I'm about to enter a partnership with someone. The original proposal was to be 50/50 partners, but now he wants to split the company into voting and non-voting shares. He would be effectively issue 100 voting and 100 non-voting shares. He would like to inject $100,000 of his own money to help jump-start the business. In the end he would own 100 non-voting and 50 voting shares, leaving me with the remaining 50 voting shares, and effectively 25% equity. I have also indicated that over time (if possible), I would like the right to buy back the other 25% equity to fully even it out. How can I protect myself in this scenario?
The first matter for you to conclude is to agree the terms of a shareholder agreement between the two founders. This shareholders agreement should govern the management of all significant governance matters. Without this you will subject to the constitution documents of the company and local company company law. This is a standard type of agreement that any decent corporate lawyer will be able to advise you on.
As the voting shares are held equally, then no major changes will be able to be made without both founders agreeing to the changes. The non-voting shares (assuming all other terms are the same) will have equal rights to financial returns (dividends and liquidation rights), but will not be able to participate in voting issues. In simple terms, you will have an equal say in the running of the company with your co-founder, but will receive 25% of the returns, while they receive 75%.
My first question to you is what are you trying to protect?
It sounds like you are trying to protect your controlling interest in the company. If that is the case you will accomplish the same thing if you have 50% of voting shares or 50% of total shares. You are in the same position either way. It will take both of you to "do" anything with regards to corporate actions.
You obviously will only have half of the ownership though under the scenario you presented. So if you are OK with that I don't think you have much to worry about.
My experience has been that the golden rule applies to partnerships. In situations where one person has 75% equity and 50% voting, the business may soon have financial problems either real, perceived or invented, that is the time for the partner with the most equity to negotiate more voting shares by injecting a little more money. Beware. This is not intended to be legal advice.
Don't stop taking massive action.
Best of Luck,
Michael T. Irvin
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