You had the idea but not the finances, so you approached a venture capitalist. She invested $100,000 in exchange for a 25% equity stake in your new corporation. You were still the majority shareholder, so her equity share never affected day-to-day operations. As your company began to grow, you partnered with like-minded individuals, merged corporations, incorporated new ideas, and continued to sell equity to fund your ventures. Your cap table gets more complex each year, and one day you realize you’re no longer the majority shareholder. In fact, your partners are working with the 25% stakeholder to squeeze you out.
Founder fights commonly occur as companies grow. The more successful your corporation, the more people want a piece of it. Founder breakups are the most common reason start-up companies fail and should be addressed early by an experienced business litigation attorney at Structure Law Group, LLP.
Most Common Reason for Founder Breakups
Your right to regain control of your corporation depends on the nature of your co-founder dispute. Many co-founder disputes arise when:
- Equity does not equal commitment.
- Founders and investors have different priorities.
- Multiple founders vie for control, and
- Corporate roles are not clearly defined.
Further, studies indicate that only 25% of founders headed their companies during their initial public offerings and more than 50% of founders turned control over to a CEO within three years. Those founders who don’t turn over control are often pushed out, and it’s reported that 80% of all founders are squeezed out by investors or abdicate their corporate roles.
Regaining Control of your Company
Many founders file shareholder litigation to challenge squeeze outs or an illegal dilution of their shares. However, initial founders who worked with an experienced business litigation attorney may have contractual clauses protecting their ownership interests. You can start by turning to your founding documents including any investor rights agreements, company bylaws, or your California articles of incorporation. Initial founders may have enforceable contractual rights such as the right of first refusal on share transfers or the authority to approve all corporate sales. Some founders structure their stock offerings so they retain control, and in turn voting rights, through a specific class of stock. A review of your founding documents may reveal missteps by co-founders and investors that can help you regain control of your corporation.
Your second option is to file a business lawsuit. These can be costly, but it may be the only way to regain control of your company. Some founders file business lawsuits when their shares are fraudulently undervalued during a takeover, stripping them of equity and control. Other founders are pushed out without access to the board’s decision-making process, which can reveal an illegal motive for the ouster.
Speak with an Experienced San Jose Founder Dispute Attorney Today
The sooner you act, the more likely a Silicon Valley business litigation attorney at Structure Law Group, LLP can protect your founder rights. Whether you’re preparing for a merger, arguing with your co-founders, or are being pushed out of your company, we may be able to help. Schedule your founder’s rights consultation with one of California’s best business litigation attorneys at Structure Law Group, LLP. Call our San Jose office today at 408-441-7500 or contact us online.