shareholders can occur even after many harmonious "marriage years".

As a startup grows out of its infancy, many new things happen. New employees are hired, restructuring takes place, or there may even be a company name change. Sometimes personal circumstances interfere with entrepreneurship. Perhaps one of the founders wants to take a sabbatical or needs to be temporarily replaced in his role for other reasons. Then it's time to adapt the articles of association to the changed internal and legal circumstances.

4. Communicate Openly and Fairly

We have one more piece of advice, which should also apply to a marriage but is often not implemented: open and honest communication. This does not mean that you cannot make decisions alone when necessary and the authority is clearly outlined in the articles of association. However, there should always be a constant flow of information and exchange. It's better to communicate too much than too little. This way, you can eliminate misunderstandings immediately instead of letting emotions build up over a long period.

Differences of opinion should be addressed immediately and directly. There is no place for shyness about conflicts in a joint venture. However, never forget: Ultimately, we are all only human. Have the courage to express your own opinion, communicate fairly at all times, and reflect on the statements of your counterpart.

5. Consider Possible Conflicts with Other Partners

Conflicts arise not only among the founders themselves. Other constellations are also sometimes highly vulnerable. Let's take a look at the group of investors. Their goals could hardly be more different from yours in some cases. While company founders have long-term growth over the next few years in mind and care about the development of their employees, an investor is primarily seeking rapid growth and high returns. A venture capital provider consciously operates with significantly higher risk than a founder would ever take. Their goal is clear: a successful exit. A venture capital firm has no emotional attachment to a company, while founders call it their "baby."

Venture capital investors often openly engage with their strategically oriented colleagues to pursue their different goals – to the detriment of the company. It is therefore crucial that, as a managing director, you are aware of your responsibility before bringing capital providers on board. Make the choice strategically wise and be vigilant when ensuring that the contractual foundations are legally sound.

Professional Legal Support for Start-Ups

Disputes among shareholders happen and can even give the company a positive boost. However, it is important to approach differences of opinion in a business-savvy and professional manner. A properly drafted shareholder agreement forms the basis of this.

In any case, it is advisable, whether in contract drafting or in the event of a worst-case scenario, to have a professional legal partner by your side. We at GetYourLawyer can help you with that. Submit your inquiry online and receive quotes from specialized attorneys who fit your needs and your company.