Resolving Equity Disputes Between Co-Founders: How business valuation helps to resolve co-founder disputes

Equity dispute resolution will need a fix before it escalates and affects the company’s growth.

Co-founder equity disputes can be the main reason a successful business fails, especially for Small and Medium-sized Businesses (SMBs). Harvard research says that over 65% of company failure is due to co-founder disputes. Such disputes arise because the co-founder needs more clarity or agreement regarding their ownership share within the company.

Why address such disputes? Because the potential impact is far-reaching and affects the business’s overall health. It is impractical to expect co-founders who begin a long and difficult journey together never to encounter conflict. So, let’s see how to resolve equity disputes between co-founders if one such issue occurs.

Equity dispute resolution between co-founders

Equity dispute resolution will need a fix before it escalates and affects the company’s growth. Co-founder equity disputes arise when the company’s founders disagree about the allocation of ownership (equity) in the business.

Reasons for equity dispute between co-founders

There can be many reasons for a co-founder equity dispute, as the company grows, the co-founders may have different plans. One co-founder’s emphasis on rapid growth can be at odds with the other’s focus on long-term sustainability.

Reasons for equity dispute between co-founders

Dissatisfaction with Initial Equity Split

Deciding how to allocate equity among co-founders at the start is a major source of potential conflict. An unequal distribution can create a sense of hierarchy, with those holding more equity feeling greater decision-making power.

Different Perceptions of Contributions

Co-founders may have differing views on the value of each person’s contributions (skills, time, ideas, capital, etc.), making it challenging to agree on an equitable split. There’s rarely an objective way to quantify and compare different types of contributions.

Lack of Vesting Schedule

Without a vesting schedule that allows co-founders to earn their equity over time, there’s no protection if a co-founder leaves early or stops contributing. This can lead to disputes over equity ownership.

Diverging Motivations and Commitment Levels

Over time, co-founders’ motivations, priorities, and commitment levels can diverge. Those with higher equity may feel more committed, while those with lower equity may feel less motivated, breeding resentment.

Potential consequences of unresolved equity disputes between co-founders

What happens if we don’t resolve the co-founder equity disputes? Let’s see that now:

  • It impacts the company’s foundation. Unresolved co-founder equity disputes weaken their confidence and affect their capacity to make judgments that benefit the business.
  • The business’s reputation may be further affected, and expensive legal action may follow.
  • Since potential investors would not have faith in their Return On Investments (ROI), restricted or no investment from them is the most typical risk in prolonged co-founder equity disputes.
  • Affect the company’s growth and divert its intention, leaving competitors to gain an advantage in the market.

Therefore, it is important to address these issues as and when required. Seeking mediation can help get an impartial opinion for equity dispute resolution.

How to resolve equity disputes between co founders?

There are many ways through which you arrive at an equity dispute resolution. They are:

How to resolve equity disputes between co founders?

Facilitating Open Communication

Make transparency a habit in your business. Encourage open discussions about disputes and their root causes. This will ensure that everyone is on the same page and that there is an actual dispute rather than an assumption.

Each co-founder should feel their viewpoints are heard and considered. Active listening involves not just hearing what they speak. Empathize with your co-founders. Encourage them to share their experiences and concerns regarding the co-founder equity disputes. Create an environment that respects each co-founder’s points.

Tips to create a supportive environment for addressing equity-related issues:

  • Create a safe space where everyone feels comfortable expressing their thoughts and concerns.
  • Define clear goals and expectations for the company’s equity distribution in the initial phase. Ensure that all the co-founders understand it well.
  • In co-founder equity disputes, seek help from a third-party mediator or arbitrator. An unbiased opinion that satisfies all the parties involved is helpful.
  • Do a periodic review of your equity arrangements

Seeking Mediation or Arbitration

A mediator or arbitrator helps make an impartial decision during a co-founder equity dispute as they are neutral third parties. Apart from that, the following are the other benefits of seeking a mediator or arbitrator.

Why can a mediator or arbitrator benefit your business? Going to court for equity disputes might take months or even years to resolve, eventually impacting your business. To avoid that, get help from a mediator or an arbitrator who can quickly give you a fair equity dispute resolution.

Role of Professional Mediators or Arbitrators

The following are the roles of mediators or arbitrators in helping to reach a mutually acceptable solution during equity dispute resolution:

  • Effective communication – Miscommunication often arises in co-founder equity disputes. Mediators or arbitrators help close this gap by actively listening and understanding all the parties’ opinions.
  • Identifies common interest – Mediators or arbitrators understand all the co-founders’ common interests and goals. Through this, they can make a decision that benefits all.
  • Reality checking – Sometimes, co-founders can propose unrealistic or unfeasible solutions. Mediators or arbitrators, through their knowledge and experience, can provide a reality check on what is possible and what works for the co-founders and the company.

Reviewing Legal Agreements and Documentation

In co-founder equity disputes, reviewing the legal documents can help determine the co-founder responsibilities. Here’s how it can help arrive at a solution.

These agreements will have the roles and responsibilities of each co-founder. By reviewing them, all the parties involved will know what was agreed upon regarding ownership, profit sharing, decision-making authority and more.

Reviewing the agreements gives you clarity in getting a fair equity dispute resolution.

