I didn’t have a contract with my friend and my business tore us apart

The first year of my business was great. Profits were through the roof. My sales funnel was spot on. And part of that success was due to a friend who helped out. The business idea was mine, the launch of it was mine, the daily work was all mine. But, I know his help was valuable. We have never talked about who owned how much of the company because it was always 100% my company and he was helping me.

One day we got together and he brought this up. He wanted a large percentage that he thought he had earned (50/50 split). Truthfully, the success of the business didn’t hinge on the work he did, but it absolutely helped. We talked about different numbers and values, and loosely agree on some terms (he would own 1/3 of the company). Neither of knew anything about owning different percentages of businesses, owning shares of stock, and we were both young and inexperienced. We also didn’t put this conversation in writing.

The next year of business was great and my friend started taking a salary along with me. He was paid well for his time, more than I paid myself. He worked hard and was good at his job. It felt like a partnership and worthy of the percentage split. We never talked about our agreement.

The third year he stopped working full-time to explore some other options. This was fine by me, but he was still getting paid by the company. A few months in, his salary wasn’t worth the time he wasn’t investing. We talked and agreed to stop paying his salary. Then he stopped doing any work at all. Phone calls were missed, emails were unanswered, nothing of value was brought to the table (certainly not 1/3 ownership).

Out of no where he asked for a buy out. The company had made some good money, but all of it was tied up in expenses and future growth. If 1/3 of the company’s money was taken out, it was doomed to fail. I told him I couldn’t afford to buy him out and that it wasn’t a reasonable request. He said he had worked hard for the company and was looking to cash out. I told him he had been paid, handsomely, for the work he had done and that cash was all tied up. He said he was legally a 1/3 owner and would come after the money. We didn’t have any contracts in place so I reached out to a lawyer. He told me the different scenarios that could unfold, but said because there wasn’t a contract I should simply offer a smaller buyout that I could afford and see if he would take it.

Through a few emails and one awful phone call we agreed to a small buyout. At one point we almost went to small claims court. I can remember writing the buyout check and absolutely loathing him for it. From that day we haven’t spoken a word.

I don’t feel great about the way the situation turned out, but I also don’t think he was reasonable in the way the situation was handled. Now, I always get a contract up front. No matter who I do business with, the terms are clear and in writing to cover both parties.

  • I went through the same thing. I worked very closely with someone for 18 months, I had my company, she had hers but we had a “verbal operating agreement” about how we split profit on deals. Long story short, 90% of the deals we were working ended up coming from us working her contacts and in the weeks before most of these deals were closing, I got the short end of the stick handed to me…i.e.”oh you’re not getting paid on these deals, we don’t have anything in writing that says that” – I almost gave up on what I was doing as I had no money left and no recourse, but its 2yrs later now and I survived.

    From that day forward, EVERYTHING is in writing. Contracts, I get PO from customers up front, employment agreements, etc.

    BUT, the biggest lesson I learned from all of this was: I will never rely on someone else to generate my income.

    Any deal we do now everyone knows where they stand, what they are getting and there are no assumptions.

    Don’t beat yourself up over it though, I consider my episode an “expensive educational experience” 🙂

  • I’m a little lost. If you HAD written a contract upfront, wouldn’t he then be able to demand his cashout? It sounds as though not having anything in writing actually saved the business.

    • you are absolutely right, “putting it in writing” if you are the “primary founder” is a good way to screw yourself since you will write down the optimistic scenario and the reality always falls short. giving a %age of a business to somebody needs to entail them staying with the business. If you want to cash out, you cash out at a discount.

  • Let me guess, you’re the idea guy, and this 1/3rd owner was just the coder. You couldn’t understand why he didn’t want to keep coding the ideas you’ve painstakingly arrived at, so you give him the shaft and feel like you got screwed over. Amirite?

    • “The business idea was mine, the launch of it was mine, the daily work was all mine. But, I know his help was valuable.” Based on this, I doubt the partner was a coder.

  • Similar thing happened here –

    My friend and I built a $20M/year business, 5 years and 150 employees later, we raised $20M in VC. And, while I DID have a contract, it sure didn’t help. I ultimately got squeezed out by my “friend”, and later had to take a smaller buy-out (just so I had *something* to show for my hard work).

