Startups Anonymous: I didn’t have a contract with my friend and my business tore us apart

By Startups Anonymous , written on August 27, 2014

From The News Desk

[This is a weekly series that brings you raw, first-hand experiences from founders and investors in the trenches. Their story submissions are anonymous, allowing them to share openly without fear of retribution. Every Wednesday, we'll run one new story chosen by Dana Severson, who operates StartupsAnonymous, a place for startups to share, ask questions, and  answer them in story-length posts, all anonymously. You can share your own story here.]

The first year of my business was great. Profits were through the roof. My sales funnel was spot on. And part of that success was due to a friend who helped out. The business idea was mine, the launch of it was mine, the daily work was all mine. But, I know his help was valuable. We have never talked about who owned how much of the company because it was always 100% my company, and he was helping me.

One day we got together, and he brought this up. He wanted a large percentage that he thought he had earned (50/50 split). Truthfully, the success of the business didn’t hinge on the work he did, but it absolutely helped. We talked about different numbers and values, and loosely agree on some terms (he would own 1/3 of the company). Neither of knew anything about owning different percentages of businesses, owning shares of stock, and we were both young and inexperienced. We also didn’t put this conversation in writing.

The next year of business was great and my friend started taking a salary along with me. He was paid well for his time, more than I paid myself. He worked hard and was good at his job. It felt like a partnership and worthy of the percentage split. We never talked about our agreement.

The third year he stopped working full-time to explore some other options. This was fine by me, but he was still getting paid by the company. A few months in, his salary wasn’t worth the time he wasn’t investing. We talked and agreed to stop paying his salary. Then he stopped doing any work at all. Phone calls were missed, emails were unanswered, nothing of value was brought to the table (certainly not 1/3 ownership).

Out of nowhere he asked for a buy out. The company had made some good money, but all of it was tied up in expenses and future growth. If 1/3 of the company’s money was taken out, it was doomed to fail. I told him I couldn’t afford to buy him out and that it wasn’t a reasonable request. He said he had worked hard for the company and was looking to cash out. I told him he had been paid, handsomely, for the work he had done and that cash was all tied up. He said he was legally a 1/3 owner and would come after the money. We didn’t have any contracts in place so I reached out to a lawyer. He told me the different scenarios that could unfold, but said because there wasn’t a contract I should simply offer a smaller buyout that I could afford and see if he would take it.

Through a few emails and one awful phone call we agreed to a small buyout. At one point we almost went to small claims court. I can remember writing the buyout check and absolutely loathing him for it. From that day we haven’t spoken a word.

I don’t feel great about the way the situation turned out, but I also don’t think he was reasonable in the way the situation was handled. Now, I always get a contract up front. No matter who I do business with, the terms are clear and in writing to cover both parties.

[image via thinkstock]