Starting a business with a partner often begins with a simple idea: we’ll split everything 50\/50.<\/em><\/p>\n\n\n\n It feels fair. You are both taking the risk, both contributing to the business and both expecting to share in its success. Neither person has control over the other.<\/p>\n\n\n\n So, 50\/50. What could possibly go wrong?<\/p>\n\n\n\n Quite a lot, actually.<\/p>\n\n\n\n There is nothing inherently wrong with owning a business equally. Many successful businesses are built that way. The problem is that, at the beginning, nobody wants to talk about what happens if things don’t go according to plan. You are starting a business together because you trust each other and believe it will work. Talking about deadlocks, departures and disputes can feel unnecessarily negative.<\/p>\n\n\n\n But those are exactly the conversations you should be having at the beginning.<\/p>\n\n\n\n And in a 50\/50 company, a serious disagreement can bring the business to a standstill.<\/p>\n\n\n\n Imagine two friends, colleagues or family members starting a business together. They each own 50% of the shares. They are both directors. Major decisions are made together. For the first few years, it works perfectly.<\/p>\n\n\n\n Then something changes.<\/p>\n\n\n\n One wants to reinvest the company’s profits. The other wants dividends.<\/p>\n\n\n\n One wants to hire five new employees<\/a>. The other thinks expenses are already too high.<\/p>\n\n\n\n One wants to borrow money to expand. The other doesn’t want to take the risk.<\/p>\n\n\n\n One is working 60 hours a week. The other has gradually become less involved.<\/p>\n\n\n\n Or perhaps they simply no longer get along.<\/p>\n\n\n\n And here’s the important part: neither one of them necessarily has to be wrong. Two perfectly reasonable business owners can look at the same situation and reach completely different conclusions. But when each side controls 50%, neither can necessarily impose a decision on the other. Depending on the company’s governing documents and the decision involved, the result can be a deadlock.<\/p>\n\n\n\n And unlike a disagreement between employees, the solution isn’t as simple as one person telling the other what to do.<\/p>\n\n\n\n They both own the company.<\/p>\n\n\n\n That’s what makes 50\/50 different.<\/p>\n\n\n\n In more than 20 years of practising business law, I’ve heard variations of this many times: \u201cWe’re good friends.\u201d \u201cWe’re family.\u201d \u201cWe’ve worked together for years.\u201d \u201cIf something happens, we’ll work it out.\u201d<\/p>\n\n\n\n Maybe you will. Hopefully you will.<\/p>\n\n\n\n But if you don’t, the worst possible time to start negotiating the rules is when you are already disagreeing about the business. When business partners are getting along, they can have rational conversations about uncomfortable possibilities.<\/p>\n\n\n\n What happens if one of us wants out?<\/p>\n\n\n\n What happens if one of us stops working in the business?<\/p>\n\n\n\n What if one of us wants to sell and the other doesn’t?<\/p>\n\n\n\n What if we fundamentally disagree about the direction of the company?<\/p>\n\n\n\n What happens if one of us becomes disabled or dies?<\/p>\n\n\n\n What if one of us gets divorced, goes bankrupt or has financial problems?<\/p>\n\n\n\n Those conversations become considerably more difficult once one of those events has actually occurred. A well-drafted shareholders’ agreement allows the partners to establish the rules while their interests are still aligned.<\/p>\n\n\n\n In my view, that is really the purpose of the exercise. You aren’t trying to predict every disagreement the shareholders will ever have. You are agreeing, while everyone is still getting along, on how certain important situations will be dealt with if they arise.<\/p>\n\n\n\n Another common source of tension has little to do with voting.<\/p>\n\n\n\n When the company was created, both partners may have expected to contribute equally. Five years later, reality may look very different. Perhaps one shareholder works full-time in the business while the other has taken a more passive role. One may bring in most of the customers. One may have invested additional money. One may be taking a larger salary.<\/p>\n\n\n\n Yet they still own the company 50\/50.<\/p>\n\n\n\n Is that unfair? Not necessarily. Share ownership and day-to-day contribution are two different things.<\/p>\n\n\n\n But imagine being the shareholder working evenings and weekends while your 50% partner leaves at 4:00 every afternoon. It doesn’t take much imagination to see how resentment can develop.<\/p>\n\n\n\n This is why conversations about compensation, responsibilities, additional financing and expectations can be just as important as the percentage written beside each shareholder’s name.<\/p>\n\n\n\n This is where many entrepreneurs discover something surprising.<\/p>\n\n\n\n Owning 50% of a private corporation does not necessarily mean you can simply decide one morning to \u201ccash out.\u201d<\/p>\n\n\n\n There is no automatic cash-out button.<\/p>\n\n\n\n There may be no outside buyer interested in purchasing half of a privately held business, particularly when the other half is controlled by someone with whom the departing shareholder is in conflict. At the same time, the remaining shareholder may not have the money to purchase the departing shareholder’s shares.<\/p>\n\n\n\n So one person wants to leave, the other wants to stay, and neither has an obvious solution. And even if they agree that one should buy the other out, another question immediately appears: at what price? Who determines the value? Is a minority discount applicable? How and when is the purchase price paid? What happens if the buyer cannot finance the purchase?<\/p>\n\n\n\n These aren’t questions you want to be negotiating for the first time when one shareholder is already halfway out the door.<\/p>\n\n\n\n A shareholders’ agreement can establish mechanisms for dealing with a departure, including rights of first refusal, buy-sell provisions, valuation procedures, payment terms and other exit mechanisms<\/a> appropriate to the particular business.<\/p>\n\n\n\n The important point isn’t that every company needs the same mechanism. It is that the partners should decide what their mechanism will be before they need it<\/strong>.<\/p>\n\n\n\n Not every partnership ends because the partners have a falling out.<\/p>\n\n\n\n A shareholder can die unexpectedly.<\/p>\n\n\n\n Become seriously ill.<\/p>\n\n\n\n Stop participating in the business.<\/p>\n\n\n\n Experience personal financial difficulties.<\/p>\n\n\n\nThe problem isn’t 50\/50 ownership. It’s 50\/50 decision-making.<\/h2>\n\n\n\n
\u201cWe’ll figure it out if it ever happens.\u201d<\/h2>\n\n\n\n
Equal ownership doesn’t always mean equal contribution<\/h2>\n\n\n\n
What if one partner wants out?<\/h2>\n\n\n\n
And then there are the things nobody likes to think about<\/h2>\n\n\n\n