Founder Disputes: Regaining Control of Your Company


Founder Disputes: Regaining Control of Your Company

Founders seek out venture capitalists when they have an idea, but lack the money to get it off the ground. While VCs can make your idea a reality, it is important to be careful about how much control they have over your company. Say a VC invests $100,000 and gets 25% equity stake in return. At first, this works because you still hold the majority stake and control of your company. But as your company grows and equity is sold and divided among more people, it is easy to lose your position as the dominant shareholders. Your partners may even have the power to conspire for the majority in order to push you out.

Founder disputes are par for the course as a business grows. if the dispute is irreconcilable, it could mean the worst for your company. This is why it is important to be aware of why founders fight and what you can do to maintain control of your company.

Most frequent causes of founder breakups

Depending on the specifics of your co-founder dispute, you may be able to take back control of your company. Co-founder disagreements are commonplace when:

  • Equity is not the same as dedication.
  • Investors and founders have diverging priorities.
  • The corporate positions are not clearly defined, causing founders to compete for power.
  • Additionally, research shows that just 25% of founders ran their businesses during initial public offerings, and more than 50% of founders handed control of their businesses to a CEO within three years. Founders who refuse to cede control are frequently forced out; according to statistics, 80% of founders either give up their corporate positions or are pressured out by investors.

    Taking back control of your company

    Founders commonly bring shareholder lawsuits to protest share dilution or squeeze outs. However, the original founders may have contractual provisions preserving their ownership rights if they worked with a lawyer on the onset of the business. Founding documents, such as any investor rights agreements, the business bylaws, or articles of incorporation, are good resources. Initial founders might be granted legally enforceable rights, such as the ability to approve all business sales or the right of first refusal on share transactions. Some entrepreneurs arrange their stock offerings so they keep ownership and voting rights through a particular class of stock. Reviewing your starting documents may turn up errors made by investors and co-founders that will allow you to take back control of your company.

    The second choice is to bring a lawsuit against a company. Although lawsuits are expensive, it might be the only way to take back control of your business. If their shares are falsely discounted during a takeover, stripping them of equity and control, this can be a reason to sue.

    Without access to the board’s decision-making process, other founders are expelled, which may have been done for dubious reasons.

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