Dealing With Control in 51/49 Business Partnerships
Hi everyone, this is Brett Cenkus, the right-brained business lawyer and business consultant. Today, we’re going to continue our series of mastering business partnerships. It’s a series of videos that’s based on my book, Partner Proofing Your Partnership.
In the last video we talked, we dove right into structuring partnerships from a high-level – structuring the equity distribution, who owns what? And, we talked about 50/50 partnerships, which a lot of lawyers don’t like. They don’t like them because there’s a risk that the parties will get sideways and there’ll be a stalemate, they won’t be able to make decisions. Now, we talked about ways to mitigate that and we also talked about the risk of other types of partnerships. Nothing is without risk. These things carry pros and cons each, but I am a firm believer that the 50/50 partnership works great for some partnerships.
Today, we’re going to dive into its corollary, 51/49, another common business type of partnership. So, to reiterate we’re talking about equity distribution and equity matters for two broad reasons. One is economics. How much money do you make? The other is control. We’re not talking here about the economics. Now, if I own 51% of a partnership and you own 49% – corporation LLC, whatever, we’re at a business – I make 2% more, or actually, if you work the math it’s something like 4% more, right, but the point is, I make more money than you do (assuming we don’t do something different with bonuses and salaries and stuff like that). That’s straightforward, you understand that that’s something you would negotiate.
What we’re talking about here are the nuances about control and those are really big issues to get into the weeds on. Much more important, in my opinion, for successful business partnerships than strictly the economics, because you’re never going to be a successful company (have a lot of money to split up) if you don’t get this other stuff right and make it work for you.
So, we talked about 50/50. 51/49 is a situation if there’s a majority-voting standard throughout. So majority, which is 51% usually, I mean, majority can mean different things, but, generally speaking, when you hear that word, it means 51%. So, if that’s the standard vote that’s required to take an action, it means that the 51% holder has all the power to make all the decisions. And, that’s what we’re talking about here. Now, we’re oversimplifying things. I understand many of you might be in 4 person, 4 founder startups, you know things like that, but we’re just using 50/50 and 51/49 to kind of get the understanding about how important the issues around control are.
In a 51/49 with a majority-voting standard the 51% owner makes all the decisions. Now, that carries a lot of risk. If you’re the 49% owner, the risk is that you get railroaded, that the 51% owner makes all the decisions, doesn’t even hear you, doesn’t pay attention to what you want, takes that extra 2% and just rams it down your throat with every decision. If you’re the 51% owner, now you’ve got control, your lawyers will generally be very happy – there’s not going to be a stalemate – but you have a risk of the opposite, which is that your 49% owner may become very disillusioned.
A lot of times, two people who think they ought to be equal decide based on someone else’s input that one should be 51 and 49. Well, that’s a well-intended piece of feedback but you have to be very careful about its risks.
Ultimately, I believe that 50/50 businesses come down to relationship and knowing the party you’re with, and 51/49 comes down to trust. What do I mean by that? With a 51/49, you really have to trust – particularly if you’re the 49% person – that the 51% is going to hear you. That’s a massive degree of control for what is ostensibly two peers being in business together. You really have to trust that that person’s going to treat you right and handle things correctly.
Then in a 50/50 deal, I say that’s about relationship because I would be very, very hesitant to strike a 50/50 deal with anyone I didn’t know really, really well in the world – that I didn’t feel very comfortable with. Now, there’re ways to mitigate all these things. There’s dispute resolution mechanisms, there’s eject buttons if things don’t work out. We’ll talk about those in other videos. But fundamentally, I think you’re deciding here, when you think about just these two things, between “how well do I know this person? Can we work through all the gray areas?” and, in the case of 51/49, “do I really trust this person to treat me okay in their decision making?”
Now, again we are oversimplifying everything. For any startup, any business venture that’s got more than two people, obviously, 51/49 or 50/50 don’t work. There are other things we can talk about.
Then there are all sorts of nuances. You could have a 51/49 percent standard but the 49% owner may negotiate for all sorts of decisions to be unanimous which would require that they approve those decisions. So, we’re back around, in that case, to a situation where you have a possibility of a stalemate. So, the takeaway from that is there are a thousand different ways to structure your business partnerships and you really want to get into the weeds and work through these things and work through it with a corporate attorney.
If you don’t yet have an agreement, you should contact me and we should work through it and figure out what works for you. Part of that process is figuring out the right custom deal for you. How do we strike this? There are a lot of different ways that we can do that. And exactly what’s right for you, again I’ve got a process and questions that we can work through and I can help you make that decision. But ultimately, you and your other partner or partners/founders will need to make that decision.
In the next video we’re going to move back out of these nuts and bolts structure issues to get back around to the question: how do you know you have the right partner? I’m going to give you a very, very handy tip for making sure that you have the right partner. We’ll jump back into that philosophical, relational and some of that softer stuff next in the next video.
Thank you for joining me this week. If you’ve got a comment, if you agree and even if you disagree, I want to hear from you. Reach out! That’s how I’m building out this series, based on your feedback. If you remember, that’s what it’s all based on is getting feedback about the book and people wanting to go a little bit deeper and get more to the nuances of this stuff. So, join the conversation. I appreciate you stopping by.