We will be taking on angel money.. The partnership terms are still negotiable.
On paper you have the advantage but after several startups control resides in he who knows how to execute the vision of the company.
The answer to your question depends on how you set up your company and why. I advise startup founders frequently with regard to the terms of their understandings with other founders. Having two founders is tough, because unless you are 50/50 (which is inadvisable for various reasons), someone will have the ultimate decision-making power. Sometimes, the person with a slight majority is not the person with the vision. So, there should be mechanisms in your founders agreements that create the decision-making environment you desire. Decision-making power comes from three places - authority as an officer of the company (daily operational level decisions), power as a board member (most policy and company-level decisions), and power as a shareholder (the really big, vision-related decisions). You each have the power of your particular offices. If you are each members of the Board, you can have equal say over Board-level decisions (that require a majority). Even then, however, there has to be a way to break ties - frequently the CEO or a predetermined third-party advisor gets to decide. If one of you hold less than 50%, however, the other member may be able to have the final say on the big-ticket Shareholder-level decisions. (This is the authority you speak of.) Even so, it is important to make sure that your priorities and vision are aligned. Once investors are involved, your power to make big decisions becomes diluted. At that point, it is important that you are on the same page, because that may be the only way for the two of you to affect the direction of the company (by voting the same). That being said, there are minority investor protections that can be written into your partnership agreement(s) and future agreements with investors that will allow a minority partner more control or to get out if the majority takes the company in a direction that he/she don't like. For instance, you can designate certain decisions in your operating agreement - such as if and when to accept angel investment funds - as super-majority decisions (66% or more) that would then require the vote of both of you to affect. I am happy to chat more about this via a call if you want to dig in deeper...good luck!
If you have a Limited Liability Company that is taxed like a partnership, which is a very common setup, your decision-making authority can be specifically agreed upon in the Operating Agreement. Essentially, your partner could retain 51% of the earnings but his/her voting interests could be equal to yours. However, I suspect your partner wants to retain their 51% voting interest as well as their 51% profit interest. In this scenario, your ultimate decision making authority is limited because you can never achieve majority status.
When I represent a minority interest holder of a company I try to build certain safeguards into the Operating Agreement. For instance, I would try to include certain actions that must either have a super majority (defined as 66% or 75% depending on the size of the entity) or in your case a unanimous vote. I would try to include things like bringing on another member, distributions, taking on debt, major capital expenses, changing the Operating Agreement etc. as items that would require your consent. This will offer some protection in the decision making process. However, your partner will retain the ultimate decision making authority for anything not specifically delineated in your governing document.
In my experience, partnerships tend to be tenuous, unless expectations and responsibilities are clearly outlined. Your question is rooted solely in the current ownership structure, which is one sliver of managing a business.
There are so many day-to-day aspects that it’s unrealistic for one person to be the decision-maker over everything. Think about the daily work that needs to be done. The production of the products or the delivery of the services. The sourcing of materials or resources. Marketing and sales. Employee or contractor matters. The accounting. The development of the brand and culture. I trust you each have strengths (and yes, weaknesses) that translate into one handling certain elements of the business better than others.
For example, I know of a service company where one of the co-founders hates dealing with employees, so the other one handles all employee relations for their 30 or so workers. That’s not a reflection of their ownership stakes, but of who's the best person for that responsibility.
Furthermore, when you take on angel investors, your ownership stakes will likely be decreased in order to bring in that money. How will that effect your roles? Another critical discussion to have.
If you haven’t hashed out these nuts and bolts of running the business and ensuring that both of you feel that the contributions are valuable on both sides of the equation, it’s likely a good time to have that conversation.
Good luck and let me know if you need more assistance.
In a scenario where you hold 51% ownership of the company and your partner holds 49%, you would technically have a majority stake and, therefore, the ability to make decisions that require a simple majority vote. However, the extent of your decision-making authority may vary depending on the terms outlined in your partnership agreement and the specific rights and powers granted to each partner.
Here are some factors to consider regarding decision-making authority:
1. **Majority Control:** With a 51% ownership stake, you would have the ability to control most decisions that require a simple majority vote, such as approving business strategies, hiring or firing key personnel, making financial investments, or entering into contracts.
2. **Reserved Matters:** Your partnership agreement may specify certain "reserved matters" or critical decisions that require unanimous or supermajority approval, regardless of ownership percentages. These could include major strategic decisions, changes to the company's structure or ownership, or significant financial transactions.
3. **Veto Rights:** Even if you have majority ownership, your partner may still have veto rights or specific decision-making authority over certain areas of the business, depending on the terms negotiated in your partnership agreement. This could limit your ability to unilaterally make decisions in those areas.
4. **Board Structure:** If your company has a board of directors, the composition of the board and the allocation of voting rights among directors may impact decision-making authority. You may have control over board appointments or hold additional voting power as the majority owner.
