Answer by Tom Webster, Startup and Commercial Lawyer, Musician, Innovator
Preventing Director Deadlock – We see this situation all too often. Two friends, the best of mates, decide to become 50/50 partners in a new venture. The friends decide that they will both be Directors of the company and equally own 50% of the issued shares (the partners). After three or four years, the business is starting to turn revenue, and the partners cannot agree on a fundamental strategic decision. This inability to agree leads to unrest, and the partners start to resent each other, and their business. Here’s how to deal with this:
Plan from the start and realize that you are going to have issues with each others’ strategic vision at some point or another during the business. Make sure that you do one of the following:
- Have a dispute resolution clause in your Shareholders’ Agreement; or
- Don’t appoint an even number of Directors’;
- Have a trusted advisor that “steps” in when important decisions need to be made and there is Director deadlock.
Make sure that you think through all scenarios when you plan your business and incorporate your company. You should at least consider the following:
- What happens if you want to mutually part ways?
- What happens if one partner wants to leave the business
- What happens to the assets of the company if you part ways
- How will the business be valued if you need to separate ways, buy one party out, or sell the business altogether.
Discuss your personal protection, as well as your company’s protection – all too often people rush ‘heads on’ into Agreements for a new business before considering the implications of signing personal guarantees, or what being a Director means for them under the Corporations Act (or relevant jurisdictional legislation).
It is a necessary conversation that needs to be had. If you have a family, how do you protect them from being caught up in your liability? If you have a partner, how do you protect them and their income? Unfortunately, being a firm that has vast experience in insolvency and bankruptcy, we see the hard truth of reality and what corporate or personal insolvency can do to personal well being. Get it sorted, before it’s too late.
Get your company structure correct, now – there is no time like the present. If you want to be successful, then plan for success. All too often we see clients who have been operating a business for one to two years without a company structure that will sufficiently help them plan for a prosperous future. Remember once you start operating a business you start to develop goodwill, intellectual property and value. Plan for success. No one want to go through a corporate restructuring unnecessarily.
This question originally appeared on Quora:What are the most common mistakes first-time entrepreneurs make?”
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