Avoiding Partnership Disputes with David Siegel.

Avoiding the Partnership or Founder Disputes that can ruin your small business with attorney David Siegel.
David Siegel - attorney
David Siegel is an attorney and partner at Grellas Shah, LLC. Grellas Shah is a full-service boutique law firm, with a focus on startups, technology, and venture law, as well as complex business litigation. David is an accomplished startup lawyer and litigator who has extensive experience in handling a broad range of corporate, transactional, and intellectual property matters, including work on multi-million-dollar financings and acquisitions, all in addition to having a deep expertise in handling complex intellectual property, corporate, and commercial litigation matters.
If you will have partners in your small business, it’s critical that you consider, discuss and define how you will work together in a legal Partnership or Operating Agreement. It’s important to consider all of the different possible scenarios that may arise in the future that might impact your small business. You must consult with an attorney to help you create your partnership or operating agreement. To help you conduct this conversation between future partners you can use the Memo of Understanding tool.
David also has extensive experience working with business start-ups. David lives in Santa Clara, California

[Legal Disclaimer]
Avoiding Legal Disputes with David Siegel:
  • From founder disputes to transactional matters and intellectual property, David Siegel shares his thoughts and experiences from his legal practice.
  • Founder/Partners Relationships:
    • Partnership/Operating Agreement:
      • What are your recommendations on what to discuss and consider before signing a partnership/operating agreement?
      • What are your general thoughts on 50/50 partnerships?
      • Are there certain clauses that every agreement should include?
      • What is your typical opinion on buy-sell clauses?
        • What triggers should be considered?
        • What is a “Shotgun Clause” and when should it be used?
        • How do we value the business?
      • How to avoid Intellectual property disputes?
    • Capitalization:
      • Companies must be “adequately” capitalized to avoid piercing the corporate veil? Does this apply to LLCs as well? Is “adequately” up to interpretation?
    • What some other common mistakes founders often make?
    • If I find myself in a bad partnership, what should I do first?
    • What tips can you share about how to find a small business attorney? What questions should I ask? How do I determine if they are good fit for me and my business legal needs? Do I sometimes need a specialist?
    • Other tips and advice to help small business owners avoid partnership or founder disputes:
      • What is each partner’s exit strategy?
        • Discuss upfront and then periodically.
      • Avoid 50/50 and if not avoidable you can have 50/50 economic interest but not 50/50 control
      • Have a strong Buy/Sell Agreement in place.
      • Consult an attorney to create an agreement before you start your small business.

Episode Host: Henry Lopez is a serial entrepreneur, small business coach, and the host of this episode of The How of Business podcast show – dedicated to helping you start, run and grow your small business.

Resources:

  • Clerky– recommended by David Siegel. Clerky is the only online legal service obsessed with helping startup founders get legal paperwork done safely. Get your legal paperwork done with confidence, so you can get back to building your startup.
  • Startup Law 101 Series from Grellas Shah

Related Podcast Episodes:

Episode 259: Business Partnerships

Business Legal Episodes

You can find other episodes of The How of Business podcast, the best small business podcast, on our Archives page.

Transcript:

The following is a full transcript of this episode. This transcript was produced by an automated system and may contain some typos. You can use this transcript to search for a topic or keyword and then reference the time stamp to find the content in the episode.

0:00:05.6 Welcome to the how of Business with your host, Henry Lopez, the podcast that helps you start… Run and grow your small business. And now here is your host.

Henry Lopez: Welcome to this episode of The How of Business. This is Henry Lopez, and my guest today is David Siegal. David, welcome to the show.

0:00:24.2 David Siegel: Good afternoon. It’s nice to be here.

0:00:26.5 S2: Absolutely looking forward to this conversation. We’re checking is, I just had a silly technical Asian my side and David’s being very patient with me, but on this episode, David and I are gonna chat about how to avoid partnership or founder disputes that could potentially ruin your business and to receive more information about the Howards ness including links to the show notes page for this episode and how you can continue supporting my show, receive exclusive content and discounts through a patron membership. Please visit the holiness dot com. So David Segal is an attorney and partner with great hall LLC. Relish is a full-service boutique law firm with a focus on startups, technology and Venture Law as well as complex business litigation. Dave is an accomplished startup lawyer and litigator who has extensive experience in handling a broad range of corporate transactional and intellectual property matters, including work on multi-million dollar financing and acquisitions, all in addition to having a deep expertise in handling complex intellectual property, corporate and commercial litigation matters, he also, of course, has extensive experience working with business startups. David lives in Santa Clara, California. Once again, David Segal, welcome to the show.

0:01:49.5 S1: Thank you for having me. So

0:01:51.7 S2: As we were chatting before I started recording, you have an interest that I thought was interesting in music and singing in particular, and in particular, a certain type of singing… Tell me about that if you would.

