Keeping Peace in the Family
My sister had a great idea for a product and started a business. I joined her and put in long hours, without compensation, for two years. My sister promised me 10 percent of the business in return. However, nothing was ever put in writing.
She kept at it, and in 2009, orders for the product took off. Our brother stepped in, investing hundreds of thousands of dollars, and the company is finally turning a profit. The question is, How much of it do I actually own? My sister says I own only 10 percent of what the company was worth when I left. She says my rightful share today is "minuscule," given the large infusions of cash from my brother. What is the fair division at this juncture?
Ownership disputes can be ugly. If the disputants are members of the same family, the potential for ugliness is even greater. For that reason, I always advise people to formalize ownership understandings with family members early on, rather than counting on mutual goodwill to resolve problems that may arise.
That said, the family in question may still have enough mutual goodwill to strike an agreement that is acceptable to everyone. I told the writer (who asked to remain anonymous; I'll call her Karen) to imagine that the growth capital had come from an independent investor rather than her brother, and that the investor had received 40 percent of the stock in return. That would have left 60 percent for Karen and her sister. Assuming they were both willing to honor their original agreement, Karen's sister would have ended up with 54 percent (that is, 90 percent of 60 percent) of the stock, and Karen would have gotten 6 percent. The sister would thus have retained control of the business, while Karen and the brother would have been compensated for their contributions.
I urged Karen to sit down with her siblings as soon as possible and work out some such agreement. They should then turn it into a legal contract among the three of them. Aside from clarifying what they've settled on, they will need a formal ownership agreement in the future if Karen's sister eventually decides to seek outside funding. Mutual goodwill isn't something you can rely on when doing deals with professional investors.
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.