Equal Member Against Placing a Buyout Clause in the Operating Agreement


2

My 3 man equal partnership disagrees on a key issue regarding placing a buyout clause in our operating agreement. One of the three is deeply against any buyout close for both his status as a member (33%) and his status as a manager/officer (payroll/decisions). Furthermore, he asks for unanimous consent on all decisions. He perceives the company as 1/3 vs 2/3 and doesn't want to have his vote negated by collusion between myself and the third member.

I'm troubled by the implications of this stance and was hoping the community might be willing to share their thoughts on the matter.

What are the pros/cons of severely limiting buyout options?

LLC Agreements

asked Jun 13 '11 at 08:50
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Steve
113 points
  • what do you mean by a buyout clause? – Tim J 9 years ago
  • Is there a statement in your partnership agreement that discusses how decisions are made (referring to things like decisions having to be unanimous) – Rafferty Pendery 9 years ago
  • @Tim - by buyout clause I mean a clause in the operating agreement that allows a persons shares to be involuntarily purchased from them and thereby removing them from future business with the company. See [Resolving Small-Business Disputes](http://danashultz.com/blog/2009/09/07/resolving-small-business-disputes-the-50-50-deadlock/) and for some colorful options ["The Texas Shootout"](http://www.mediate.com/articles/spoelstra6.cfm) – Steve 9 years ago
  • @Rafferty - We are making the partnership agreement now. – Steve 9 years ago

3 Answers


2

These are tricky issues, but hardly unusual. It's worth using the opportunity to work through now what you'll do as and if you at some future stage find that there are two (or even three!) profoundly different intentions for the future of the company. It seems to me quite likely that the 'blunt instrument' of unanimity + no buy-out could be refined.

Without knowing the circumstances, I suspect that the combination of

  • Unanimity in decisions
  • A buy-out process that bends over backwards to be fair, objective and externally-referenced in the matter of valuation
  • Drag-and-tag provisions for sale/purchase of holdings

could work out just fine. The valuation process holds the key to the typical concern - that one partner may contribute a lot, but be elbowed out of the company and the benefit. How best to do this will depend a great deal on factors such as whether your business will be cash-hungry or cash-generative, how much of the business is consulting or similar, whether you intend this as a long-term business or envisage cashing out in the medium term and so on.

answered Jun 13 '11 at 20:42
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Jeremy Parsons
5,197 points

1

I would never start a company without a buyout/vesting agreement (*). I admit when I first saw it I shared the same concerns of your cofounder, but it's necessary to avoid somebody being able to walk away with a significant part of your company. Things happens, people change their mind, and it's not an uncommon situation to lose one or more cofounders. The company must be able to survive in these kind of situations.

So for me, if somebody refuses the buyout agreement, he cannot be part of the company.

Similarly, "unanimous consent on all decisions" it's absolutely a no-no. A startup needs to move fast, and you don't want to waste days or weeks until you have unanimous consent. At the end of the day, the CEO is the person who will make the call; of course decisions can be delegated, and it's the CEO's job to make sure everybody is happy with the company strategy, but one person needs to be able to decide when things get complicated.

Exceptionally, a few decisions can be subject to board of directors approval; one of those might be the removal and buyout of one of the founders. In this case, assuming the BoD is composed by the three founders, the majority of the BoD should approve this decision.

At the end of the day, if this cofounder "perceives the company as 1/3 vs 2/3" I don't really understand why he's willing to be part of the company.

Edit: (*) The buyout agreement must be time-limited. For instance, the company can buy back 100% of the cofounder shares before he spent a year in the company. 66% after a year and before he spent two years, and so on...

answered Jun 13 '11 at 17:59
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Filippo Diotalevi
2,573 points

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Some decisions should probably be unanimous - others don't have to be.

I wonder why you would want to force someone to sell their shares if there is also a vesting schedule. That seems like a bad idea to me. I would also not take kindly to that.

answered Jun 14 '11 at 01:00
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Tim J
8,346 points

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