

Ask YC: Shotgun clauses, good or bad? - lux

My partner and I are working on a partnership agreement for our new startup right now and have most things settled, but we're on the fence about whether or not to include a shotgun clause and we wanted to solicit some real-world experiences and not just to proceed purely on the advice of the lawyers.<p>On the one hand, it's meant to provide a means of breaking up where a partner is forced to offer something they consider to be fair (because they would have to be willing to accept it themselves). On the other it seems like something that could be manipulated to the advantage of the partner with access to more cash, and I can see such potential abuses being particularly plausible in high-growth scenarios like startups.<p>Everyone would like to believe they can trust each other and that these are just formalities, but situations change and when the going gets tough, who knows how someone might react?  So is a shotgun clause good or bad for startups, and can simple arbitration provide the same thing?<p>For those not familiar, here's some info about shotgun clauses:<p>http://en.wikipedia.org/wiki/Shotgun_clause
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dangoldin
From the Wikipedia page:

In academic circles it has been argued that, under certain circumstances,
these clauses are not economically efficient in that the partner who values
the company most is not always the one that ends up buying the company. De
Frutos and Kittsteiner suggest in their paper that in order to ensure an
efficient outcome, there should not be a contractual obligation for the party
who triggers the clause to name the price. Instead, they advocate including in
the termination agreement a clause stating that the parties will negotiate for
the right to be the person who chooses whether to buy or sell at the price
specified by the other partner. They suggest that this negotiation takes the
form of an ascending auction where the shareholders bid for the right not to
set the price per share. Each partner raises his/her bid continuously, but
either partner can drop out of the auction at any time. The party that drops
out becomes the one who must propose the price per share, but that person
receives a payment from the other partner equal to the bid at which the
auction ended. The first and most well known of these specialty firms is The
Shotgun Fund(tm).

Why not put something along those lines in the contract?

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ggruschow
I was up close to a shotgun clause getting "fired." It was definitely better
that they had a way to separate. Arbitration failed. It was hell for a couple
of months for the rest of the company though because it was unclear who to
listen to. The company survived though, and it probably wouldn't've otherwise.

The partner with more access to capital initiated in this case - as you're
worried about. The other partner scrambled, found some investors and LBO style
loans, and in the end, he "won".

There's obviously issues, but I'm not aware of a better way to resolve the
situation while still retaining upside potential from a sale.

If anyone involved is likely to get even a little bull-headed, it seems like a
good idea.

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run4yourlives
Shotgun clauses are a fair way of handling things if your relationship
deteriorates. (That's the whole reason you're writing the agreement down in
the first place)

I wouldn't sign one if you are dirt poor and your partner is loaded, but if
you have a decently equal access to cash, it's not a problem.