0:02:03.6 S1: Yeah, my free time, I guess my big activity is singing mostly 17th and 18th century choral music, which I’ve been doing for well, for years now, or a lot, I wanna say, and I did a brief search on because I didn’t quite know what it was, but this was commonly, back then, the music that was used to help communicate the messages in the Bible, I’m crudely explaining it, but give me a better definition of what this music was for originally…

0:02:39.6 S1: A lot of the music is, yes, it is church music, which is not a part of how I got involved in it, but interest is just the music of that era, there was secular music as well, but most of the major works are religious in nature, and a lot of it was performed in church as part of normal liturgy.

0:03:06.0 S2: Interesting, fascinating. Alright, so let’s just shift them and talk about why I have you here today, which is the legal matters related to partnership to streets, but I thought as I usually do when I chat with attorneys, is just do a quick disclaimer, if you would, David, on what you’re sharing here today and that it’s not direct legal advice, if you could share that with us, please…

0:03:29.5 S1: Yeah, of course. It’s a lawyer. Anything here would not the actual legal advice, if you have a legal issue you need to discuss, reach out to a lawyer and the audience getting involved in starting their own business, I think it’s smart enough to realize this, but it’s important to point out just in case, agreed.

0:03:51.9 S2: Excellent, alright, so let’s get in it, you’ve seen a lot of issues or a lot of things that lead up to founders or partners getting crossways, and as I’ve mentioned in the opening, I’ve seen it. You’ve seen it more than I, where that can ruin a business. Certainly, it can ruin people’s lives, it can get very emotional, and then the very badly… So let’s start talking about that.

0:04:18.6 S1: What are your…

0:04:20.3 S2: I thought I would work through it sequentially be as I’m starting to think about starting a business with someone else, what are some of the things that you usually give guidance on that people need to think about, and then eventually we’ll talk about in a moment, boiling down to an operating or partnership agreement was, what are some of those critical areas that you often advise on…

0:04:41.7 S1: Sure, and to some extent, this depends on whether I’m speaking to a founder as representing the founder or speaking… Rightness is representing the business, but there is one thing I would say both sets would buy share, which is… What is the exit strategy here is, a lawyer is not going to be able to prevent two people from disagreeing down the road, that’s just the nature of the world. A lawyer can help set processes and a lawyer can help set up an organized way to get through a dispute such that the business can continue after, but it’s important at the outset to start thinking about, and I hate to call it worst case scenarios, but that is what it is, what happens down the road, if things don’t go the way everyone’s hoping…

0:05:39.8 S2: Yeah, yeah, great points. Are that I wanna explore here for a moment, the concept of starting with an exit strategy, I think you’re hearing people more and more now David, talk about this because so many people are advising it, but I’m guilty of it where I’ve gone into businesses where it wasn’t we now, we’ve been talking about, we’re gonna have this business forever, I guess, I don’t know, we hadn’t thought about it, but it’s so critical to think through it, particularly from the perspective of the impact on the partnership, if I have one idea and you have another as to where we’re gonna go with this longer term…

0:06:15.7 S1: Right, Andretti soft issues and the heart issues, and then I will say on that note that there is legal documentation and legal decisions that get made, but part of thinking through how to minimize the risk to the business and the founders over the course of the life of a business is actually documenting things beyond the legal and attorneys are mainly there for legal advice, but we deal with a lot of companies and there’s a bit of business advice that always creeps through, but charting out with each other what you see as… Where this business is going, or what the strategy for it is, what your expectations of time and other things are, if you’re… Oftentimes, entrepreneurs are working a full-time job and starting a company, it’s good to have as much out in the open at the beginning to avoid problems down the road.

0:07:24.2 S2: And not to get ahead of our conversation here, but that is also something, as you mentioned it, that’s so important to do on a periodic basis, and like you said, get the input of an attorney, because what I have found is what we… It’s important to have that conversation now at the beginning, but man, things changed dramatically in individuals lives and perspectives as you get into the business over time, all

0:07:49.4 S1: The time, whether you think it’s gonna happen or not, that

0:07:51.8 S2: I can… Absolutely, it will happen. And so we wanna, hopefully to your point, if I was hearing your right, is continue to also get that counsel and have these conversations so that you hopefully can avoid getting completely crosswise with each other as you… As things change, right? But other points that you made, the worst-case scenario point, I think that’s such an important one, David, because what I find is we’re typically in that honeymoon phase of the business upfront, we can’t possibly imagine that you and I who have been best buddies forever are ever gonna get cross-wide where we’re gonna disagree on anything, and we also… I think we have a tendency to avoid having those discussions about what could go wrong that is correct, and one of my strategies for kind of grounding that is to start talking in specifics.

0:08:51.2 S1: So most of the time when I’m talking with entrepreneurs or founders, if I start getting into, Okay, how would you feel about your co-founder incurring a million dollars in debt for the business without your approval? Would that be… Okay, once I start talking about specific types of things that could happen and how decisions get made, people are usually willing to start thinking more long-term and more going back to worst case scenario, but in a more kind of objective way.

