Many entrepreneurs prefer to find someone else to join them on their journey rather than go it alone when embarking on a new business venture. Co-founding a business offers a host of key benefits. For instance, your business will benefit from your combined experience, skillsets, and contacts. You share the stress and burden inherent in a new business venture and mitigate the extent of your personal risk. Day-to-day, co-founders can support each other and act as springboards for one another’s ideas.
Unfortunately, co-founding a business also presents a range of unique issues. Minor disagreements are part and parcel of working with another person and can even have a positive effect on a business, focussing its owners’ minds on how things might be improved. The impact of a serious dispute can be catastrophic. Co-founder disputes are a major cause of startups failing, so effectively addressing any disputes that do arise is essential to your business’s success.
In this guide, our dispute resolution solicitors discuss the main causes of co-founder disputes and explain how you can resolve a co-founder dispute.
Contents:
- What are the signs of a potential co-founder dispute?
- What are the consequences of unresolved co-founder disputes?
- How can you resolve a dispute with a co-founder?
- What evidence do you require?
- What procedures can you use to resolve a dispute with a co-founder?
- Remedies for co-founder disputes
- Can I prevent a co-founder from setting up a competing business?
- Summary
What are the signs of a potential co-founder dispute?
Few co-founder disputes arise unexpectedly. There are often red flags indicating all is not well long before the dispute erupts. Being alive to those warnings can help you nip the issue in the bud before it threatens the success of your business.
Examples of some common issues that may lead to disputes include the following:
Consistent disagreements
A dispute often follows a period of disagreement between the co-founders, often resulting from deeper rooted issues such as a perceived power imbalance.If you and your co-founder are in constant disagreement, it’s time to consider whether an underlying problem needs addressing.
You disagree on core issues
Occasional disagreements with your co-founder on minor issues are inevitable. Fundamental differences in your priorities, ethos, and vision for the business’s future can be much more of a problem.
You no longer collaborate
Most co-founders believe that collaboration significantly improves their business’s chances of success. If your co-partner starts working alone or making unilateral business decisions, something might be wrong.
Your co-founder is distancing themselves from you
If your once personable co-founder appears to be avoiding you, something may be amiss. Addressing the issue swiftly will help you ascertain whether it is business-related and find a way forward.
Your questions go unanswered
Honesty and transparency is fundamental to a successful business. If your co-founder begins acting suspiciously and avoiding your questions, alarm bells should ring.
What are the consequences of unresolved co-founder disputes?
Unresolved co-founder conflicts can have many undesirable consequences. They destroy trust and create a toxic work environment. They affect productivity, leading to reduced profitability. In worst-case scenarios, they can cause your business to fail.
How can you resolve a dispute with a co-founder?
Resolving a dispute with a co-founder amicably is always the best option. Often, a cards- on-the-table approach can facilitate open, honest discussions and you may be able to identify a practical solution that allows you to get back to business quickly.
Some disputes are incapable of amicable resolution. In these cases, you may need to take legal action or at least legal advice to protect your position and the business.
What evidence do you require?
Where possible, you should collate as much evidence about the issue as possible before seeking legal advice. That way, your dispute resolution solicitor will develop a clear picture of the matter and can give meaningful advice.
Examples of the types of evidence that can assist include the following:
- Contracts, such as a Founders Agreement.
- Any documents relating to the running of the business, such as the Articles of Association.
- Notes from meetings at which the issue was discussed.
- Documentation evidencing any significant decisions.
- Relevant correspondence between you, your co-founder, and any other parties, preferably in a bundle in chronological order.
Your solicitor will use the evidence to support any Court claim you bring. If you can’t locate everything, don’t worry. Our experienced dispute resolution solicitors will advise you on what you need and assist you in sourcing it. Legal claims in co-founder disputes can be subject to strict time limits, so seeking timely legal advice is more important than gathering all the evidence at the start.
What procedures can you use to resolve a dispute with a co-founder?
Co-founder disputes can be resolved in two main ways: litigation and alternative dispute resolution (ADR).
ADR
Being unable to resolve your co-founder dispute amicably does not necessarily mean you will end up in Court. There are several alternatives to litigation that can produce effective results far quicker and for a fraction of the cost.
For example, mediation is regularly used to settle co-founder disputes. In mediation, the parties are joined by an impartial third party, the mediator, who helps them identify a solution that works for them and their business. The parties can choose the mediator they consider best suited to their case based on their experience, specialisms, and manner.
