7 ms·

I didn't have a contract with my friend and my business tore us apart

36 points by danaseverson 13y ago

sejje 13y ago
Sounds more like you had an oral contract and didn't live up to it, frankly.
- sejje 13y ago
  Since I'm already downvoted, let me clarify: Ownership is ownership. Maybe there's inherent responsibility, but you can't take away ownership. If your friend was required to work to achieve his shares, it should have been set up as vestment. Giving ownership may have been a mistake on your part, but once you gave it, it's my personal belief that you should keep true to your word.
  - nobodysfool 13y ago
    I don't know but I believe that if he was getting paid more than his work was worth, then his distributions (aka paychecks) could be considered distributions of owner's equity, hence he was being bought out a little bit at a time.
    - grey-area 13y ago
      If that wasn't explicitly stated, why would his friend believe that to be the case, since he already owned 1/3 and was also doing work for that salary? Normally ownership does not change without dilution, it has nothing to do with ongoing work. This kind of thing has to be spelled out in contracts - they should have set up a company and issued stock at the start, in most countries that is fairly straightforward, and it makes the legal position crystal clear.
  - rahimnathwani 13y ago
    Yes, everyone's shares should be subject to a vesting schedule, including the founders': http://www.entrepreneur.com/article/231044 http://www.entrepreneur.com/article/231044
- kelnos 13y ago
  How is that at all the case? The oral contract seemed to be simply, "I own 2/3 of the company, and you own 1/3". There was nothing about forcing the other party to buy out their portion. There was nothing about any kind of valuation. I'm not sure why he didn't simply say, "sorry, I don't have the means or desire to buy out your portion". When you own a part of a private company, you don't have any liquidity until you have a buyer. You can't force the existence of a buyer. In the absence of a contract stating otherwise, the majority owner is under zero obligation to be that buyer. In the end, he got the other guy to agree to take a certain amount of money and go away. That may not be what the other guy expected when he thought he owned 1/3 of the company, but I personally don't believe he had any right to expect anything without further terms laid out in writing. I'm just glad that it seems like the majority owner managed to get out of the situation without having to destroy the business.
  - busterarm 13y ago
    Agreed. If buying out a partner destroys the business, the value of the business is a lot less. For everyone siding with the friend, how fair is it that someone skims 30% off the top and the majority owner gets to liquidate and/or nothing? That's having a senior lender, not a business partner.
peeters 13y ago
I'm not sure what the lesson learned here is. You didn't sign a contract with your friend, which led you later to be able to abandon the terms you mutually agreed on. Couldn't you have saved the friendship simply by not exploiting that fact?
- rahimnathwani 13y ago
  The act of putting together a contract would have forced them to think through the 'what if' scenarios (e.g. founder leaving etc.). They didn't do that work, so their expectations diverged, and it screwed up their friendship. Lesson: spend some up-front effort clarifying expectations, rights, obligations and walk-away provisions. Maybe write the stuff down and sign it.
- redthrowaway 13y ago
  In addition to the explicit agreement ("you own 30%"), each side has implicit terms that they believe the other side holds as well ("you keep working"). Unfortunately, these implicit expectations are often not shared between parties. It sounds like the author thought he was bringing his friend on as a late cofounder with all of the responsibilities that entails, whereas the friend thought it was payment for work he'd already done. The point of the contract is to make sure these implicit assumptions are made explicit, so both parties know where they stand before agreeing to a deal.
redorb 13y ago
I would have offered payments on the 1/3.. Perhaps you did, if so you did all you could
zebra 13y ago
After being there I've made two personal rules: 1. No business with friends and relatives 2. If you break #1 write down all negative scenarios and reactions to them and sign this with your party. This gives your friendship a chance to continue
- chris_mahan 13y ago
  True dat. I learned my lesson.
- thatthatis 13y ago
  Forget #1, do #2 regardless of who you're going into business with.
ef4 13y ago
This post seems to be ignoring the most obvious outcome: "yes, you own 1/3, but I'm not interested or able to buy your share right now." This is why owners of small ventures think about "liquidity" events: until you have one your share of ownership is not something you can just "cash in" because you feel like it.
- dragonwriter 13y ago
  > This post seems to be ignoring the most obvious outcome: "yes, you own 1/3, but I'm not interested or able to buy your share right now." That's potentially a very dangerous admission if the relationship is -- as it seemed to be -- already falling apart. Absent the right kind of advance arrangements -- which clearly didn't exist -- its possible that could give the dissillusioned party the right to force dissolution.
  - nostrademons 13y ago
    Without a contract or incorporation papers, there's nothing to dissolve - the business doesn't exist as an entity, it's just a couple of guys doing things and maybe getting paid for it. The money belongs to whoever's bank account it goes into, and the code belongs to whoever wrote it. If there were incorporation documents, then minority shareholders generally don't have the right to force liquidation, unless they're also creditors and the company is in violation of their credit agreement. But then, since there were no papers, there's no agreement there. Basically all you've got is two guys who are bitter because their perspectives of work vs. reward are different.