0:09:30.5 S2: Yeah, yeah. And again, that’s a great example of that, where again, an attorney can help us think through those scenarios, but we have to resist that push back to say, Wow, you know, you’re just being an attorney and thinking about everything that can go wrong, and it’s ever gonna happen but it does happen, it happens almost every single time, because again, usually what we end up having are very superficial conversations with the assumption that we have read each other’s minds on all of these to particular points, and be that We’re not… Things aren’t gonna change over time…

0:10:11.0 S1: Yeah, right. And that is pretty typical. That’s not the way… And I understand why it’s not the way, it’s hard to start a business and put in your life and your resources, and at the same time… Think about the bad things that could happen. Right. So that’s what lawyers are for. It doesn’t have to dominate your time and energy, it’s a set of conversations, a set of documentation, and then you focus on your business. That’s the way it should happen.

0:10:47.7 S2: Yeah, well said, well said. But what are your thoughts on 50-50 partnership? So two people coming together and we’re gonna own it, 50-50 equity-wise.

0:10:57.9 S1: So the first thing I always think about and talking to clients about 50-50 partnerships, which are… In some situations, they’re unavoidable. One thing to keep in mind is disaggregate economics and control, so you can make a decision to have 50-50 economic interest in the company without having 50-50 control. Those are not the same… Those are not the same decision, and that sometimes changes the way people think about things, but the reality is a lot of the time when people think of themselves as equal owners of the potential business going into it, it’s hard to separate out control and economic interests. Am I a fan of it? Now, from a legal perspective, it makes everything more complicated, but it’s not really my job to say, to say One of you has to be the controlling person here and one has to be the minority shareholder interest holder, if that’s what the two people need to move forward then it’s my job to help with that, there are various types of things that should be put in place with a 50-50 partnership, but the big… Going back to the exit strategy, there has to be a way out without ruining the business, unless the two agree that what should happen if there’s a dispute is that it should dissolve, that’s rarely what people want, it’s rarely the best thing to happen.

0:12:38.2 S1: There has to be a kind of all purpose way out.

0:12:43.3 S2: And are you alluding to some type of vice class when you say way out? Yes. Okay, okay, alright, well, time into that in a moment, but actually… Interesting, your thoughts there. I agree, my personal preference, when I’ve done… In the fact, I don’t think I’ve ever done a 50-50 partnership. And for my clients, I always advise, as you just said, to think about it very carefully before doing so, although I’ve had a couple of attorneys tell me, which is interesting to think about that… Well, when you’re 50-50, you gotta make a decision, in other words, so it almost forces you to have to agree to move forward, but that’s easier said than done, but thank you for those thoughts on that, so let’s dive into… By cell, it can get very complicated, would you just at a high level, in somewhat layman’s term, explain what we mean by a biceps.

0:13:43.4 S1: It’s kind of a broad concept where… And it doesn’t have to be in a 50-50 situation, but that’s it. Easiest to explain it is some mechanism for, if you’re a partner a and partner B for based on one or more different types of triggers to force one of those partners to buy out the other, or… It could be the reverse, the force, it could be either forcing you to be bought out or forcing you to buy up the other one.

0:14:13.2 S2: Or it could just be a right of first refusal as well.

0:14:15.9 S1: It could be that as well. It’s kind of a broad concept with a 50-50 partnership, my preference is to have some mechanism for… Well, let me take a step back there by sell agreements often deal with situations like where there’s some sort of involuntary transfer, like his partner A and partner B, and let’s say partner B gets divorced in some portion of partner fees, interest goes to their spouse or partner be goes bankrupt, and their interests in the companies to go to someone else, having some mechanism for Partner A to buy out any involuntarily transferred interest is often a part of a by-sell agreement. But with a 50-50 partnership, I’m more focused on the idea that there should be, if there’s a fundamental dispute or deadlock, a way for a to buy out the or by out as that the business can continue.

0:15:12.5 S2: Right. And those triggers, again, could… Again, whether it’s 250 or not, because I believe, and I’ve had in every single partnership agreement, at least in recent history, some sort of a buyout clause even when it hasn’t been 50-50, but you mentioned some of the tiger or somebody could get divorced, somebody could die somebody could be coming… Capacities of those things could be things that trigger whatever it is, however, it is that we’ve set up this buy-out opportunity… Right.

0:15:42.5 S1: Right. And it can then just be because of a deadlock is the other… Right now.

0:15:49.9 S2: One of the approaches which we actually have used a couple of times is what I guess colloquially or slang has been called the shotgun clause. What are your thoughts on that approach? And then perhaps if you could just explain it at a high level what that is…

0:16:06.6 S1: Yeah, so I found the most common way people approach, particularly the dead kind of buy-out where, let’s say partner A, and there are variations on this, but the basic idea is partner a invokes the clause, then partner a says, Give the number, let’s say, I’ll buy you out for 500000, and then partner B has a choice of either accepting that offer or buying partner at for 500000, it’s kind of like the parable about two people trying to divide something up in person, aid decides how it’s to be split. In person B gets to decide who gets which park

0:16:49.7 S2: Right, because what that keeps have in partner A, and I come to you say, I’m gonna give you 500000 David to buy you out. If I low-ball you, if that’s my strategy, you can turn the tables on me and buy me out at that low ball price… Right.

0:17:06.5 S1: Right. And that’s the logic behind it. In a lot. Strong logic.