    My meta-advice here would be: never build a business with a friend. Find a true *partner* – that is, someone you get along with, have mutual respect with/for, and someone you know compliments you well.

  • I feel like your friend earned his third in the early days. After he left discussions could have been had about buying him out slowly (as he was getting paid but not working) but the third was his. A frontal demand for an immediate buyout was out of line, but the shares were theirs to part with.

  • The only thing a contract would have done would be to hold you to the third you agreed on. Fact is you went back on your word.

    • That’s not what I took away from the story. It sounds like the missing founder was attempting to force his hand by liquidating his shares, thus hurting the company. Say for example, the company was being sold instead, I didn’t gather that the OP would have had an issue giving him the 1/3.

  • I’m guessing if you had a contract giving up 33% of the company the VC raise could not have happened, or at least would have been substantially different.

    • In my experience, it doesn’t really matter. Those percentages get diluted as you add more shares to account for funding. Most people don’t allocate shares for funding, options, advisory, etc. out of the gate. It gets accounted for as you go.

  • Wow so if you had written the contract, you would have to pay him the share. Sounds like you really screwed your friend. Can he use this blog post as an admission and get his money back? Hope so…

  • you just sound like a bad friend. Would it really have gone any differently if you had a contract? you probably still would have gotten a lawyer and fought it. all a contract would have done is make you keep your word, which is not a lot to ask from a friend. Once he owned 33% of the company, regardless of what he does in the future he would still own 33%.

    • I think you’re missing a major component to this story. The 33% partner was trying to force him to buy him out. It sounds like that was an unreasonable request at the time. “If 1/3 of the company’s money was taken out, it was doomed to fail.”. The 33% partner, as a friend, should still have cared about his friends business and not forced his hand like that.

      Never in the story did he say that he didn’t deserve 33% of the company. His gripe was about the timing of his “cash out” request.

    • You’re way off. People get diluted all the time so that they don’t end up with what they started with, and there’s typically a vesting schedule in place to protect against the scenario where one founder drops out a month into it, but still owns as much of the company as the guys that put the next 5 years of their lives into it.

      Also, demanding a buyout is unreasonable – you typically have to wait for a liquidity event to get paid anything for your stock. You can ask nicely, but it’s not a right unless you have a clause in your contract that clearly spells this out.

  • Contracts are great. Good contracts are better. I think you’ll want to learn about vesting schedules for future partnerships. Along with terms for valuation should problems arise.

  • All these comments are ridiculous. A bad friend who went back on his word? Sheesh. The bad friend here is the one who got greedy and demanded to be PAID IN CASH for all his equity, right now, at some probably absurd valuation. This is a completely ridiculous demand. The fact is that equity in a private company/endeavor is a risky asset that usually comes with no guarantees unless one was explicitly granted at the time it was given (things like stock options issued to employees as part of their contract). Granted, OP sounds like an idiot for actually thinking that his “friend” had such a right but perhaps that was his way of being a “good friend.” Who knows. But anyone who thinks OP is a bad person who lied an cheated is just as much of a slimy cheat as the OP’s ex-friend.

  • Your business didn’t tear you apart– you did. Do you really value the survival of your business more than your friend?

    Did you explore getting a bank loan to fund your buyback? Or look for another partner to buy in? Or asked him for a payment plan?

    To make this right, please pay him completely for his 1/3. Do it gradually if that’s all you can do.

    Are you required to do this? No. Will he thank you? Maybe. Will you regain your lost honor? Yes.

  • Similar experience except I did have an agreement. What I discovered is that once a bitter partner gets the legal ball rolling, you are forced along for the ride. I agreed to a valuation and a buyout but the angry partner just kept pushing forward looking to cause pain. Wasted time and wasted money for everyone.

  • Where does it say that you have to be the one to buy him out? Tell him to find his own buyer. Set the criteria for the buyer, skill set,
    hours of work, etc and the buyer has to be approved you. Then let him try to sell his share.
    This is his problem not yours.

  • The partner unofficially owns 33% of the business but since its unofficial he can’t sell it to anyone because he doesn’t legally own it. What should have happened was the formation of an LLC or partnership that would have given him shares which he would then be free to sell to anyone. What is absurd is that your friend thought he had the right to demand a buyout at any time he wanted. What if you insisted that he buy you out for 2/3rds? Its just as absurd.

