Tuesday, July 12, 2011

Business Equity & Friends

I wrote a blog which briefly discussed protecting minority shareholder rights. I said it may not seem fair, but owners can do whatever they want with distributions, etc. when they grant equity to someone...unless that someone has insisted on minority shareholder rights and insisted on having those codified in a Buy/Sell Agreement, Term Sheet, or other applicable documentation that would withstand a legal challenge.  Here is an excerpt from Norm Brodsky's monthly article in Inc. where he answers questions put to him by other entrepreneurs that I think illustrates what I've said: "I told Andre (the small business owner who wrote in) that, to begin with, he was confusing ownership with compensation. Unless there is a written agreement that states otherwise, the majority owner can do whatever he wants with the company's cash. His partner's 30 percent stake does not entitle him to 30 percent of the profits—or any other share, for that matter. It is strictly Andre's decision." (I added the bolding and italics.)

And here's another excerpt regarding an area I've discussed. I repeatedly state that someone MUST have the majority stake. No two people can ever ALWAYS agree about EVERYTHING ALL the time. (Hopefully with these caps you hear me!) Someone has to take the lead when you just can't come to a decision. You can check out earlier blogs where I discuss how to do this, especially when there are 2 or more co-founders. Here's Norm's weigh-in: "And though the two of them needed to talk through their differences and reach an understanding, I discouraged Andre from making his friend an equal partner. I don't believe you should ever give anyone more than 49 percent of the stock in your business unless it's absolutely necessary—say, to raise capital you need to grow. The majority owner controls the business. If partners each own 50 percent of the stock, the company has two heads, which seldom works well in my experience and often leads to disaster." (Again, I added the bolding and italics.)

To read more about business equity, minority shareholder rights, and majority owners, read Norm Brodsky's entire article on Inc.com, Divvying up the Business.



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