Should I start a business as a 50-50 partner without risking deadlock?

It is very common for two people to want to start a company and then to decide that the equity split should be 50-50. Very often the people involved in that decision come to regret it. And when you hear an experienced entrepreneur talk about how their own startup or business is structured, they’re going to come up with different things. They’re not going to tell you, like, “Gosh, you know, I just think really good friends ought to be, like, just partners. It’s always going to work out. It’s going to be so awesome.” They’re not going to say something like that because, as we all know, there are risks. Friends starting companies with equal ownership is usually not a good idea. Is it always wrong? Well, I guess not; but the risk is too high.

I am going to run through the pros and cons of having two co-founders, each owning 50% of the company. My goal is to show that 50/50 ownership is a bad idea, and to offer a better structure.

Neither Founder Has the Control

The reason why 50/50 is so dangerous is because neither founder has the control, and as a result, there is nobody who can decide what to do when the founders do not agree. Deadlock means something is not happening, not because the people in charge do not want it to, but because those in charge do not agree, and nobody can make them agree. The founders of startups often get swept up by their mutual goals at launch, thinking they will never come to an impasse. The minute one disagreement ends in a stalemate, no launch, hire, or transaction can take place. 50-50 deadlocks can lead to company closures. The longer the company exists, the more opportunities it has to face an impasse, and therefore stop.

But most of the time, even serious shenanigans on your partner’s part won’t get them out of the company. If, for example, your business partner takes money out of the company or misuses a company asset, the remedy is for you to file a lawsuit against your partner for breach of fiduciary duty. In Texas, you cannot get your partner out. That means no forfeiture, and no forced buyout. You get money damages for what the company or you may have lost. They stay, you pay.

A court will, however, possibly appoint what’s called a receiver, a third party who essentially takes over the company and administers things on the company’s behalf. You can also request that the business be dissolved. A receiver takes control, so you would be handing the reigns to a stranger. Dissolution is shutting down the company. Either way, it is difficult to make the court do, and either way, once the court does, you lose control of the business. And I mean completely. Definitely don’t take either path if you don’t have to.

A Tie Breaker

You should not choose 50-50 but if you do, make sure you know how to break a tie. A tie breaker is essential. There are several ways to do it.

Option one is a board, which will make sure that your business keeps running if things come to a standstill. There are a couple options, either you can have a board that only breaks ties, or you can have a board that helps with the whole thing. It’s essential to protect the board from potential lawsuits filed by the dissatisfied partner, and that’s done by giving them immunity, creating a safe harbor and/or footing their legal bills.

Another is having a third person who each side trusts decide every dispute. You have to immunize that person from liability (i.e., they cannot be sued by the unhappy partner either) and foot their legal bills too.

Then there are those partners who toss a coin whenever there’s a disagreement (did someone say “heads”) or trade off who gets to make the final call for set periods. That’s messy, but at least it is proof that someone figured there might be a deadlock and that it was a good idea to decide how to settle it before it happened.

Or worse, fed-up partner A leaves and starts a new company. Partner B calls foul, accusing A of stealing its trade secrets. Maybe B is right; maybe not. But a suit that claims that one partner stole the other’s trade secrets could prove costly, regardless of whether it stands up in court.

51-49, with Veto Power

So what can happen instead? You can do 51-49, one owns more, and both have the same economics.

The person who owns the majority of the company gets to make the call. Whoever owns 51% will have the final say, even if the contracts are equal and the pay, bonuses and distributions, too. The 49% owner might be able to negotiate veto power on major decisions.

A veto right is bargained for when it comes to minority owners, which means it can be wielded over stuff other than the items on a common list, which includes things like adding new owners, selling most of the business or its assets, dropping the minority as director or manager, and altering bylaws or the LLC agreement.

A lot of potential partners would scoff at the idea of being the 49er, the person whose final say wasn’t final. Thing is, it’s worth it. No deadlock means there’s a way out of any stalemate, and both are equal as far as cash is concerned, so that much pay and bonus for each and equal divdends.

With 50-50, neither partner holds the upper hand, so there’s no way to get the boat out of a stalemate if it hits. Then a life circumstance for one of the partners changes, say a split from a spouse or a health diagnosis, and a plan that worked for years suddenly doesn’t work anymore. That leaves a really big problem on your hands: company stalled, customers losing faith, workers jumping ship. After a fight, nobody wins and the business might not survive. There are some ways out of a 50-50 — in paper, that is — but those are often bad.

My top pick is 51-49, with veto power. The next best bet is 50/50, with a tie-breaker. Worst choice? No tie breaker. If your co-owner won’t agree to the 49%, talk about a written tie-breaker before you launch.