Mediation is voluntary. Anything said during the process is confidential and cannot be referred to in Court proceedings. The parties’ solicitors will make any settlement binding with a Settlement Agreement, which may or may not be attached to a Court Order.
Mediation and other ADR methods offer a range of significant benefits, including the following:
- It can preserve the parties’ relationship.
- It is cheaper than litigation.
- It can be arranged at short notice.
- It is often less stressful than litigation.
- It allows for flexible commercial solutions
- The parties retain control.
Litigation
Unfortunately, some co-founder disputes prove incapable of resolution without using litigation. Where the parties’ positions are particularly far apart or their views deeply entrenched, they may need a Judge to step in and decide the issue.
Starting legal proceedings involves issuing a claim in Court and serving it on your co-founder. In your claim documents, you will set out the nature of the dispute and ask the Court to grant a specific remedy, such as damages or an order that certain action is taken or stopped. Your claim will then be allocated to a ‘track’ based on its value and complexity.
There are three civil litigation tracks: small, fast and multi. The Court will set a timetable for your case up to trial based on the guidance contained in the relevant track. The timetable will include steps such as disclosing documents and exchanging witness statements.
Our dispute resolution solicitors will undertake most of the work for you, but they will require your input at various stages, such as locating documents for disclosure and preparing your witness statement. At the same time as proceeding through the Court’s timetable, they may, if appropriate and if instructed, continue settlement negotiations with the other side.
Crucially, civil claims are subject to strict time limits, known as ‘limitation periods’. The relevant limitation period depends on the nature of the issue. For example, in breach of contract claims, the time limit is generally six years from the date of breach. If you miss the limitation period, your claim is barred regardless of its merits.
Whilst litigation is a last resort, it is sometimes unavoidable and does have several advantages, including the following:
- Unlike most forms of ADR, litigation yields defined results.
- The result is automatically binding on the parties (but may still need to be enforced).
- Court rules are strict. Most ADR methods rely on the parties acting in good faith. In Court proceedings, the parties are subject to stringent rules that can carry severe consequences if they are broken. Parties are more likely to act honestly due to the penal consequence of making false statements.
Remedies for co-founder disputes
The remedies you are entitled to depend on the nature of your claim. Say, for example, your venture is set up as a limited company, of which you and your co-founder are shareholders. Your relationship will likely be governed by a Shareholders Agreement detailing each party’s rights and obligations. If your co-founder breaches the terms of the Shareholders Agreement, you may be able to bring a claim for breach of contract. Depending on the terms of your Agreement, the nature of the breach, and its impact, the remedies you may be entitled to include the following:
Damages
If your co-founder’s breach has caused you financial loss, you can claim damages to compensate you.
Transfer of Shares
Many Shareholders Agreements contain a clause providing for the transfer of shares in the event of a breach. If your co-founder refuses to comply with the Agreement, you may be able to seek a Court Order forcing them to do so.
Of course, you can negotiate a settlement with your co-founder on terms that are favourable to you. For example, if you feel that the co-founder’s involvement in the business is no longer viable, you might try to negotiate exit terms with them.
Can I prevent a co-founder from setting up a competing business?
If your co-founder leaves the business, there’s a chance they’ll want to use their experience to set up a competing venture. If they do, they may use your business’s crucial commercial information, such as your trade secrets, confidential information, and customer lists in connection with it.
Most Founders Agreements contain a non-compete clause restricting an exiting co-founder’s use of the original venture’s commercial information. Whilst valid, these clauses must be carefully drafted to ensure that they protect your legitimate business interests whilst not representing an unlawful restraint of trade. If your non-compete clause is reasonable, and the co-founder’s actions breach it, you may be able to rely on it to restrict what they can do in connection with their new venture.
Our dispute resolution solicitors have extensive experience in assisting business owners facing this issue. They will review the terms of your Founder’s Agreement and any other relevant documentation, advise on the extent of your rights, and assist you in enforcing them and protecting your business interests.
Summary
Co-founders can enjoy immense success, as market leaders such as Procter & Gamble and Hewlett and Packard. However, co-founder relationships are complex, and the risk of conflict is ever-present. Understanding how to prevent disputes and manage any that do arise is crucial to the success of your venture. Seeking guidance from expert dispute resolution solicitors like ours will assist you in navigating the potential pitfalls of working with a co-founder, and protect your position when things go wrong.
