
I didn't have a contract with my friend and my business tore us apart - danaseverson
http://startupsanonymous.com/story/i-didnt-have-a-contract-with-my-friend-and-my-business-tore-us-apart/
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ef4
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
> 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
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
"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

~~~
nostrademons
I knew that posting a wrong answer would get me a right answer. ;-)

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dba7dba
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
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
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
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
I'd say don't say regret. The negative connotation of that is not as good
as... "Hey, I know you have been on hard times and feel guilty for not paying
back that loan. Don't worry about paying...(the rest of your phrasing)

------
peeters
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?

~~~
redthrowaway
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.

------
Mikeb85
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.

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

~~~
sejje
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
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
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.

------
zebra
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

~~~
thatthatis
Forget #1, do #2 regardless of who you're going into business with.

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chris_wot
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.

------
brudgers
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
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
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
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).

~~~
brudgers
The reason I mention this is that in 45/45/10 the 10 has as much control as
either of the 45. Control is what matters. The author's hardball for 67% gave
him the appearance of control so long as his friend didn't treat the business
as a passive source of income.

And treating his third as a passive source of income is identical to the extra
third the author won. Deciding equity based on work done in the past is a
mistake. Equity should be decided based on sharing the work going forward into
the future. That's why 50-50 is good - it is focused on the future.

------
quackerhacker
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.

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