0:17:10.4 S2: Yeah. However, if you come to me regardless of what price and I just am not in a financial position to buy you out, then I have a disadvantage, that is probably the most common criticism, and when they subscribe to for shotguns is it does benefit one partner with resources over a partner without resources, and if not their partner has resources, then it isn’t a particularly effective and equitable way to allow people to walk away.

0:17:46.5 S1: So it’s not the only mechanism, the

0:17:48.9 S2: Notes I was talking about that the challenge though is in a… Isola doesn’t have that provision that… So typically, then you certainly have the provision of a right of first refusal, so explain that if you would…

0:18:05.2 S1: Yeah, a writer-first refusal is where if one person wants to transfer their interest in the company, then the other partner has the right to step in and buy the selling partner’s interest on the same terms they were gonna sell to a third. Right, and this is all about keeping the shares or equity interests of a company within the… One can say the family of people who are actually running it as opposed to a larger company where you have third, outside investors in a lot of small businesses, particularly in a lot of businesses at the beginning, and small businesses in particular, the equity owners, the owners of the business or the people running it, you’re not giving away to random third parties…

0:18:54.3 S2: Right, yeah, what we’ve done, for example, related to that, is have as part of the clause that if they, especially depending on what position they were in, but if they were in an economic interest only, then if they transfer their shares that new member in the case of C also remains in an economic interest only they don’t have an active participation in the business, so in the case of a divorce, that now you’re… I’m not in business with your wife, but now your wife or half of your shares or your units, and she doesn’t get to come into the business, or he doesn’t get to come into the business, so we wanna control that. Right.

0:19:32.5 S1: Right, and that’s a very common… A well-drafted operating agreement for an LC specifically will provide that if outsiders get an interest in equity, membership interest in the company, that those become non-voting interest in economic interests as you state, other than the shotgun clause where one party states the value or where I have the right of first refusal. The way it’s supposed to work is my understanding is if I’m the one that’s trying to sell my interest, I have to have gotten an offer that then I bring to you and you can buy me out of the same offer, other than that, in other situations. What’s your recommendation and thoughts for how we value… My interest in the business. Sure, there’s two other strategies, one is the outside evaluator, the… And there are so many structures for getting a third-party valuation and resolving third-party valuations, so that’s one, the other is in the auction method where the Diggins each other to come to a number. In either of these cases, there are various ways of avoiding the issue of who has the economic resources, oftentimes we’ll deal with that to an extent by pre-negotiating when, as part of the buy-sell agreement, payment over time for any of these buyouts, actually with a pre-degree upon terms at the beginning, and of course, you can also have provisions to allow the buyer to obtain financing if all this is more complicated and takes more time, but it does usually lead to a better eventual result.

0:21:25.8 S2: Do you see… Just on a tangent here, do you see sometimes that we may not have added that layer of complexity in the initial agreement, but might have come together and agree to have MEND our agreement to provide for those provisions later. What your thoughts there… I mean, of course, later would mean… Everybody would have to be an agreement. Right.

0:21:45.3 S1: Yeah. So yes, the answer is that does happen, but that has to be at the right time and before there’s a real falling out…

0:21:58.6 S2: Yeah, because otherwise, you’re not gonna get… Agreement is gonna be anything. It’s just gonna get on here… Okay, and I remember the other thought that I’ve often used as far as a trigger when there is a death, is we’ve included it and here recently what we did for life insurance is we put in a provision that was only after the business attained a certain amount of value, and I forget how… What the formula was to calculate that, in other words, we didn’t wanna have the burden of carrying the policy from day one, but I think two years later, what are your thoughts on that?

0:22:33.5 S1: Yeah, it depends. That depends on the business. It would be, it’s onerous to have that kind of obligation to at the very beginning, for obvious reasons, there’s limited resources, so having that spring in either after revenue goals are met or after a particular particular period of time is a smart move.

0:22:58.3 S2: And that way, it’s already in the dictum in other horses, in our agreement, we don’t have to now agree to go get this policy, we agreed to it ahead of time, just a matter as to when we execute it on it.

0:23:09.1 S1: Exactly. Okay.

0:23:10.1 S2: We’ve touched on 5050s, we’ve touched on I’m quite a bit here now in the bicol agreement, what other clauses might come to mind, David, especially related to hopefully a partnership going bad, is there other classes that come to mind that you wanna talk about?

0:23:27.6 S1: Yes, and one of the most important ways to keep a partnership from going bad is to button up other issues because… And I’ll get to what I mean by that, but what you don’t wanna have happen as part of a partnership dispute is giving one partner some sort of leverage because of an unrelated issue, so for example, if the two partners or say to have an adequately memorialized the terms of their equity interests or haven’t adequately memorialize their assignment of IP into the company that gives one or the other partner leverage against the business, and that is not usually helpful in terms of having an efficient resolution because of instead of disputing how you’re going to buy out the other or hopefully that’s pre-planned and all that, you’re now also adding in disputes over, well, what do we have to pay the leading partner to assign their IP or to memorialize whatever interest they’re going to have because it’s not more realized in the first place. So that it kind of seems like a tangent, but it ends up being critical because a lot of these partnership disputes end up being about something else or something else…

0:24:58.2 S2: Yeah, and I can see… So I wanna explore the whole IP… So she brought it up as an important point. And how that happens, I’ve seen where that happens, where we started developing stuff before we’ve actually formed a legal entity or have a partnership or operating agreement, we kinda rushed through that and we’ll clean this stuff up later, then later… And how this idea that I own is much more valuable to me as the point in part that you’re making… Right.

