WHAT HAPPENS WHEN THERE IS A DISPUTE AMONGST CO-FOUNDERS OF A COMPANY?

Drama happens even in situations where you wouldn’t expect it to crop up. Success will cover up many sins. When things are going up and to the right, things might be going wrong underneath and you won’t be aware of it. It’s the black ice of startups. It’s dangerous because every startup will hit the skids sooner or later. You can’t count on good times forever — winter is coming.



In India according to Companies Act 2013, there can be two types of companies i.e. one started by a single person as the founder and the other with more than one coming together as co-founders. So when a company is started with a few people coming together as co-founders, it has its pros and cons.

Pic Courtesy- Legistfy.com

Leaving the advantages and brighter side of such a company for another day, if we look at the problematic side, the relationship between the founders or the creators of the company plays a very important role as a startup company could be ultimately doomed by a co-founder dispute and even small disagreements amongst them can systematically erode the core of your company. Sometimes even the original creators may find themselves at a crisis point where they no longer understand each other or their plans for the dream program they created for companies that are prevailing over long period time in the business market.

Instances of Such Conflicts

So let’s look at some of the reasons which lead to such conflicts and disputes amongst the co-founders of a company:

  • Anything that impacts the amount of money made for the various founders has the potential to generate conflict and is also one of the most common factors leading to conflict amongst co-founders.
  • Also when founders begin arguing about who is doing how much, it eventually leads to a dispute situation. Though it is natural for each co-founder to invest time/energy based on her situation, it is not agreed by all in a team of people working together.
  • Another question commonly raised by co-founders that can lead to a lot of disagreement is who gets to make the decisions around.

So normally what happens when a company faces such a problem is, the co-founders sort out the issue by mutually understanding each other, coming to a common conclusion or by agreeing on a common point put forward. But sometimes what happens is such a heated conflict or a dispute amongst co-founders lead to business litigation and a settlement that turns out to be not so lucrative for the withdrawing partner.

Litigation If Required

When a conflict or a dispute ultimately leads to a litigation, that’s when the call for a Lawyers need comes into play. What a lawyer provides as a professional service to his clients in dispute is a real redressal for legal situation lockdown. A lawyer will give suggestions and advice which will prevent the co-founders from reaching to a point of dispute and conflict or in other words chaos in the internal management. For example, a lawyer hired by founders of a company, will make sure that the agreement (Memorandum of Association and Articles of Association) that is made to start-up a company, between the founders and other legal documents are scrutinised properly and legally bind the parties mentioned in the agreement.                                                          Pic Courtesy- Tech node

Tie-Breaker Policy

Another simple way to avoid conflicts and disputes amongst co-founders is by having a Tie-Breaker Policy, where if two founders or creators of a company are at conflicting situation, a third co-founder who is particularly effective, can take the final decision as long as politics remain on the sideline.

Clauses Which can Emphasise on stopping out dispute before it starts

Contribution and Ownership of Each Partner to the Firm

It is important to mention clearly the ownership pattern of each partner addressing the percentage and number of shares held individually. Depending upon the number of shares held, co-founders are assigned their voting rights which also if clearly mentioned could avert serious complications. In the case of Housing.com, the shareholding pattern with regard to the capital invested, the effort made by the partners was missing in the agreement. Also, no provision with regard to the vesting of shares was explicitly mentioned as such.

Business Decisions

In the benefit of the Company’s interest, it is essential to lay down a mechanism to take the decisions smoothly in order move forward. The decision-making power should be shared depending upon the shareholding pattern of each co-founder, but the mere presence of such mechanism can avert many future disputes. In Housing.com dispute, with a total number of 12 co-founders, only two were given recognition by the Board. Since they lacked the majority in the board, the decisions making mechanism had taken a hit. Therefore, if it is made clear in the co-founders’ agreement the decision-making power vested in every individual, it would be hassle free for the management to take decisions.

Strong Dispute Resolution Mechanism

Even the above-mentioned clauses are taken care of with a strong Memorandum of Association in the backing; there are still chances of a Co-Founder dispute being raised. Therefore, there needs to be a strong and clear, predetermined mechanism for such dispute resolution which can resolve the issue quickly without causing any damage. For example, co-founders can decide to opt for mediation with a predetermined mediator to resolve any disagreement. Straight away taking the litigation path may hamper the company’s image thereby leading to losses. In the case of Housing.com, there was clearly no dispute resolution mechanism present, if any, therefore when the dispute escalated, the Co-Founder was left with no choice but to quit, twice. Mere difference in ideology, which can easily be resolved through mediation, witnessed 9 out of 12 co-founders exiting the company.

 

Pic Courtesy- Personneltoday.com

"It’s Over" Co-Founder Disputes

Loss of Trust: The partners at some point lose trust in one another.

Unfortunately, sometimes someone violated a partner’s trust or the relationship deteriorates to such an extent that the partnership is over. This essentially means that your company is finished. You probably just partnered with the wrong person and that’s the end of it. Nothing can be done. Pick yourself up, take some time off, and get back in the saddle with the learnings you’ve gained from this experience.

Even if you're not currently having any problems with your partner, the best way to avoid them in the first place is to have frequent, regularly scheduled “off-sites.” This is a great way to examine where you are as a company and what you both could be doing better. These meetings establish a regular routine between the both of you that keeps the relationship well-oiled and builds and deepens trust, loyalty, and alignment over time. When big issues arise or the inevitable difference of opinion bubbles to the surface, you can talk through these in an atmosphere of respect and trust--knowing that you both have the best interests of the company and each other at heart.

Let us help you, draft legally binding agreements and documents that can effectively prevent such conflicts and chaos in the internal management. You can also start by examining every aspect of the co-founder relationship and other legal consultation with us at Legistify.