27 Jun TOP FIVE MISTAKES OF NEW ENTREPRENEURS (FIRST IN A SERIES)
Sometimes the owner-entrepreneur of a new company hires legal counsel the first day, sort of like how it would occur in a textbook. More likely than not, however, they’ve been trying to skimp on legal fees and have avoided seeking counsel until a problem arises.I started noticing patterns about these problems. The real take-away, of course, is to engage counsel earlier to identify trouble spots before they occur. But knowing that most entrepreneurs will continue to skimp on legal fees, I thought I would share these mistakes from real clients (with identities hidden and obscured) so that all is not lost from their pain.MISTAKE NUMBER ONE. 50/50 PARTNERSHIPS SHOULD BE CALLED “DISASTERS-IN-WAITING”Last year I had to counsel a client suffering in a 50/50 partnership because no one person can control the business entity when dissension enters the ranks. Although I will use the term “partnership”, the client actually had formed a corporation where they owned fifty percent of the voting shares of stock and fifty percent was owned by their business partner. The partners had been friends at the time of forming the corporation.Three years into the company, when the other partner’s father prematurely passed away he suffered from a dark night of the soul. He no longer had any desire to work. For a while, my client was happy to carry the vast majority of the burden for the first year after the unexpected death (partnerships, after all, are formed with some sort of understanding that there will be ups and downs in life). But two years later, the other partner, shielded from work by his wealth still had never fully returned to work and never really wanted to work. Although there is recourse by going to court, because my client did not have the resources to go to court, he effectively was unable to “fire” the other partner, unable to buy out the other partner and unable to make strategic decisions as revenue declined precipitously in a changing environment. The company, which had long term leases, loans and contracts based on the revenue stream of two working partners, ended in disaster.The Lesson. A structure where no one has ultimate control is ultimately a recipe for stalemate and disaster. Perhaps not right away, but it almost always ends as such and takes careful negotiation to avoid litigation. Your better strategy is to avoid this structure at all costs.