Provisions in Founders’ Agreement

The following provisions will be available in a shareholder or partnership agreement to help better handle co-founder equity disputes:

  • Equity ownership – The co-founders should know their ownership percentage in the company. This agreement will mention a provision for that purpose and outline the initial equity structure.
  • Decision-making authority – Whenever there is a major event in the company, the agreement specifies how the decision-making process will occur and the co-founder’s role.
  • Dispute resolution mechanism – During the co-founder equity disputes, how they will resolve them is mentioned in the agreement’s provision.
  • Buyout provision—This provision lists any terms and conditions relevant to buyouts and explains the requirements in case of a dispute, departure, or other triggering events.

Exploring Buyout Options

A buyout is a great way to settle a dispute. To repurchase a co-owner equity.

To grasp this, you must first ascertain the monetary worth of the co-founder’s ownership interest. You need to know the company’s cost and the equity of the departing co-founder. A mutual understanding of the equity’s price is required. When you negotiate this, you have to think about things like:

  • The current financial state of the company
  • Future potential
  • Market conditions
  • Any relevant agreements or contracts in place

Methods for Valuing Co-founder Equity Stakes and Negotiating Buyout Terms

The idea of “who wants what” is the basic criteria for valuing the co-founder’s equity stakes and negotiating buyout terms. Each co-founder’s contribution to the company will be the major deciding factor. You will get a better price if you contribute more toward the company’s success.

Also, during the negotiation of buyout terms, it is important to maintain the following:

  • Fairness – Ensure that both parties have an equal opportunity to express their views and interests while negotiating.
  • Transparency – Transparent communication during negotiation helps build trust between the parties, resulting in realistic expectations.
  • Legal compliance—It is important to adhere to the legal regulations of buyouts so that the parties do not face the consequences, including penalties and lawsuits.

How can business valuation help resolving dispute between co founders

Business valuation plays a crucial role in resolving disputes between co-founders by accurately assessing the company’s worth.

Determining Fair Equity Distribution

One of the most common sources of conflict among co-founders is disagreement over equity distribution. A professional business valuation can objectively determine the fair market value of the company and each co-founder’s stake based on their contributions, time invested, and other relevant factors.

Facilitating Buyouts

When co-founders decide to part ways, a business valuation is essential to determine the fair value of the departing co-founder’s shares for a buyout. This helps prevent disputes over the buyout price and ensures a fair transaction.

Assessing Intellectual Property Contributions

If a co-founder claims ownership of intellectual property (IP) used by the company, a business valuation can assess the value of that IP and its contribution to the company’s worth. This can help resolve disputes over IP ownership and compensation.

Evaluating Performance and Contributions

Business valuations often consider each co-founder’s roles, responsibilities, and contributions to the company’s growth and success. This analysis can help resolve disputes over perceived inequities in effort, performance, or compensation among co-founders.

Providing an Objective Third-Party Opinion

By engaging a qualified and independent business valuation professional, co-founders can rely on an objective third-party opinion to resolve their disputes. This can be more effective than relying on potentially biased internal assessments.

Using the services of experienced valuation experts like Eqvista in dispute resolution cases is advisable to ensure an accurate and reliable valuation. Eqvista’s valuation experts employ various methodologies, such as the income, market, and asset approaches, to arrive at a well-supported valuation. We assure you that our expertise and objectivity can be instrumental in resolving co-founder disputes equitably and efficiently.

The key benefits of using Eqvista’s business valuation in co-founder disputes

Eqvista’s business valuation services can provide several key benefits in resolving disputes between co-founders:

Objective and Independent Valuation

Eqvista employs accredited valuation professionals who can provide an objective and independent assessment of the company’s fair market value. This impartial third-party valuation can help resolve disagreements over equity distribution, buyouts, or intellectual property contributions among co-founders.

Comprehensive Valuation Methodologies

Eqvista utilizes multiple valuation approaches, including discounted cash flow analysis, market comparables, and asset-based methods. This comprehensive approach ensures a well-rounded valuation that considers the company’s future cash flows, market trends, and asset values, reducing the risk of biased or one-sided valuations.

Expertise in Shareholder Disputes

Eqvista has specific expertise in valuing companies involved in shareholder disputes. Their case studies demonstrate their ability to navigate complex situations, consider expert testimonies, and reconcile differing valuation approaches to arrive at a reasonable and defensible valuation.

Efficient and Cost-Effective Process

By offering business valuation services alongside their equity management platform, Eqvista can streamline the valuation process, reducing time and costs associated with engaging separate valuation firms. Their integrated approach ensures a seamless and efficient experience for co-founders.

Compliance and Legal Support

Eqvista’s services help ensure compliance with relevant regulations, such as ASC 718, ISO limits, and Rule 701. They also provide legal support, including preparing defensible 409A valuations and necessary tax reports, reducing the compliance burden on co-founders during disputes.

Connect Eqvista for a definite value to resolve disputes

It is important to resolve the co-founder disputes as it can impact the company’s overall performance. As there are several aspects to consider when arriving at an equity dispute resolution, getting support from a valuation expert is recommended.

Eqvista, being the most suitable valuation provider in these situations, can help you give a precise company appraisal and a business valuation in case of a shareholder buyout. We also help you create and manage captable, equity distribution, and more. To know more about our services, contact us today!

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