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How to stop your business partner ripping you off

Written by: Michael Smyth

Article Overview: Laura thought she had all the bases covered by having a comprehensive suite of Intellectual Property and Restraint clauses in her employment agreements. What she didn’t expect was that her own business partner would leave the business and set up in direct competition to her utilising the company’s IP.

How to stop your business partner ripping you off

How Laura ended up in this mess
Laura and Sarah had met when they were working for their former employer. During that time they had come up with a unique idea for a business. They each had complimentary skills so it seemed an ideal partnership.
Laura and Sarah were advised against a legal partnership
Laura and Sarah took legal advice at the outset and were advised to set up a limited liability company rather than have a partnership arrangement. Each were to be Directors and equal shareholders.. The company was set up and started trading. At that stage everything looked rosy and both were looking forward to creating a sustainable business that would work for both of them.
Two years later Laura noticed that things weren’t right
After 2 years the company started to show some profit but Laura and Sarah were starting to have differing ideas of how to grow the business where once they were in complete unison. Laura started to notice a difference in Sarah as she appeared to become more detached from the business and her. She began to have suspicions.
Her suspicions were confirmed
Laura’s suspicions were confirmed when she received a letter from Sarah resigning as Director of the company. Legally this meant that Sarah no longer had a duty to act in the best interests of the company and paved the way for her to set up in competition. However, she remained a 50% shareholder.
Sarah wanted Laura to buy her out
Sarah wanted Laura to buy her shares in the company. Laura was angry. Not only had she lost her business partner and her IP, but now she was being asked to pay for the privilege. It seemed that Sarah was holding all the cards. Laura either had to buy Sarah out at an agreed value (which meant going through a valuation process), force a liquidation of the company or set up a new company again. None of those options were particularly attractive.
This all could have been avoided
Laura could have avoided all this hassle and cost if she had invested in a shareholders agreement when she and Sarah had first set the company up and started trading. A shareholders agreement is a private agreement between the shareholders of a company which sets out the basis upon which they will collaborate to make the business a success.
Had Laura and Sarah had a shareholders agreement they could have included clauses which prevented either one of them going off and setting up in competition to the company. This is especially important where two shareholders are bringing separate IP to the company and collaborating on the development of new IP, including building a customer base.
The agreement could also have determined what would happen if one party resigned as Director and how that person’s shares were to be treated. For example, could such shares be sold to a third party and what would be the agreed method of valuation? Unfortunately, Laura had none of these safeguards in place.
But we will never fall out!
When most people set up a business they never anticipate falling out. If you did you wouldn’t go into business in the first place. However, we all know that people do sometimes fall out. This includes instances when the shareholders are long term friends or even family members. It is in these particular instances when a shareholders agreement can be of most effect since such disputes can turn very acrimonious.
So even if your business partner is a long term friend or a family member make sure you have a shareholders agreement in place at the outset.

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Article Tags: business partner, employment agreements, intellectual property



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Re: New Infographic: Top Ten Reasons to Partner with Someone - I really like this! I like how it's so concise and the visual is really nice! I think a great partner is invaluable. But a bad match in a partner can set a person back. Just like a good marriage statistically results in being happier, but a frustrating marriage can reduce life satisfaction. So finding a great match in a business partner is really important. Open communication is so vital, as keeping info from your partner can result in big blow ups and lack of trust later on.
Finding a business partner - Hi Yasunori - what kind of business partner do you need? what are your skills and what do you need from your potential business partner?
Kevin's Case Study #2 - The Art of Pitching - As a startup, how do you pitch your new idea to a potential strategic partner without having him/her steal your idea? For instance, if I wanted to make unique t-shirts for a specific target market and approached an existing business at a networking event that already had that customer base...what's to stop that company from cutting out the middleman (i.e. me) and printing their own shirts?
When is it ok to lie to your business partner / investor? - Have you ever lied to a business partner or investor? Have you overinflated your progress or said you were working when you were really slacking off? When is it ok to lie to a business partner or investor? Where do you draw your line in the sand?
Partnering up - Hi Som - if you need a good programmer to partner with, what are you bringing to the table? If you have a solid plan and it's going to make money, you should be able to convince a programmer to partner with you if you're going to take care of the business end.


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