When people start a business together, they’re usually excited, optimistic and focused on growth. They trust each other. They share a vision. They believe they’ll always be aligned. In many ways, it resembles the beginning of a marriage.
Nobody starts a business expecting a dispute with their co-founder. Nobody launches a company thinking about deadlock provisions, compulsory share transfers or exit mechanisms. Sadly, lawyers do.
Some of the most successful businesses I have worked with have, at some point, gone through the corporate equivalent of a divorce. And just like a divorce, the outcome is often messy, costly and painful.
The myth of founder harmony
Most shareholder and founder disputes begin because someone becomes unhappy, or because people change. One founder wants to scale aggressively while another becomes more risk-averse. One wants to reinvest profits while the other wants dividends. One is working 70-hour weeks while the other is gradually stepping back. One wants to sell. One wants to stay.
None of these situations necessarily involve wrongdoing. They simply involve people whose priorities have evolved in different directions. Burnout, disengagement and cashflow pressure are also common causes.
The challenge is that many businesses have no roadmap for dealing with these situations. Instead, they find themselves trying to negotiate the rules in the middle of a disagreement. That rarely ends well.
The difficult conversations nobody wants to have
When founders start a business, they will spend countless hours discussing branding, products, pricing and growth. Far fewer spend time discussing what happens if one of them wants to leave, stops contributing, becomes ill, or disagrees on a major decision. What if someone wants to sell their shares? What if one founder starts a competing business? What if an investor wants to buy the company and only one founder wants to proceed?
These conversations can feel uncomfortable. Ironically, avoiding them often creates the very disputes everyone hopes to avoid. That is why good lawyers raise them at the outset.
Why a shareholder agreement is really a business pre-nup
A sensible pre-nuptial agreement is not prepared because a couple expects to separate. It exists because sensible people understand that circumstances can change. The same principle applies in business.
A properly drafted shareholder agreement creates clarity around decision-making, share transfers, founder exits, deadlock situations, valuation mechanisms, good and bad leaver provisions, protection of confidential information, restrictive covenants, and the future of the business if relationships deteriorate.
Its purpose is not to prepare for failure. Its purpose is to protect the business and preserve relationships when difficult situations arise.
Case study: the founder who checked out
I recently advised a business where two friends had built a successful company together. Over time, one shareholder gradually disengaged. For more than a year they contributed very little to the day-to-day operation while the other shareholder continued carrying the workload, responsibility and financial risk.
There was no shareholder agreement. No bad leaver provisions. No agreed valuation mechanism. No clear exit route. The departing shareholder demanded a full market valuation for their shares despite having contributed little to the business for a significant period. The remaining shareholder faced an unenviable choice: personally fund a buy-out, risk expensive litigation, or potentially close the business altogether.
Fortunately, we were able to negotiate a commercial settlement. However, much of the cost, stress and uncertainty could have been avoided had there been a properly drafted shareholder agreement with appropriate bad leaver provisions and a clear valuation mechanism.
Case study: the founder who became a competitor
In another matter, one founder established a competing business while remaining involved in the original company. Questions arose regarding clients, confidential information and competing interests. Allegations of breaches of fiduciary duties followed. Once again, there was very little documentation governing the relationship between the founders. No meaningful restrictions, no clear obligations on departure, no agreed framework dealing with competition after exit. The absence of documentation made it harder and more expensive to untangle.
When business and personal relationships collide
Some of the most challenging disputes I have encountered have involved not just business partners but husbands and wives. The paperwork can feel unnecessary when the owners are married. After all, what could possibly go wrong?
Unfortunately, when relationships break down, the consequences can be devastating. Unlike a traditional shareholder dispute, the parties are often dealing with the emotional strain of a personal separation at the same time as deciding the future of a business. One party wants to continue running the business. The other wants their investment realised. Neither has the financial resources to buy out the other. Outcomes vary from partial buy-outs and forced sales to closure of otherwise profitable businesses.
I have also seen cases where no agreement could be reached at all, leading to prolonged deadlock that effectively paralysed the business. Staff become distracted by uncertainty. Customers notice tension. Decision-making slows. Growth stalls. The business itself becomes collateral damage.
So what happens when there are no documents?
One of the biggest misconceptions is that the absence of a shareholder agreement means there are no rules. That is not the case. When disputes arise, parties are often left relying on company law, directors’ duties, implied rights, past conduct and whatever evidence exists in emails, messages and informal arrangements.
Well-drafted shareholder agreements often provide a clear roadmap for resolution. Bad leaver provisions can determine how shares are valued or transferred where a shareholder resigns, competes, breaches obligations or departs in circumstances justifying a reduced valuation. Pre-agreed valuation mechanisms, compulsory transfer provisions and deadlock clauses can all help prevent disputes escalating into litigation.
Sometimes separation is the best outcome
One of the biggest misconceptions is that a founder exit automatically signals failure. In reality, some of the healthiest outcomes occur when business partners recognise they are no longer heading in the same direction. The alternative can be years of frustration, resentment and stagnation. A structured exit allows both parties to move forward while protecting the business they worked hard to build.
Many founders say they do not need a shareholder agreement because they trust their business partner. The agreement is not there for the relationship you have today. It is there for the difficult conversations you hope you never need to have.