5. **Management Structure:** The day-to-day management and operation of the company may also affect decision-making authority. Depending on your roles and responsibilities within the company, you may have more influence over certain aspects of the business than others.
6. **Relationship Dynamics:** Effective decision-making in a partnership often depends on collaboration, communication, and trust between partners. Even if you technically have majority control, maintaining a positive working relationship with your partner and considering their input and perspectives can be essential for the success of the business.
Ultimately, the distribution of decision-making authority in a partnership is influenced by a combination of ownership percentages, legal agreements, governance structures, and interpersonal dynamics. It's crucial to have clear and transparent communication with your partner and to document decision-making processes and responsibilities to avoid misunderstandings or disputes down the line. If there are specific concerns or considerations regarding decision-making authority, it's advisable to consult with a legal advisor to ensure that your partnership agreement reflects your intentions and protects the interests of both partners.
If you own 51% of your company and your partner owns 49%, you have a majority ownership. Here’s a detailed explanation of what this means for decision-making authority and how it might be impacted by taking on angel investment:
### Decision-Making Authority with Majority Ownership
**1. Voting Control**
- **General Decisions**: As the majority owner, you have the final say in most company decisions that are put to a vote. This includes strategic directions, business operations, and major financial decisions.
- **Board Decisions**: If you have a board of directors, your majority ownership typically gives you the ability to influence or control board appointments and decisions, depending on how the board is structured.
**2. Operational Control**
- **Day-to-Day Management**: If you are also the CEO or managing director, your majority ownership supports your authority in daily operational decisions.
- **Tie-Breaking**: In case of a disagreement, your 51% stake means you can outvote your partner on critical decisions, avoiding deadlocks.
**3. Legal Control**
- **Bylaws and Operating Agreement**: Your control is also subject to the company's bylaws or operating agreement. Ensure these documents reflect your decision-making power.
- **Amendments**: Majority ownership allows you to influence or directly make changes to the company's governing documents, though some changes might require a supermajority (e.g., 66% or 75%) depending on your bylaws.
### Impact of Taking on Angel Investment
**1. Equity Dilution**
- **Post-Investment Equity**: Taking on angel investment will dilute your ownership percentage. For example, if you raise capital and issue new shares, your 51% could become less, depending on the amount raised and the new equity distribution.
- **Maintaining Control**: To maintain control, you might negotiate terms to ensure your decision-making authority isn’t disproportionately affected by the dilution.
**2. Investor Rights and Preferences**
- **Board Seats**: Angel investors often request board seats or observer rights. This can influence board decisions and dilute your control over strategic decisions.
- **Voting Rights**: Investors might seek special voting rights on certain decisions, such as selling the company, raising more capital, or changing key management roles.
- **Protective Provisions**: Investors may include provisions that require their approval for significant decisions, such as mergers, acquisitions, or major financial commitments.
### Negotiating Partnership and Investment Terms
**1. Protecting Majority Control**
- **Voting Thresholds**: Ensure that critical decisions still require a simple majority, and avoid setting higher thresholds that could undermine your control.
- **Board Composition**: Negotiate board seats so that you maintain a controlling interest in the board’s decisions. For example, if there are five board seats, aim to control at least three.
**2. Anti-Dilution Provisions**
- **Preemptive Rights**: Ensure you and your partner have the right to purchase additional shares in future funding rounds to maintain your ownership percentages.
- **Class of Shares**: Issue different classes of shares with different voting rights to preserve your control.
**3. Investor Agreements**
- **Terms Sheets and Shareholder Agreements**: Clearly define the terms of the investment, including the rights and obligations of all parties. Ensure protective provisions are balanced and do not overly limit your operational flexibility.
- **Drag-Along and Tag-Along Rights**: Understand and negotiate these rights to ensure minority shareholders (including you post-investment) have fair treatment in major transactions.
### Practical Steps
1. **Legal Counsel**: Hire a lawyer experienced in startup investments to draft and review all agreements.
2. **Clear Communication**: Have open discussions with your partner and potential investors about expectations and decision-making processes.
3. **Long-Term Strategy**: Consider how future funding rounds will impact your ownership and control. Plan for growth while maintaining strategic authority.
### Example Scenario
- **Pre-Investment**: You hold 51%, your partner holds 49%.
- **Post-Investment**: You take $100K from an angel investor for 10% equity.
- Your new ownership might be approximately 45.9%, your partner’s 44.1%, and the investor’s 10% (exact percentages depend on the pre-money valuation).
### Conclusion
As a majority owner, you have significant decision-making authority, but taking on angel investment will require careful negotiation to maintain control. Focus on structuring the investment to balance funding needs with retaining strategic and operational authority. Ensure all terms are clearly documented and aligned with your long-term vision for the company.
Would you like assistance with drafting specific legal agreements or preparing for negotiations with potential investors?
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