Arbitration/Mediation/Confict in business relationship
Hi Mr. Chou. Hi, my boyfriend & I live together. We also work together. I joined his small company six months ago to launched a new brand in his existing business. I have been instrumental in the marketing/design/PR etc of this brand. I am on the company VISA but have not been paid a salary as we are waiting for this product to take off. (Clients pay late so we all sacrifice taking regular salaries at the moment)
He has offered 16% share in the business (not signed)
Due to personal issues I don't want to be in the relationship but I don't want to lose the work I've put in either, as the brand is already looking lucrative. I need to move out but we are cash-strapped at the moment.
I have asked him to back-pay me for 6 months of work (when our business loan comes through) in place of shares in the business. I am feeling trapped.
Please advise on what my options are?
Thank you kindly. I appreciate any light you can shed on the situation.
If you have looked at some of my previous answers you may know that I always advise questioners that 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.
I am not an attorney and cannot give you legal advice but can respond from my mediation, management and consulting experience. Note that this issue may certainly have legal ramifications and you may wish to consult an attorney at some point.
It is best to have as much structure created at the outset of starting or building a business rather than in the middle because there are inevitable assumptions and expectations created by each party. FYI the area of least development in business creation is in break-up or dissolution contingencies, where partners specify what the rules are in case of problems.
Consider doing the following preparatory and proactive steps right away as a good discussion foundation. Here are my recommendations:
1. Document a chronological timeline noting the creation of the business, the promises made and the individual contributed work product, asset contributions, the identification of accounts, or any other contribution. Also document the rise of the conditions leading to the dispute and record how this plays out. Note any written agreements or oral agreements and understandings. These carry the force of law. Because you cite personal reasons for your need to alter your relationship with the company, note that this problem is not related to the company per se, and you will want to show the other company members how your request is not a harm to them.
2. Review your existing documents. Review whatever written agreements, operating agreements or other governing documents you have for guidance about rules for disengagement, if any. Again, oral agreements count.
3. Look at your legal options. There is potentially some serious money involved here nevertheless any litigants will incur a large cost to file suit, and you have to count the possible cost to yourself to pay for or defend litigation. Remember that nearly 90% of lawsuits settle before trial so the question is usually not IF you will settle, but when and at what cost. Disputing parties would be better off to wisely choose a cheaper, faster mediated settlement. As far as I can tell there is not an issue at present that could be successfully litigated, since you are only making a request to the company to consider your proposal, and the company has not reneged on any promise or obligation so far.
4. Go see a lawyer. The local Bar Association usually has a referral service that will give you access to an attorney for free. You may wish to understand the legal landscape. In most states when a company does not have completed organization documents or operating bylaws, the state has standard bylaws of some type codified and these would be the documents you would rely on legally. You can get a copy and see if they offer any guidance. You may have more leverage to motivate acceptance of your proposal depending on the state.
Once you understand where you are and how you got there you are then in a position to work out a settlement.
In the case of a minority partner, typically you have very little leverage unless your operating documents call for a settlement procedure when a partner decides to exit the partnership. Note that Partners also have a duty to the partnership to not damage it. Hence, a partner cannot just demand his "piece" out of the middle if it will precariously damage the partnership interests for all. This also applies to holding assets of the company as hostage negotiating leverage. Be careful about this.
As to the ability to force the company to buy you out, again you will have to refer to your operating agreement, but absent any specific language, normally you cannot force anyone to buy you out. You will have to find ways to make it irresistible to the other partners to CHOOSE to exit your position, either by offering a sweet deal or by making yourself such a pain they get rid of you. These strategies certainly carry risks.
These are some ideas. Feel free to follow up with additional questions.
For your general information, the pros and cons of the types of dispute resolution methods follows.
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 often 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
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
Negatives of Litigation:
waiting for court dates can do more harm
usually more expensive than mediation and arbitration
part of the public record