When a company has multiple owners, it’s critical to have written documentation detailing the specifics of the relationship. Laying out expectations before starting the business will help you maintain a professional relationship and avoid pitfalls in the future. Have frank and detailed discussions about the company’s structure and goals, and always consult with a legal professional.
Here are some things to consider in a multiple owner situation:
How is the equity of the company divided?
There are numerous ways to divide the equity of a company. If a single investor has 51% or more of the company, that person is considered to hold the controlling interest. Levels of equity usually come with specific rights. Valuation can be a tough thing to gauge in a new business, making the process of assigning equity difficult.
How can someone exit the company?
Determine upfront how you’ll handle a situation where someone wants to be removed from the ownership of the company. Make sure there is a clear understanding of the options available and what they will receive when they leave.
What is the procedure for removing someone from the company?
If one of your company’s initial investors poses a threat to its future success, it may be necessary to remove them. Determine in advance the procedure you’ll follow if this happens.
What is the process for handling the death of an important member of the ownership group?
Consult an attorney for help with a Buy/Sell Agreement, which outlines the detailed steps when an owner dies prematurely. One option is to purchase life insurance on each of the owners. The proceeds can be used to purchase the deceased owner’s interest from the survivors, leaving a single owner. Such agreements can be complicated; be sure to work with your attorney to create a legally enforceable document.
Do any of the investors have a right of first refusal in future business ventures?
Depending on the situation, an investor may want the right to invest in future business opportunities. If a contract includes a right of first refusal, the investors want to be given the opportunity to invest before others are asked.
Who has voting rights?
Having ownership in a company may or may not come with voting rights and it is important to specify this in your initial contracts.
How are the salaries of the owners that operate the business determined?
If one of the owners is also going to operate the business and take a salary, establish upfront how that salary will be determined. Advanced planning will assure investors that the salary is a reasonable amount with a predictable impact on the company’s expenses and profits.
What steps are necessary before making key decisions such as large capital expenditures?
There is usually some limitation on the company’s spending in initial contracts. It may be important to give the owner-operator freedom to purchase necessary business supplies and equipment. But other issues may not be so clear-cut — what if one owner decides to purchase a new car wrapped in the company’s logo?
Be sure you have language in place that regulates large expenditures. It may be as simple as establishing a concrete dollar amount over which approval is needed from a board or advisory team. Or it may be more complex, such as a list of areas with detailed descriptions and dollar limits for large expenditures.
Should there be an insurance policy on key people in the business?
If a key employee such as a sales manager dies, it can take a significant toll on your business. How will you prepare for that possibility? To transfer this risk, consider insurance options that can protect your company from the financial impact of such a situation.