Having a disagreement with your company’s investors is one of the most difficult challenges that any small-business owner can face. It’s stressful and time-consuming, and the stakes can be very high.
It’s quite common to see the founders of successful businesses kicked out of their own companies due to disagreements with their funders. But like any challenge you face, it’s important to understand your options and take a careful, gradual approach to resolving the conflict as amicably and as quickly as possible.
These five steps can help you resolve the situation so it doesn't stop your business in its tracks.
1. Agree to disagree. The first approach is to try to reach an agreement despite your differences. A friend and fellow business owner recently went through a scathing disagreement with his original investors regarding the adoption of an expansion plan. They were one step away from litigation that wouldn't have benefitted anyone. During one of their final attempts at mediation, they realized that the real problem wasn't the expansion plan itself but the ability of the current investors to fund it. Had they taken the time to figure out what they were really disagreeing about at the beginning, they'd have saved months of time and many sleepless nights.
2. Determine the root cause of the disagreement. You need to understand your own motivations and those of your investors. A client recently updated me on a disagreement their company is having with its investors that's been going on for almost a year. The founder wants to renegotiate his artificially low compensation because the company has proven to be wildly profitable—to everyone’s surprise—and his investors refuse to approve it. At this point, they're at a standstill with both sides refusing to budge and the company starting to lose customers.
On the surface, this is a disagreement about money, but in reality, it’s about something else: fairness. The founder thinks it’s unfair that he should be paid so little given his stellar performance; the investors think it’s unfair to change the terms of their agreement just because the company is doing well. (It could have gone the other way.) By understanding the “why,” you can address the root cause of the disagreement and improve your chances of solving it.
3. Evaluate each side of the disagreement. Not all disagreements are worthy of a battle. When I first started my business nearly 15 years ago, I had a partner. But soon after launching our business, he dedicated virtually all his time to other projects, while I dedicated all my time to this one.
After a while, I started making decisions—like taking on new clients—without consulting him, which led to an important disagreement. I believe we handled it maturely because we both understood that the business was far more important to me, while for him, it was just something on the side. We parted ways amicably, and each of us moved on.
4. Agree on the worst-case scenario. Unfortunately, you can’t always make a decision based on what's best for everyone. Sometimes the best you can do is to avoid the worst.
The founder of a famous fish restaurant in Miami recently retired and turned the business over to his son. Despite his “retirement,” the father still shows up to work every day and doesn’t agree with the important decisions his son is making. This disagreement between “founder and son” has significantly impacted the quality of the food, the efficiency of the service and customers' enjoyment of the overall experience. If they can’t agree on what’s best for the business, they're going to have to agree on what’s worst—which is what they're doing now—and find a way out of it.
5. When all else fails, review your legal documents. Before going to court, be sure to review your bylaws or operating agreement. If these were drafted properly, then the documents should spell out what to do in the case of serious disagreements. You should also consider lining up financing from another source that's more in line with your own strategy in order to buy out your current investors.
If reaching an agreement on a buyout fails, then unfortunately, you need to consider escalating. But it’s best to escalate gradually. The worst decision in almost every case is to immediately pull the nuclear option and sue. No one truly wins after a long, drawn-out legal battle.
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