    - DannyBee 13y ago
      "Without a contract or incorporation papers, there's nothing to dissolve - the business doesn't exist as an entity, " Buzz, thanks for playing ;) This depends on the state, and a lot of states have enacted UPA. In california for example, you can create a partnership if you have two or more persons who carry on as co-owners of a business for profit[1]. Agreement is by conduct. No formalities or filings are necessary to end up with a partnership entity :) In fact, this is the language in the uniform partnership act: ""The association of two or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not the persons intend to form a partnership." If you have formed a partnership, as may very well be the case in the story here, the rest of what you say would be incorrect. [1] To be ultra clear, this does not mean that there is an existing business they have agreed to co-own
Mikeb85 13y ago
You can't simply 'cash out' of your business unless there's a buyer. If the other owner isn't that buyer, you get nothing. If you have a brick and mortar business, like a restaurant, and you're the sole owner, you can't sell without a buyer. Same goes for a 30% owner. You can't even demand the profits since dividends have to be authorized by the majority (ie. not the guy with 30%). What it comes down to is you didn't owe him shit (except the 30%), and he was being greedy and ignorant. And yes, a proper contract, with a witness (or even better a lawyer) would have been a huge benefit to both of you, if for no other reason than tempering expectations.
dba7dba 13y ago
IMO, don't do any business with a friend you want to keep for life. Actually, don't even lend them any money. One of my best friends from high school was in a tight spot for rent (laid off, lost house, evicted, all with wife+2kids), so I loaned him 1.5 months worth of rent. Result? I haven't gotten the money back after 3+ years. And it destroyed our friendship. It's not the money that really hurts. The worst thing is he won't even return phone/email. I know he's just avoiding because of the shame of not being able to pay back. I regret loaning him the money, because the cost was far more costly than the $. It cost our friendship.
- DLarsen 13y ago
  If you're able to help out a friend or loved one, it's far better to just give a gift and expect nothing in return. Don't even expect any kind of recognition or credit. Although some folks might feel some kind of obligation to return a favor in the future, helping in this way is far less likely to ruin relationships.
  - dba7dba 13y ago
    Sad thing is I never expected any recognition or credit. Never asked for interest. Only sent gently worded email reminders about 2 times, like months after. I know not situations will work out the way mine did, but I would advise against any significant financial transaction with 'friends' that you want to keep as 'friends'.
    - DLarsen 13y ago
      Perhaps you could restore the relationship around by forgiving the debt. "Hey, I really regret loaning you that money. Hard lesson learned. Don't worry about paying me back. As far as I'm concerned we're back to square one; you don't owe me a penny. Our relationship is way more important than the money." Easier said than done, but you'd probably get your friend back.
      - weaksauce 13y ago
quackerhacker 13y ago
It's stories like these that always make me pursue my projects independently as far as I can. I've learned my lesson from blurring lines between personal and business...the personal feelings alone can destroy my drive and ambitions. I know failure...tasted it about 3-4 times. I guess I'm cold hearted, I would've pursued success and burnt the bridge with my friend, if I did all the footwork in the beginning till the end. I'm starting to learn, nice people get stomped on in business.
brudgers 13y ago
What goes around... In a closely held company being a hardass negotiator with your partners poisons the long term personal relationships that such companies rely upon to maintain stability. That seventeen percent that the author won upfront with hardball is now a 33% burden two years later. Unresolved resentment over being treated as a subordinate due to a weak negotiating position from the lack of a formal agreement is the context that makes "now you are working for me" legitimate. Things would not be worse if the author had gone fifty fifty and focused on growing the pie instead of victory. This is why Spolsky advocates just having equal equity.
- thatthatis 13y ago
  I think equal equity is a time bomb. I advocate 50.01, 49.99 if it is two ways. It gives the person a minor trump card in a true deadlock that can save the company, but not enough that the long term wealth diference is anything but a rounding error.
  - brudgers 13y ago
    It's 50 50 that the person who knows how to save the company in such a scenario is the minority owner. Collaboration is better than lines in the sand. Throw a minority partner into the mix - say 5%. What good is 47.6%?
    - thatthatis 13y ago
      I think it is more like 20/20/60. 20% chance that either person is right and 60% chance that both solutions will work. I agree that a minority partner is also a good solution. I'm not arguing against 45/45/10. I am arguing against any proportion of initial equity that could lead to a 50/50 deadlock (which includes 25/25/25/25 with 4 founders).
      - deleted 13y ago
        [deleted]
      - dllthomas 13y ago
chris_wot 13y ago
The poster says that he did indeed agree to a one-third, two-third split. The guy worked with him on that basis. It doesn't matter if the poster didn't think he was worth it, that's what was agreed to. As for a buyout, that's another matter. But he did own 1/3 of the company. If it wasn't incorporated, then that person may have become liable for any debts. To the poster: stop being an arsehole.

