Navigating Co-Founder Divorce in Your Startup with Silicon Valley lawyer Louis Lehot

Breakups are painful – both in business and in relationships. Similar to marital divorce rates, there is now also an increase in partner disagreements in thriving businesses.

Since the first case of COVID-19 was found in the U.S. on January 20, 2020, the pandemic has created several challenges for businesses, large and small, around the country. Owners and investors must now come to terms with the reality of an increase in “business divorces” in 2020 and beyond.

Even though it may appear as “just business,” the business divorce can create as much emotional stress and dram as a divorce between spouses. A business divorce can be full of emotions, blaming as well as very expensive legal fees. Oftentimes, the divided parts equal less than the pre-divorce total.

These days, certain industries can be extremely vulnerable to volatility in financial markets. So, it would be wise for owners and investors to examine positions with partners, investors and investments, and make hard decisions to protect their future.

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Most publicly held companies have diversified investor and owner bases with a corporate structure to address any business challenges. But some companies have a few partners and one or two main investors. While these businesses might face similar challenges coming from COVID-19, they operate through a partnership.

Through the global pandemic, certain companies may have had to respond drastically when business is not profitable. The crisis and required responses can be the subject of real disagreement among owners, and also could affect how owners resolve them. While some will look to sell shares and member interests, some may cause dispute resolution procedures and pursue help under a governing state statute. More often, there is an increasing number of situations where the owners find that business divorce is the best possible option.

According to The University of Miami Herbert Business School, with corporate divorces thorough due diligence is recommended to reduce information asymmetries. While industry and location knowledge is necessary, organizational culture is a crucial factor that needs to be assessed before entering into a merger. The report showed that unpredictable “shocks” within the industry and cultural differences were often to blame for breakups.

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In the pandemic, companies in a variety of industries have faced many of the same issues, according to Law360, such as demand for products may have fallen; supply shortages and delays are creating scarcity and increased costs; disagreements about employees no longer needed; businesses unable to fulfill contracts; fixed costs still due; and more.

At the beginning of COVID-19, there was a lot of information shared about challenging exit strategies like force majeure, frustration of purpose, judicial dissolution, impossibility, outs due to “material adverse change,” and management deadlock.

But the reality is that there is just no absolute certainty that solutions like these will be successful in an unprecedented pandemic. That is why it is crucial that all business partners deal head-on with the operative agreements in their business relationships, with extra scrutiny.

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