Consider this scenario: You and two partners with equal ownership and voting rights have developed a company and have finally turned a profit after two years of hard work and sweat. And its at the post announcement party that one of your partners introduces you to a principle at another business that expresses a desire to purchase your business. Great news, right? Nice to be loved. However, you know that the business, just having turned a profit, will be worth a billion times more in just a few more years. And besides, you’re now making money now and the pressure to sell is non-existent. Then the other shoe falls. The partner also tells you that he’s already agreed to sell his share of the business. As you take a sip of your champaign, you realize that if your other partner does the same, you’re a minority owner. Worse yet, if the purchaser is a competitor, he or she may only want to purchase the assets of your business and then shut you and your billion dollar valuation hopes down. At this point, unless you can convince your other partner to stick it out, you’re screwed.
The remedy for this situation should have been addressed long before the first sale. Founder goals should have been on the table first. Things happen and a committed partner may find him or herself in financial trouble and need to sell. You could consider a no sale clause. But, it’s unrealistic and unadvised to create rules to force a partner to stay on. Who needs that hassle. They’d only borrow money against their shares and if they default, the loaning institution will be your new partner. Rules prohibiting this will only create a very irritable and unreliable perhaps even larcenous partner.
The only option I see is a right of first purchase for all partners in the event another partner decides to bail. Terms must include a discount for partners below the offered price and a reasonable amount of time to obtain financing.
Another item that should be included early in the business formation is the inclusion of at least one very interested advisor with the financial strength to act as the buyer or financier in the event a partner purchase should be required. This stakeholder would double as a financial advisor always keeping the business on sound financial footing from the perspective of a potential investor. It might be a good idea to offer this advisor options in exchange for performance, say monthly meeting attendance, to assure participation. As a participating insider, the transition from floundering partner to new partner with experience and commitment would also reduce time to achieve the sale and negate the impact of negative press. And finally, having more than one such advisor might be a wise move.
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