0:25:25.8 S1: Exactly. And you end up debating over what is it that I need to pay this other person to assign IP that everyone understood was gonna be owned by the REITS, a pay-off for no purpose other than the fact that the parties are now disputing… However.

0:25:43.7 S2: Explain if you will, why that ends up happening because people, if we’ve come together and loosely and we start developing stuff, who owns it is what comes into play here… Right, right.

0:25:55.2 S1: And generally, there’s different law broadly, the person who creates IP is generally the owner, unless there’s something that varies that whether it be a written agreement or there are implied licenses in life, but nobody wants… Nobody wants to rely on fuzzy provisions that leave a cloud over a company’s IT, if it’s an IP-focused business, this doesn’t impact every business the same way, though I will say, when you talk about it, you’re not just talking about things like patents and trademarks and points you’re also talking about confidential information, so it’s a rare business that doesn’t have some confidential information, has everybody signed confidentiality provisions, or are you worried that your partner is gonna go letter off and put confidential information about the business on the internet because they’re not down to… Do anything different.

0:26:56.3 S2: Or they might have gotten an offer, advice from somebody else to, Hey, be part of their business, but help us start this in Florida. It’s two separate businesses. Yeah, so I think I read about it in one of your blogs and your website about having, even before we formalize the legal entity to have, I think you refer to as contractor agreements, but I explain what can we do initially as we start working together, but before we formalized everything.

0:27:24.2 S1: Yeah, you can do… There’s various things you can do. You can certainly have an NDA, that’s easy between up to like, Oh, that’s the easiest thing in the world. But you can have a founder’s agreement of some sort, or it can be… You can have a partnership agreement without an entity because you can have a general partnership by law, but I’ll be quite honest, the easiest thing in the world now is creating a legal entity in the past that was an expensive thing to do, but now… And every dollar counts. I don’t mean to be flip about it. But the reality is, it’s very easy to create an entity that IP can be assigned into… I see.

0:28:11.3 S2: Just for that purpose, even if it’s… Even if we don’t have our complete formal operating and partnership agreement, ’cause that can be the legacy and more expensive, you’re saying go form the into S heck, I could do it myself in the state of California for a couple hundred bucks, and then have agreements in place that at least assign the IP to that entity… Yeshe.

0:28:33.5 S1: Cheapest way to get the IP owned by something. Yes, anything else is going to be more… Have to be more customized and I’ll just be more expensive.

0:28:43.9 S2: Understood. Great, great advice. This is a relapse briefly, pausing this episode, to invite you to schedule a free coaching consultation with me, I welcome the opportunity to chat with you about your business plans and offer the guidance and accountability that we all need to achieve success as an experience, a small business owner myself, I understand the challenges you’re experiencing, and often it’s about helping you ask the right questions to help you make progress towards achieving your goals, whether it’s getting started with your first business or growing and maybe exiting your existing small business. I can help you get there, to find out more about my business coaching services and to schedule your free coaching consultation, please visit the holiness dot com, take that next step today towards finally realizing your business ownership. Dreams, I look forward to speaking with you. So let’s talk about… You also talk about… Again, I probably read it on your blog, you all have a great blog at grell, Shaw’s website, grills dot com, and I’ll have a link to it on the show notes page for that, a lot of great information there, but that’s where I read about the potential issues related to capitalization, as I’d like you to introduce us to that concept and what are we talking about there? That could be an issue.

0:30:06.4 S1: Yeah, so this all deals with the concept of what people call piercing the corporate veil, so the idea is when you’re creating an entity, a limited liability entity, so we’re talking about LLCs, corporations, limited partnerships, is that the owners of the entity are not supposed to be liable for the debts of the entity itself, it’s one of the main reasons to create an entity is to kind of protect the owner’s personal assets, but that protection is not a full proof protection, and basically, the high level idea here is the law doesn’t want to allow you to defraud creditors by creating an entity to shield the owners from liability, and there’s different ways that when a creditor can go beyond the corporation or an LLC and soon the owners directly into these debts… It’s called piercing the corporate veil. One of the main ways that happens is if the business is not as one would say, adequately capitalized, and the idea here is, do you create a business with a lot of potential liability for Sable liability and not have any assets in the… Build in the business to satisfy those lives

0:31:34.7 S2: That often sometimes referred to in this application as a shell company that’s used just for that purpose of defrauding a potential creditor.

