Summary
- How you resolve a co-founder dispute in the UK depends on your business structure and your governing documents.
- A shareholders’ agreement, articles of association or partnership agreement should set out how deadlocks are broken and what happens when a founder leaves.
- Where documents do not settle the matter, the options are mediation, arbitration or litigation, in rough order of cost and finality.
- This guide explains how to handle a co-founder dispute for founders and business owners in the United Kingdom.
- LegalVision’s business lawyers specialise in advising clients on co-founder and shareholder disputes.
Tips for Businesses
Put a shareholders’ agreement and service agreement in place before you start trading. Define roles, decision-making and leaver provisions. Agree how deadlocks are broken. When conflict starts, address it early and try mediation before arbitration or litigation.
A co-founder dispute is a disagreement between the founders of a business over strategy, roles, money or control. In the UK, how you resolve one depends on your business structure and your governing documents. A company shareholders’ agreement and articles of association set out how deadlocks are broken and what happens when a founder leaves. Partnerships rely on the partnership agreement. Where those documents do not settle matters, founders use mediation, arbitration or litigation, in roughly that order of cost and finality. Company shareholders may also bring statutory claims not open to partners. This article explains the main options for handling a co-founder dispute and when each one applies.
What is Co-Founder Conflict?
You will likely end up in a disagreement with a co-founder at some point, even if you do not anticipate from the outset that you will face any problems. Co-founder disputes are when you are in a dispute with at least one of the other founders of the business. Often, co-founder situations are treated differently from normal disputes because co-founders will typically have a pre-existing close relationship. This relationship will almost always have a legal component largely contingent on the business structure your business employs.
As a result, it is best to prepare by anticipating that there may be conflicts between co-founders and ensuring that your corporate governance documents provide clear guidelines upfront as to how these can be resolved. This proactive approach, combined with familiarising yourself with early dispute resolution methods, can help you to protect personal relationships with your co-founders and minimise the effect of potential disruptions on your business.
Proactive Measures for Preventing Co-Founder Disputes
While it is natural to want to avoid conflict altogether, it’s more realistic and beneficial to acknowledge that disagreements may arise when working with co-founders. You should prepare for this possibility from the outset, before going into business together. By anticipating potential areas of conflict and addressing them in your corporate governance documents, you can create a framework for constructive resolution.
In the UK, we recommend that co-founders of a company implement the following:
- Bespoke Articles of Association: These should be tailored to your specific business needs and include provisions for conflict resolution.
- Shareholders’ Agreement (Founders’ Agreement): This document should clearly outline:
- what happens in the event of a conflict, such as how decisions are made if the board is deadlocked;
- procedures for when a co-founder leaves the business or underperforms; and
- bad leaver, good leaver, and early leaver provisions relating to shareholding and board positions.
- Service Agreement: For each co-founder, this should specify:
- roles and responsibilities;
- work distribution;
- time commitments; and
- performance expectations.
By having these agreements in place from the outset, you create a clear framework for addressing potential disputes. If a co-founder breaches their service agreement, for instance, it becomes easier to determine if this triggers any leaver provisions outlined in the shareholders’ agreement.
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Business Structure Considerations
At this point, it is also worth considering the structure of your business. If your business is a partnership, for example, then the process of coming to an agreement to solve an issue will be different to if your business is a limited company.
As a partnership, your rights and responsibilities should be in your partnership document, and generally, you will be able to come to resolutions by consulting the partners of your business. In a limited company, however, you may need to pass a shareholders resolution if you intend to resolve a problem through a collective agreement.
Communication
Given the amount of time that you would have put into your company with your co-founder, it is likely that both of you have significant experience of your company and have a good idea of how to take it forward. You should keep this in mind when discussing problems, and do your best to argue in a collaborative way that is based on data and statistics.
Ultimately, you should refer back to your general business plan if your co-founder dispute is about strategy. As a new business or startup, it is also important that your co-founder dispute does not affect the people at your company. Keeping your team motivated is a highly important factor in the success of new ventures.
However, in some situations, you may find that simply discussing problems is not helpful at all. If you believe that your co-founder is not receptive to your issues at all, or there is a more significant problem with your personal relationship, then you may want to consider more formal methods of dispute resolution. For example:
- mediation;
- arbitration; or
- litigation.
| Mediation | A professional mediator is someone who will help you craft a resolution to your problem that both parties consent to. This can be good practice on effective communication, which can help strengthen your relationship long-term. |
| Arbitration | To be able to arbitrate on an issue, there must be a serious legal problem between you and your co-founder. Arbitration is often preferred to litigation, because it is often cheaper and less time-consuming. You can force an arbitration only where you have a pre-existing agreement in place entitling you to do so. For instance, if your business is run as a partnership and you have an arbitration clause in the partnership agreement. |
| Litigation | Absent an enforceable term compelling your co-founder into arbitration, your only option may be to claim against them. This is the nuclear option and you should only pursue it where relationships have broken down and you do not expect them to recover. Furthermore, litigation is expensive and time-consuming. |
This guide outlines how to resolve commercial disputes.
Key Takeaways
If you are in a co-founder dispute with a co-founder, embracing conflict and trying to deal with it early through appropriate communication can be a good idea. However, sometimes, the issue may be too significant to resolve internally. Instead, you may wish to opt for more formal dispute resolution processes, such as mediation, arbitration, or litigation. Your options will depend on the nature of your dispute and the legal structure through which your business operates.
If you need help with your business, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
What are good leaver and bad leaver provisions?
Good leaver and bad leaver provisions decide what happens to a departing co-founder’s shares. A good leaver, such as someone retiring, can usually keep or sell shares at fair value. A bad leaver, such as one in breach of contract, may sell at a discount or forfeit shares.
What is a deadlock situation in a co-founder dispute?
A deadlock happens when co-founders or directors cannot agree on a key decision. It is common where two founders hold equal shares and equal votes. Deadlock can stall the company, so shareholders’ agreements often include a casting vote or a buy-out clause to break it.
Can I force my co-founder to sell their shares?
Only if your governing documents allow it. Some shareholders’ agreements include buy-out or shootout clauses that let one founder buy the other out or trigger a forced sale. Without such a clause, you cannot compel a co-founder to sell their shares.
What is the difference between mediation and arbitration?
Mediation is a confidential process where an independent mediator helps you reach an agreement you both accept. Arbitration is more formal and produces a binding decision. You can only compel arbitration where a valid arbitration clause already exists in your agreement.
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