  • To me it sounds like a poor business plan regardless of inexperience. More like common sense. As far as the friendship goes, the 33%r sounded like a jack arse. You painted him out to sound lazy and unreliable. This is one side of the coin, I would like to hear from the other guy. All in all it sounded like you were trying to work for something, someone was dead weight, and you needed to do something. It’s nice to help people even friends, but not at the cost of everything you worked for. You need to think about yourself too as well setting limits on much you help others. Too much helping others can be a bad thing sometimes, it’s good to have a healthy balance of doing things for yourself and others not one or the other. It seemed like you did way too much to help this guy. Don’t feel bad things like these happen in life, I had 3 similar things happen but to the extent I lost money. But it made me realize I was not doing enough for myself, I found the balance, and no matter how bad the situation it could always be worse so brush it off and carry on.

    Hope this helps someone, I typed this while laying in bed. I wanted to type outfast before I slept so please forgive my mistakes

  • I’ve red in construction my whole adult life ,ive worked as a partner with a friend for many years we split 50/50 when we decided to quit drywall and start our own construction company I was all for it,we have a verbal contract but me still getting my finances back together we kept his business name..red flag one he registered company as sole propriorship, [company in his name, he handles all money etc for his wife supposedly helps..red flag two every job in past year has ended up falling short in the end profit basically not there,the first job was a 50,000 burn house rehab in which I made 6000.00 total while we set a budget I did almost all work we were to have subcontracted ie plumbing1500 elec 1500 HVAC 1500 misc 2500all materials for those 3 was 500 now I’ve been in const my whole life and know what materials and subs,labor costs and my figure with our pay which I put hi is 35000.00 leaving 10000.00 unaccounted for then we move to our present addition which with new roof plus kitchen came in at 105,000.00 now in 4 months I’ve made 6000.00 that includes me doing drywall which paid 1000 so I’ve made 5000,and now he says no money left including final pay so were a month to 6 weeks of work to finish on getting no pay,oh also me being the trusting kind I rented one of his houses on the verbal contract to buy or sell it was a heap I gave 6000.00 down and remodeled it completely ,in this year my credit that was getting good has gone to pot I paid all my bills ahead of time now im behind on everything now all the jobs I do make a profit but his with me never do .he gets combative when I ask for receipts shows hand written numbers of what things cost again I know what things cost so I’ve started legal action,im conservatively out 30000.00 this year not including 25000 house so never start business with friend not only did he screw up my credit ,he set me back years my fault for trusting him car mas a b he can finish these jobs I will not do anymore

  • I am in business with a monster, his idea my money and hard work getting contracts. he does nothing to extend his help. I am not getting paid in a timely manner no contract has been drawn up as well. I have proof I put all the money in, he feels like its his idea which I have customize it better than his approach, and clients love it. without me he will not last. I run the entire company. Im not making any money he is, he hides what he gets, in business with a long time friend never again

  • … [Trackback]

    […] There you can find 58113 additional Info on that Topic: startupsanonymous.com/story/i-didnt-have-a-contract-with-my-friend-and-my-business-tore-us-apart/ […]

  • … [Trackback]

    […] Read More here on that Topic: startupsanonymous.com/story/i-didnt-have-a-contract-with-my-friend-and-my-business-tore-us-apart/ […]

  • … [Trackback]

    […] Read More Information here to that Topic: startupsanonymous.com/story/i-didnt-have-a-contract-with-my-friend-and-my-business-tore-us-apart/ […]

  • … [Trackback]

    […] There you will find 84017 more Information on that Topic: startupsanonymous.com/story/i-didnt-have-a-contract-with-my-friend-and-my-business-tore-us-apart/ […]

  • … [Trackback]

    […] Info to that Topic: startupsanonymous.com/story/i-didnt-have-a-contract-with-my-friend-and-my-business-tore-us-apart/ […]

  • … [Trackback]

    […] Read More Info here on that Topic: startupsanonymous.com/story/i-didnt-have-a-contract-with-my-friend-and-my-business-tore-us-apart/ […]

  • {"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

    You may also like