36 points by danaseverson 13y ago

sejje 13y ago

Sounds more like you had an oral contract and didn't live up to it, frankly.

sejje 13y ago
Since I'm already downvoted, let me clarify: Ownership is ownership. Maybe there's inherent responsibility, but you can't take away ownership. If your friend was required to work to achieve his shares, it should have been set up as vestment. Giving ownership may have been a mistake on your part, but once you gave it, it's my personal belief that you should keep true to your word.
- nobodysfool 13y ago
  I don't know but I believe that if he was getting paid more than his work was worth, then his distributions (aka paychecks) could be considered distributions of owner's equity, hence he was being bought out a little bit at a time.
  - grey-area 13y ago
    If that wasn't explicitly stated, why would his friend believe that to be the case, since he already owned 1/3 and was also doing work for that salary? Normally ownership does not change without dilution, it has nothing to do with ongoing work. This kind of thing has to be spelled out in contracts - they should have set up a company and issued stock at the start, in most countries that is fairly straightforward, and it makes the legal position crystal clear.
- rahimnathwani 13y ago
  Yes, everyone's shares should be subject to a vesting schedule, including the founders': http://www.entrepreneur.com/article/231044 http://www.entrepreneur.com/article/231044
kelnos 13y ago
How is that at all the case? The oral contract seemed to be simply, "I own 2/3 of the company, and you own 1/3". There was nothing about forcing the other party to buy out their portion. There was nothing about any kind of valuation. I'm not sure why he didn't simply say, "sorry, I don't have the means or desire to buy out your portion". When you own a part of a private company, you don't have any liquidity until you have a buyer. You can't force the existence of a buyer. In the absence of a contract stating otherwise, the majority owner is under zero obligation to be that buyer. In the end, he got the other guy to agree to take a certain amount of money and go away. That may not be what the other guy expected when he thought he owned 1/3 of the company, but I personally don't believe he had any right to expect anything without further terms laid out in writing. I'm just glad that it seems like the majority owner managed to get out of the situation without having to destroy the business.
- busterarm 13y ago
  Agreed. If buying out a partner destroys the business, the value of the business is a lot less. For everyone siding with the friend, how fair is it that someone skims 30% off the top and the majority owner gets to liquidate and/or nothing? That's having a senior lender, not a business partner.

