Table of Contents
In Short
- Co-founder disputes can arise from misaligned visions, unequal contributions, or unclear roles.
- Resolving disputes often involves open communication, mediation, or legal intervention if necessary.
- Having co-founder agreements and exit strategies in place can prevent or mitigate conflicts.
Tips for Businesses
To minimise the risk of co-founder disputes, establish clear agreements that define roles, responsibilities, and contributions from the outset. Regularly communicate to align on business goals and address issues early. Consider formal mediation for resolving disputes amicably, and have a well-defined exit strategy to ensure smooth transitions if necessary.
As a business co-founder, you may find that your relationship with other co-founders has soured. This can be for a number of reasons. In some cases, you may be tempted to separate ways with your team or terminate your relationship with your co-founders outright. However, before you throw in the towel, you should consider exploring possibilities for resolving the conflict. This article will highlight some of the key options that are available to deal with a co-founder dispute.
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.
Continue reading this article below the formBusiness 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
These provisions determine what happens to a co-founder’s shares if they leave the company. Good leavers (such as retirees) may keep or sell shares at fair value. Bad leavers (such as those in breach of contract) might have to sell at a discount or forfeit shares.
A deadlock occurs when co-founders or directors cannot reach an agreement on a crucial business decision. This often happens in companies with an even number of decision-makers and equal voting rights. Deadlocks can paralyse a company’s operations and growth.
We appreciate your feedback – your submission has been successfully received.