0:31:43.5 S1: Yes, it is. And there are shell companies that are completely battle and there’s this kind of shell company. So the idea here is, I don’t wanna say it’s exactly that a creditor would have to prove intent, but it’s not just the matter of the business not having enough money, there has to be some element of creating the business for the purpose of shielding people from my ability, and I don’t wanna scare people over this, it’s not the idea that at all times, you look, does the company have enough money, does the company have enough money for extent this is… You’re looking at the time of formation, because this is an intent issue, obviously companies sometimes can’t satisfy adepts down the road, you can get upside down, and so that’s polyester a rule of thumb, then David, initially as to what

0:32:36.4 S2: You know what… Because this is an appearing of the Val… Hopping in a court of law, if I understand correctly, right? Judge determines based on the evidence… Yep, you’re right, you can go after the personal assets, so is there a kind of rule of thumb on what the capitalization needs to be…

0:32:52.6 S1: There’s not a number of what there is, is it supposed to be in light of what would reasonably be expected to the liabilities, and important in this is just documenting how you’re making that decision, and also important in this is to realize we’re not just talking about… Taking the million dollars in your bank account and putting it into the business, in case you don’t have a million dollars, other things count like do you get business liability insurance? That’s a huge important thing to do, get business liability insurance, not just to protect the business, but to protect yourself to show ’cause that’s a way of capitalizing a business.

0:33:30.3 S2: Okay, okay, yeah, I didn’t think about that. Alright, excellent. Great, great advice there, and again, obviously at the end of the day, there, you gotta get advice from a CPA and possibly an attorney as well, on making sure you’re doing that the right way, you… Right, that is great. Okay, thanks for sharing that. I didn’t know that much about that. What are the common mistakes that have we not touched on, that you see founders making partners making, especially again, as they’re coming in together into business, are there things we haven’t touched on that come to mind.

0:34:03.9 S1: The one big one that people should think about is whether or not to have a vesting arrangement for ownership of equity, so the idea here is, even if you’re splitting up 50-50 or one third, one-third, one-third, whatever it happens to be, Do the owners own outright at the beginning or do they have to earn the equity by working for the business over time, and it can be a difficult conversation at the beginning, but let me tell you that it is not that uncommon in a partnership or founder dispute where there is no vesting for one of the entrepreneurs or founders partners to who… Let’s say owns 50%, and there was no vesting to say, Alright, I’m just going to go and get another job and do other things, and I own half this company, and there’s nothing you can do about that. If the intent is that the owners work for the business, then that has to be incorporated somewhere, and one of the key ways of doing that is just investing over time…

0:35:17.3 S2: Right, this is an interesting point. I have always understood and used investing when there’s a sweat equity being acquired, but you’re saying even if we came in 5050 when each put 50% of the money, that even in that case, there’s a vesting schedule, in case, as you just described, three months into it, I decide, Okay, I’m bored, I’m gonna go do something else. Or whatever the case might be. Yeah, that would keep me engaged for a period of time actively involved in the business. Now, can I not achieve the same thing though by spelling out what my roles are in the partnership operating agreement, or is that just not very enforceable?

0:35:58.3 S1: It can be enforceable.

0:36:01.0 S2: But it’s really enforceable to the degree that I say, Well, I’m gonna stop paying you a salary, but I can’t take your interest… Right.

0:36:09.6 S1: Yeah. Well, yes, I mean, without vesting terms, it’s very hard to do someone’s interest, but I’ve seen… I’m not the biggest fan of partnership or operating agreements that say, X person is responsible for a bet and E because it’s ultimately going to be subjective.

0:36:28.1 S2: Okay, okay, and then you get into even more disagreement on what we meant and what that means, and because that is where there’s a lot of… What essentially happens, well, I’m putting in more effort and I didn’t know this was gonna be that much work, and it seems like you’re getting rewarded equally, but I’m putting it… I’m the one doing the hard work and all that happens then…

0:36:47.5 S1: Right, right. And then that’s what happens all the time, and then…

0:36:52.4 S2: Exactly. Coveting even for those who are fully capitalized for their proportion of interest in equity.

0:37:02.4 S1: Yeah, and let me make one note about that, if someone’s putting in 2000 into a business and they’re going to investing, it is obviously equitable that they get if they get their money back for any invested portion, I’m not suggesting someone… You put 200000 in a toy. Understand what you’re saying.

0:37:25.8 S2: No.

0:37:26.1 S1: Yeah, there has to be some fairness.

0:37:28.1 S2: I don’t lose my principles of will, but I don’t get ownership as I only get ownership or we’re maintain ownership as it best… According to that schedule. Exactly. So in that case… What part of the agreement would be is, Alright, David, that’s fine. Here’s your 100000 balance back that is invested, but now you only have the 25% that’s yours, that’s still vested in the company. Exactly, understood, understood. Excellent, thanks for clarifying that. Alright, let’s move forward then, and I’m in a bad partnership and things are going sideways, what do you usually do with that phone call when somebody calls you… What’s your first guidance… Piece of guidance there.

0:38:15.7 S1: Sure, and I’m assuming here at this point, I’m representing a partner and not representing…

0:38:22.0 S2: And let’s clarify that because you made that point earlier, which is such a big one, and I think people get very confused about that, especially even early on, David, ’cause I know I’ve had to explain this to various people, and it’s perfectly okay, for example, in our last one, we hired an attorney and he made it very clear we were all okay that the attorney was representing the entity, the business, we each individually could have gone and gotten our own and dependent attorney representing us exclusively. Right.