peeters 13y ago

I'm not sure what the lesson learned here is. You didn't sign a contract with your friend, which led you later to be able to abandon the terms you mutually agreed on. Couldn't you have saved the friendship simply by not exploiting that fact?

rahimnathwani 13y ago
The act of putting together a contract would have forced them to think through the 'what if' scenarios (e.g. founder leaving etc.). They didn't do that work, so their expectations diverged, and it screwed up their friendship. Lesson: spend some up-front effort clarifying expectations, rights, obligations and walk-away provisions. Maybe write the stuff down and sign it.
redthrowaway 13y ago
In addition to the explicit agreement ("you own 30%"), each side has implicit terms that they believe the other side holds as well ("you keep working"). Unfortunately, these implicit expectations are often not shared between parties. It sounds like the author thought he was bringing his friend on as a late cofounder with all of the responsibilities that entails, whereas the friend thought it was payment for work he'd already done. The point of the contract is to make sure these implicit assumptions are made explicit, so both parties know where they stand before agreeing to a deal.

redorb 13y ago

I would have offered payments on the 1/3.. Perhaps you did, if so you did all you could

zebra 13y ago

After being there I've made two personal rules: 1. No business with friends and relatives 2. If you break #1 write down all negative scenarios and reactions to them and sign this with your party. This gives your friendship a chance to continue

chris_mahan 13y ago
True dat. I learned my lesson.
thatthatis 13y ago
Forget #1, do #2 regardless of who you're going into business with.

ef4 13y ago

This post seems to be ignoring the most obvious outcome: "yes, you own 1/3, but I'm not interested or able to buy your share right now." This is why owners of small ventures think about "liquidity" events: until you have one your share of ownership is not something you can just "cash in" because you feel like it.

dragonwriter 13y ago
> This post seems to be ignoring the most obvious outcome: "yes, you own 1/3, but I'm not interested or able to buy your share right now." That's potentially a very dangerous admission if the relationship is -- as it seemed to be -- already falling apart. Absent the right kind of advance arrangements -- which clearly didn't exist -- its possible that could give the dissillusioned party the right to force dissolution.
- nostrademons 13y ago
  Without a contract or incorporation papers, there's nothing to dissolve - the business doesn't exist as an entity, it's just a couple of guys doing things and maybe getting paid for it. The money belongs to whoever's bank account it goes into, and the code belongs to whoever wrote it. If there were incorporation documents, then minority shareholders generally don't have the right to force liquidation, unless they're also creditors and the company is in violation of their credit agreement. But then, since there were no papers, there's no agreement there. Basically all you've got is two guys who are bitter because their perspectives of work vs. reward are different.
  - DannyBee 13y ago
    "Without a contract or incorporation papers, there's nothing to dissolve - the business doesn't exist as an entity, " Buzz, thanks for playing ;) This depends on the state, and a lot of states have enacted UPA. In california for example, you can create a partnership if you have two or more persons who carry on as co-owners of a business for profit[1]. Agreement is by conduct. No formalities or filings are necessary to end up with a partnership entity :) In fact, this is the language in the uniform partnership act: ""The association of two or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not the persons intend to form a partnership." If you have formed a partnership, as may very well be the case in the story here, the rest of what you say would be incorrect. [1] To be ultra clear, this does not mean that there is an existing business they have agreed to co-own

