This article first appeared on Forbes.
My law firm helps launch more than fifty legal entities a year. A question I often hear from clients is how a company should make decisions when it is equally owned by the founders. Here are the four most common approaches founders can take:
1. Require unanimous consent.
The most common approach is to require the unanimous consent of the owners to make decisions. What does this mean? If a corporation is equally owned by two founders and only the two founders serve on the board of directors, then decisions will require the consent of both founders.
The advantage of this approach is that each founder has the peace of mind that decisions will not be made without their consent. For example, each founder knows that additional equity will not be issued without their vote. The drawback is that a 1-1 vote resulting in a tie can lead to deadlock and inaction at best, and at worst it can result in a lawsuit between two frustrated founders who feel the other is preventing the company from moving forward.
2. Have board members cast tie-breaking votes.
The second approach is to have additional people serve on the board of directors or own a small percentage of the LLC to serve as the tie-breaking votes. This approach can be an effective pressure release as it prevents deadlock. However, it should be properly structured to ensure the vote cannot result in a tie.
The challenge lies in deciding who to select to play this key role as the arbiter for decisions. This should be someone who will keep the company’s best interests in mind when deciding how to best move forward. Sometimes founders immediately have someone who they can mutually agree upon, but other times each founder has a different person in mind and a committee approach might be needed.
3. Don’t divide the equity equally.
The third approach is to not divide the equity equally to avoid potential deadlock. Two founders could decide that one has more experience, capital or other valuable assets to bring to the company and should get more equity and, therefore, be the tie-breaking vote.
While this solution helps to avoid the potential for deadlock, it can be a challenge to decide which founder will be the decision maker when push comes to shove. One advantage of an LLC is the founders can decide that certain important items will still require the consent of both owners, such as adding additional owners or dissolving the company.
4. Have multiple decision making buckets.
Lastly, the founders can decide that one founder will be the tie-breaking vote on certain items and the other person be the tie-breaking vote on other items. However, this can be problematic if disagreements arise over whether an issue is in decision making bucket A or B.
There is no one-size-fits-all solution for how to decide on the inevitable difficult decisions that will come up for your company. Founders should weigh the pros and cons of each approach to decide which one is best suited for helping them make decisions that are in the best interests of their company.Published in