0:38:52.2 S1: That’s correct. And sometimes there’s three attorneys sometimes, or sorely partner A, partner B and the company… That’s not that unusual. Gotcha. And in some ways, that can be the best… Sure.

0:39:02.7 S2: That means everybody is represented, but more expressions, more expensive, but to your point, I call you as partner a, I’m the one that has an issue, I’m probably calling you for you to represent me, and therefore, of course, you can’t be the same attorney that we hired to represent the business or higher or that represents the other partner…

0:39:21.2 S1: Right, exactly. And if I’m representing Partner A, I have a mandate. So from my perspective, I wanna find out what goals are… What are we trying to do here? I will say a good attorney representing a partner in a partnership dispute, assuming… I’m making some assumption here that when I’m talking about a partnership dispute, I’m talking about a dead lock kind of dispute… Right, obviously, if there’s some other issue. Someone’s defrauding someone and then that’s a whole different work, but I’m talking about just a partner break-up situation, a good attorney obviously zealously represent their client, but also has enough experience to know what a reasonable resolution is, because it is very rarely good for anyone to litigate these things to end up in court because it’s just so expensive and it… It doesn’t do any good for the business.

0:40:20.7 S2: On May possibly end up destroying the business anyway, it

0:40:25.3 S1: Often does destroy the bins for various reasons, just elicit around it or the costs or the attention being paid. So I wanna understand what goals are, but I also wanna try to explain what a reasonable resolution is and how we can get there, and the best partnership dispute resolutions from the perspective of efficient and efficient in terms of time and efficient in terms of cost, and allowing the business to go forward, which can be in both partners interests, is where I’m able to talk to the other side’s attorney and come up with a resolution because we’re able to do distance ourselves from the emotions around mediating between the two parties.

0:41:14.8 S2: Yeah, and it might even be that we go to formal mediation, that’s in fact a clause obviously, that I would like to have in my operating our partnership agreement. Right.

0:41:24.0 S1: Absolutely having… So I have mixed feelings about mandatory mediation donations.

0:41:30.9 S2: Come on that please.

0:41:34.1 S1: For those who don’t know, there’s different types of dispute resolution processes outside of court, one of them is mediation, which I am generally a huge fan of, where basically both sides hire a third party neutral, often an ex judge, sometimes a lawyer who helps negotiate a resolution team to parties, it’s entirely voluntary to agree to a resolution, but this person is there to help bridge the gap and in any dispute at some phase… Mediation makes sense. I’ve seen sometimes forced mediation prior to actually litigating result in a party who’s not ready for it, just not actually participating, he’ll go, but they won’t yeading and then it’s ineffective and then it’s harder to get another mediation down the road, and…

0:42:28.6 S2: I see, so

0:42:30.2 S1: It kinda depends on… To me, it depends on the personality is involved, nothing outset, if they are personalities that I would think would be amenable to trying to find ways to resolve things just as a general matter, then yeah, then pre-dispute mediation makes perfect sense. If they’re more stubborn people than I get concerned about…

0:42:50.1 S2: Right, right. Okay, excellent tips. Or thank you for that. You mentioned obviously, and we’ve talked about finding an attorney, a couple of tips you might have for, How do I find a good attorney?

0:43:02.8 S1: Yeah, first things first device, the best way to find attorney is to talk to somebody you know to buy… Get a referral. There are a lot of attorneys out there and you can Google, but what are you gonna really… You read websites, if you’re in a situation where you’re reading websites, which is fine, we all do it. You don’t want someone who does literally everything, so if they’re doing Corporate Law and family law and trust in the States, and personal injury, that’s not for you. You want someone who concentrates on what your legal needs are, obviously they’re firms that do all sorts of things that are larger firms… I’m not talking about that, I’m talking about… It’s a small firm with a couple of attorneys, they’re gonna need to specialize, and the other thing is, and this depends on your type of business, if you are a business that relies, for example, on outside investment, then you don’t want an attorney whose core clients are your investors.

0:44:07.4 S2: Right. That makes sense as I have… One of the challenges, of course, with the attorney says, In my experience, most attorneys don’t offer a free consultation like some CPAs do, and so it’s hard, but I always tell people in that first meeting, if it doesn’t feel like a connection, you probably should move on right

0:44:28.5 S1: I agree with that.

0:44:29.9 S2: And so that’s why our referral or somebody I meet at a chamber or something like… Is those what I always recommend as a way to hopefully connect with them, maybe even in a different setting to make sure there’s a personality match for you there.