Mikeb85 13y ago

You can't simply 'cash out' of your business unless there's a buyer. If the other owner isn't that buyer, you get nothing. If you have a brick and mortar business, like a restaurant, and you're the sole owner, you can't sell without a buyer. Same goes for a 30% owner. You can't even demand the profits since dividends have to be authorized by the majority (ie. not the guy with 30%). What it comes down to is you didn't owe him shit (except the 30%), and he was being greedy and ignorant. And yes, a proper contract, with a witness (or even better a lawyer) would have been a huge benefit to both of you, if for no other reason than tempering expectations.

dba7dba 13y ago

IMO, don't do any business with a friend you want to keep for life. Actually, don't even lend them any money. One of my best friends from high school was in a tight spot for rent (laid off, lost house, evicted, all with wife+2kids), so I loaned him 1.5 months worth of rent. Result? I haven't gotten the money back after 3+ years. And it destroyed our friendship. It's not the money that really hurts. The worst thing is he won't even return phone/email. I know he's just avoiding because of the shame of not being able to pay back. I regret loaning him the money, because the cost was far more costly than the $. It cost our friendship.

DLarsen 13y ago
If you're able to help out a friend or loved one, it's far better to just give a gift and expect nothing in return. Don't even expect any kind of recognition or credit. Although some folks might feel some kind of obligation to return a favor in the future, helping in this way is far less likely to ruin relationships.
- dba7dba 13y ago
  Sad thing is I never expected any recognition or credit. Never asked for interest. Only sent gently worded email reminders about 2 times, like months after. I know not situations will work out the way mine did, but I would advise against any significant financial transaction with 'friends' that you want to keep as 'friends'.
  - DLarsen 13y ago
    Perhaps you could restore the relationship around by forgiving the debt. "Hey, I really regret loaning you that money. Hard lesson learned. Don't worry about paying me back. As far as I'm concerned we're back to square one; you don't owe me a penny. Our relationship is way more important than the money." Easier said than done, but you'd probably get your friend back.
    - weaksauce 13y ago

quackerhacker 13y ago

It's stories like these that always make me pursue my projects independently as far as I can. I've learned my lesson from blurring lines between personal and business...the personal feelings alone can destroy my drive and ambitions. I know failure...tasted it about 3-4 times. I guess I'm cold hearted, I would've pursued success and burnt the bridge with my friend, if I did all the footwork in the beginning till the end. I'm starting to learn, nice people get stomped on in business.

brudgers 13y ago

What goes around... In a closely held company being a hardass negotiator with your partners poisons the long term personal relationships that such companies rely upon to maintain stability. That seventeen percent that the author won upfront with hardball is now a 33% burden two years later. Unresolved resentment over being treated as a subordinate due to a weak negotiating position from the lack of a formal agreement is the context that makes "now you are working for me" legitimate. Things would not be worse if the author had gone fifty fifty and focused on growing the pie instead of victory. This is why Spolsky advocates just having equal equity.

thatthatis 13y ago
I think equal equity is a time bomb. I advocate 50.01, 49.99 if it is two ways. It gives the person a minor trump card in a true deadlock that can save the company, but not enough that the long term wealth diference is anything but a rounding error.
- brudgers 13y ago
  It's 50 50 that the person who knows how to save the company in such a scenario is the minority owner. Collaboration is better than lines in the sand. Throw a minority partner into the mix - say 5%. What good is 47.6%?
  - thatthatis 13y ago
    I think it is more like 20/20/60. 20% chance that either person is right and 60% chance that both solutions will work. I agree that a minority partner is also a good solution. I'm not arguing against 45/45/10. I am arguing against any proportion of initial equity that could lead to a 50/50 deadlock (which includes 25/25/25/25 with 4 founders).
    - deleted 13y ago
      [deleted]
    - dllthomas 13y ago

chris_wot 13y ago

The poster says that he did indeed agree to a one-third, two-third split. The guy worked with him on that basis. It doesn't matter if the poster didn't think he was worth it, that's what was agreed to. As for a buyout, that's another matter. But he did own 1/3 of the company. If it wasn't incorporated, then that person may have become liable for any debts. To the poster: stop being an arsehole.