Expert: Timmy Chou - 1/29/2011

Question
Hello,

I have a problem that I dont know how to deal with and Im hoping you can offer some advice :)

I have made a massive blunder that I am struggling to find a honorable and decent resolution to. As with all matters such as these, there is some background information that I think should be covered.

About 2 years ago my musiness partner and I set up a wholesale trading company. We broke our backs to get this company to where it is now - working at full pace each day, 7 days a week, often 16-18 hr days. The blood, sweat and sacrifice we have endured has had no limits.

Nearly 2 years on and we have opened another company. What we do is hard to explain, but basically the original company exports and trades in the goods that the new company will now source. This is a far more professional company that should make much more money and be easier to expand etc. Basically, its the top of the food chain, and we have already got some very nice government contracts.

It is our plan to grow the company by employing very professional people to do specific jobs that they do well, and to stand back as much as possible (Perhaps this is unrealistic).

Anyhow, my partner and I rather hastily decided that it would be a good idea to give away 10% of the company to someone. The idea was that this person would take charge of all the day to day operations and by owning a percentage of the company, they would have much incentive to keep costs low (which can easily spiral).

We made it clear that the share in the business was to be paid for with blood, sweat and tears. I have known this person for a long time, and I was pretty sure that this opportunity was going to be grasped with both hands. But so far I have only seen him behave like an employee (and not even a great one). He is never wants to stay to work late if there is work to be done, he misses work due to personal appointments and commitments, he has even missed a day at work due to going out drinking the night before.

I think the most serious issue is that he seems to have an employee attitude ie, when 5o'clock comes, he wants to forget about work. Its as though he feels like he is doing me a favor when we have to work through the weekend to get the work done.

My problem is that I wish I never offered the share to this person now. Its not been officially transfered, but I have given my word that this is what I would do. Though I did stipulate that we expected 'blood' as payment. Till now I have seen almost the opposite, and I want to correct this issue as soon as possible.

On the other hand I am concerned that I have not given him enough of a chance to adjust to the way my partner and I work (even the Pakistani and Japanese say my partner and I are hard core!!!)

My thoughts were that I should tell him that our feelings towards his work ethic mean that we dont feel that he will be able to earn/pay for those shares without dragging him along for the ride. That I would be happy to give him a job (which I am), and that I think we would all be happier this way.

I think its one of those cases where I expected too much, and regardless of how much I pay that person, they are never going to perform the way I expect.

Any advise you could give would be great :)

Answer
Thank you for your question!

As I always mention, Mediators act as neutral third parties to disputes and never "get involved" in judging the merits of conflict, but merely use special techniques to help the parties decide how to negotiate their own settlement.

The case you describe here is far too typical.  I am not an attorney, nor could could I mediate this matter with you alone but I can respond to your question from my business consulting experience.

Note that this issue may have legal ramifications and you may wish to consult an attorney.

First, congrats on the success of your venture, as you have observed, very few can put in the effort required.

It is very typical for there to be insufficient consideration to the rules of handling conflicts and disputes within governance documentation.  You would do well to review the contingency planning in all of your governance docs going forward.

I would suggest that you sit down with your advisers and draw up a share grant agreement or stock purchase agreement that includes a vesting schedule.  In other words, the shares are issued, but they vest according to performance that you specify, and they also expire if they are not vested by a certain date.  

Within the vesting schedule should be a very detailed description of the expectations you require.  Additionally you should also draw up a detailed employment agreement that also lays out expectations and clearly gives your rights if the performance you seek is absent.  

You should then meet with your guy and introduce the documents and be sure to give the speech about entering a high-growth period and that you expect 100% effort and that if he hasn't the stomach for it perhaps he should reconsider, and that he should expect to be putting in many additional hours, etc, etc.

I think you should be able to artfully draw a picture and position yourself to be able to pull the plug if the effort is not there.

I would probably advise you that at this point you really need "believers" on board to get your company to the next operational level, and I would not advise you to keep him on board if he merely wants a job.  Long term this arrangement is not favorable IMO.  

These are some ideas.  Feel free to follow up with additional questions.

For your information, the pros and cons of the types of dispute resolution methods follows.

GOOD LUCK!

Arbitration, Mediation, and Litigation

Arbitration: the referral of a dispute to one or more impartial persons for final and binding determination outside of the judicial system

Benefits of Arbitration:

 Confidential, no public record
 Limited exchange of documentation, information
 Quick, don't have to wait for a court date
 Arbitrators have expertise in the subject matter and are trained in conflict resolution
 Cheaper than litigation
 Preserves business relationships

Negatives of Arbitration

 It's a compromise, no %100 winner
 Complex arbitration can be costly
 If not satisfied, may litigate the arbitration procedure
 Poor results with an unskilled arbitrator
 Both parties must agree to cooperate in the process

Mediation: the process by which parties submit their dispute to a neutral third party (the mediator) who works with the parties to reach a settlement of their dispute.

Benefits of Mediation:

 Neutral mediator can objectively suggest alternatives not considered before
 Parties are directly engaged in negotiating the settlement
 Can be quicker than litigation
 Less costly than litigation
 Preserves business relationships
 85% of American Arbitration Association cases mediated find successful solutions

Negatives of Mediation

 may not reach a binding decision
 unskilled mediator

Litigation: using the judicial system to resolve disputes

Benefits of litigation:

 a clear winner and loser
 uses a prescribed set of procedures
 more predictable outcomes
 is final

Negatives of Litigation:

 waiting for court dates can do more harm
 usually more expensive than mediation and arbitration
 part of the public record