0:44:44.4 S1: Right, I agree with that. And yeah, in terms of… I’ve found that all accountants have ever dealt with CPAs do free console attorney’s very more. We have a hybrid approach at replaying that if you would… For us, it depends on what the consultation is, so if somebody wants to have a consultation to see if we’re a good fit and learn about the firm and things like that… That we don’t charge any money. Okay, if somebody wants an hour of attorney time to discuss substance of whatever their issue and get legal advice, and that might turn something more in the future, but it’s the actual substantive legal work than we do, or reduce three, one hour

0:45:30.6 S2: Now that seems very fair. Both options seem very fair, especially the ability to come in first and make sure that we have a connection here, we’re the same types of approach, and so that’s I think very valuable year, some perspective, clients, the best way they know how to evaluate what their relationship is good. Is to see some legal work being done for the trials.

0:45:55.9 S1: It depends, the different strategies in that projective and now you expect both ways. Alright.

0:46:01.0 S2: So that’s a perfect segue. Tell me anything else that we haven’t chatted about, you about Bella Shaw, and you guys have a great resource page as I alluded to. So tell us a little bit about that.

0:46:11.4 S1: Yeah, so as a firm, our core clients are starters and small businesses and founders, entrepreneurs, that’s what we do, we do, which is less typical for firms of our size, have a divided half and half into doing more of the corporate IT side work, and then on the other side litigation, and I am the one kind of exception at the firm that I do both, I started at a large firm as a litigator and then came to girls and started doing more corporate side work, I think from a partnership dispute type perspective, having both of those perspectives is invaluable because I know how things go wrong right at the beginning, I know how to set things up to try to avoid them going wrong or to minimize the impact of them going wrong. In terms of resources, I would say this to anyone, I’m biased, I fully admit that, but on our website is something called The Start-Up 101 series, which was authored by… Or the founder of our firm, George Perlis. And it’s the reason I joined gorilla shot. Before I joined it, I came across that website and read that stuff and I knew this is a place I wanted to work, ’cause I wanted to work with startups, and this is the person I wanted to work with, so I highly recommend people read that because one of my biggest tips for entrepreneurs is education, you need good advisors, but you can’t blindly higher advisors and trust them to just make decisions for you, you have to be a part of the decision making, and part of that decision making is understanding things and…

0:47:55.3 S1: Yes, an advisor who can explain things to you in ways you understand is great, but having some background is just… There’s no way to replace that.

0:48:05.0 S2: Well, I said, yeah, we can just like with… I say that just like with financials, we cannot completely a quest it. Oh, I just don’t know anything about the law or business. I know that’s not a good excuse, we have to rest, it takes time and you gotta keep asking the same questions, but it is our responsibility as entrepreneurs and business owners to learn and educate ourselves, and then of course, get advice… Get legal advice as well. Exactly, well said, and I will attest that I’ve been a lot of attorney’s websites, and this one has an inordinate amount of accessible information, including that start-up 101 guide, we’ll have a link to it on our show notes page at the business dot com, and then related to that, David, there’s a resource book resource that I think you would recommend to us.

0:48:52.3 S1: Yeah, so there’s a company called query that we really like as a website, as a business, what their thing is, is they provide basic… They’ll do the process of basic legal documentation, creating a corporation, stock issue, it says, and the like, it’s much cheaper than hiring an attorney, and it sounds weird, but as an attorney for the type of business that’s going down a certain path, that’s just the efficient thing to do is to go a company like clerk, they have a startup legal guide actually start-up legal concepts for founders, I think it’s the official name, and I’ll get the link over to you, which also I think goes through a lot of basic principles that entrepreneurs should know in an accessible way.

0:49:42.3 S2: Wonderful, thanks for that recommendation, and I’ll get that link from you and put it on the show notes page as well. Absolutely. Alright, David, we’ll wrap it up. Which one thing you want us to take away in summary, related to what we’ve talked about about hopefully avoiding partnership or founder dispute, which one thing you wanna stick away.

0:50:01.8 S1: Don’t shy away from having difficult conversations at the beginning, its founders and entrepreneurs need optimism, and that’s what can get them through late nights and working on weekends and all the things you have to do, but if you spend 20% of your time at the beginning, just charting out the Justin cases with someone who knows how to do that, you will be better off for it later not… I hate to say not everything is going to go right, and having the back up that there is exit ramps that can keep the business going is in… Everyone are

0:50:39.1 S2: Completely agree, that has been absolutely my experience and the advice that I give… Thank you for validating that. I think it’s so critical and so common that we overlook those things, so… Thanks, thanks for sharing that. Tell us where you want us to go online to learn more about you and about grills show…

0:50:56.8 S1: Yeah, I mean, our website grills dot com, as we discussed, there’s a lot of resources just generally speaking, but you can also take a look at the services we provide and the various people we have to help you out and…

0:51:11.4 S2: It’s Grella.com. That is correct, David, fascinating. I’ve learned a lot, thank you so much for being patient with my questions and explaining to me in terms that I can understand your… Excellent at that. So thank you so much for being with me today.

0:51:29.5 S1: Thank you for having me, it’s been great.

0:51:31.1 S2: This is envelopes, and thanks for joining me on this episode of The How of Business. My guest today again was David Siegel, I released new episodes every Monday morning, and you can find us anywhere you listen to podcasts, including Apple Podcast, Google podcast, Spotify, and at my website, the TheHowOfBusiness.com

 

Leave a Reply

Your email address will not be published.