As a mediator, my job is to help other people settle disputes. I am also an attorney who handles business transactions and business dissolutions. So, when I am mediating a case, I often ask, “How did we get here in the first place?”
For my clients, I plan as much as possible to avoid litigation in the first place. I recommend that for mediation be required prior to litigation in my agreements. That way everyone must pause before they run to the courthouse before filing a lawsuit and think twice about the cost and time involved in litigation.
Having a rock-solid operating agreement is one safeguard against litigation. With startup businesses, you may have partners who are putting in sweat equity rather than money. But what if one of the partners stops contributing sweat equity? That’s right…they are still a partner.
What we have done at Sherwood, McCormick & Robert is to build in service agreements that are tied to their ownership interest. If the partner suddenly disappears, or they refuse to do the work, there is a cost with a discount and a mechanism for the other partners to remove the other member/partner.
Unfortunately, it’s hard on the front-end because you need foresight of everyone involved putting in their sweat equity to make the business work. So, the agreement needs to be more than “we are going to buy you out” when conflict arises. With a start-up, there isn’t much value to the business, so the person not doing anything says, “I don’t want to be bought out.” And because there’s not a lot of value, the person can hang on and let the others do all the work. Thankfully, I’ve done enough of these cases to see patterns emerge that I’m able to structure the agreements to help avoid future issues.
My role in advising is not just on the legal or business structure side, but also an advisor to make them think about what happens “if” this happens. Spending a couple thousand dollars outlining a business agreement can save tens of thousands of dollars in the future. Too many times I’ve heard one party believe what another person tells them is in the agreement, but isn’t, and regrets not having a lawyer review the contract.
Yes, it’s true that certain people have built big businesses with a handshake. Unfortunately, you get one person that takes advantage of that trust and the other person gets ruined over it. So, if spending $1,000 to have a contract reviewed that may potentially save $30,000 or $100,000 later, I’d say it’s worth it.
