Questions

If I have 51 percent and my partner has 49 percent of our company, what real decision making authority would I have?

We will be taking on angel money.. The partnership terms are still negotiable.

4answers

On paper you have the advantage but after several startups control resides in he who knows how to execute the vision of the company.


Answered 9 years ago

The answer to your question depends on how you set up your company and why. I advise startup founders frequently with regard to the terms of their understandings with other founders. Having two founders is tough, because unless you are 50/50 (which is inadvisable for various reasons), someone will have the ultimate decision-making power. Sometimes, the person with a slight majority is not the person with the vision. So, there should be mechanisms in your founders agreements that create the decision-making environment you desire. Decision-making power comes from three places - authority as an officer of the company (daily operational level decisions), power as a board member (most policy and company-level decisions), and power as a shareholder (the really big, vision-related decisions). You each have the power of your particular offices. If you are each members of the Board, you can have equal say over Board-level decisions (that require a majority). Even then, however, there has to be a way to break ties - frequently the CEO or a predetermined third-party advisor gets to decide. If one of you hold less than 50%, however, the other member may be able to have the final say on the big-ticket Shareholder-level decisions. (This is the authority you speak of.) Even so, it is important to make sure that your priorities and vision are aligned. Once investors are involved, your power to make big decisions becomes diluted. At that point, it is important that you are on the same page, because that may be the only way for the two of you to affect the direction of the company (by voting the same). That being said, there are minority investor protections that can be written into your partnership agreement(s) and future agreements with investors that will allow a minority partner more control or to get out if the majority takes the company in a direction that he/she don't like. For instance, you can designate certain decisions in your operating agreement - such as if and when to accept angel investment funds - as super-majority decisions (66% or more) that would then require the vote of both of you to affect. I am happy to chat more about this via a call if you want to dig in deeper...good luck!


Answered 9 years ago

If you have a Limited Liability Company that is taxed like a partnership, which is a very common setup, your decision-making authority can be specifically agreed upon in the Operating Agreement. Essentially, your partner could retain 51% of the earnings but his/her voting interests could be equal to yours. However, I suspect your partner wants to retain their 51% voting interest as well as their 51% profit interest. In this scenario, your ultimate decision making authority is limited because you can never achieve majority status.

When I represent a minority interest holder of a company I try to build certain safeguards into the Operating Agreement. For instance, I would try to include certain actions that must either have a super majority (defined as 66% or 75% depending on the size of the entity) or in your case a unanimous vote. I would try to include things like bringing on another member, distributions, taking on debt, major capital expenses, changing the Operating Agreement etc. as items that would require your consent. This will offer some protection in the decision making process. However, your partner will retain the ultimate decision making authority for anything not specifically delineated in your governing document.


Answered 9 years ago

In my experience, partnerships tend to be tenuous, unless expectations and responsibilities are clearly outlined. Your question is rooted solely in the current ownership structure, which is one sliver of managing a business.
There are so many day-to-day aspects that it’s unrealistic for one person to be the decision-maker over everything. Think about the daily work that needs to be done. The production of the products or the delivery of the services. The sourcing of materials or resources. Marketing and sales. Employee or contractor matters. The accounting. The development of the brand and culture. I trust you each have strengths (and yes, weaknesses) that translate into one handling certain elements of the business better than others.
For example, I know of a service company where one of the co-founders hates dealing with employees, so the other one handles all employee relations for their 30 or so workers. That’s not a reflection of their ownership stakes, but of who's the best person for that responsibility.
Furthermore, when you take on angel investors, your ownership stakes will likely be decreased in order to bring in that money. How will that effect your roles? Another critical discussion to have.
If you haven’t hashed out these nuts and bolts of running the business and ensuring that both of you feel that the contributions are valuable on both sides of the equation, it’s likely a good time to have that conversation.
Good luck and let me know if you need more assistance.


Answered 7 years ago

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