Not long ago, I found myself discussing the pitfalls and challenges of crafting a Stockholders’ Agreement among four founders of a new and well-capitalized company.
The founders, not surprisingly, voiced the opinion that it is unlikely they’d ever get down to a point of counting votes because they’ve always been able to “hash things out and reach a consensus.”
Of their history, I have no doubt.
They are all reasonable, intelligent people, devoting their full efforts toward the advancement of their mutual interests. Were I in their business, I would not hesitate to have any one of them as my partner.
There is, however, one issue on which they will not readily find consensus despite their history of collaboration:
What happens when somebody wants to leave?
I’m going to veer into the hypothetical to better frame the issue:
Assume that a company has four founders. Two are in their twenties, one is 35 and one is 50. Factor in that the 35-year-old member’s spouse just began her surgical residency and is anticipating receipt of significant offers from practices all over the country upon her completion of the program.
In other words, the partners are of one mind when it comes to company issues, but they are not all marching through life in lockstep. Few of us are.
Now, let’s examine the buy/sell issue.
It is reasonable to assume that either the 50 year old or the 35 year old may foresee departure from the company at an earlier point than would either of their younger colleagues.
The departing members would necessarily want to maximize the amount they would realize upon leaving the company. That’s reasonable. They will have put in hard work and long hours, and they’ll want to reap the rewards of their efforts.
The remaining members will want to conserve cash – not only to keep the company going, but also to hire new people to replace those who are leaving.
So what are their options?
Option #1: DO NOTHING
The great thing about deciding to do nothing is that you can get started right away. Unfortunately, that’s the only good thing about deciding to do nothing.
Option #2: TAKE ACTION NOW
They can take the bull by the horns and negotiate the buy/sell while all of them still anticipate remaining with the company for quite some time.
Of course, we advise the latter.
Particularly for a well-capitalized company, it’s important to have this discussion now – before people find themselves positioned on opposite sides of the table.
Additionally, there are quite a few options and departure scenarios to discuss. More than you might assume.
This fact makes it all the more worth it to begin exploring options early.
Key Takeaway and Actions:
It’s never too early to plan for a partner’s departure.
- Explore individual exit plans with your partner(s).
- Explore the various departure scenarios that might be available.
- Share any questions you have about this topic in a comment to this post. We’d be happy to provide insight and assistance should you need it.