Equal shares in business partnership lead to its disintegration

A business partnership where co-owners have equal shares, disintegrates sooner or later – this is explained by many factors and confirmed by test.

Many “great” partnerships where owners had a 50/50 share, really broke up – for example, joint case of Vladimir Potanin and Mikhail Prokhorov, equal owners of KM Invest who could not agree for several years on the terms of the discrepancy of partners in the general business.

It is generally accepted that the most convenient division “according to the classics” is share distribution 51/49. In this case, 2% guarantee their owner decisive vote on all key organizational and corporate issues, if it is stated in the charter and corporate agreement. Such scenario implies partner inequality, but with mutual agreement the parties protect them from disputes over the distribution of votes and the spheres of influence. At the same time, the financial result can be shared between co-owners in equal shares.

For the positive development of partnerships, in fact, any (better not equal) share distribution is possible if made consciously. 50/50 in the vast majority of cases means simply unwillingness of partners to conduct uncomfortable conversation and therefore equal shares arise: 50/50, 33/33/33, 25/25/25/25.

At the same time, it is important to understand what exactly the size of their shares means for partners: is it the right to have a decisive vote, distribution of dividends from profit, receipt of share of the company’s value in its sale, additional financing from own money in case of problematic situations in the company.

When dividing a business on a parity basis, partners can recognize equality of each other, but omit the primacy and degree of involvement in the company management process. This understatement sooner or later will pop up and expose the problem of competencies and engagement of co-owners. When discussing the issue of headship, it becomes clear that the decisive role in the company must be determined based on competence and the degree of involvement of each of the partners, and not the size of his share. Shares in companies determine the degree of risk and financial participation of each party, but strategic decision-making is almost always fraught with risks, therefore, it is necessary to manage the company’s policy based both on the level of competence of partners, and on the size of each partner’s contribution.

Partners who are on a 50/50 path believe the co-founders, investors and depositors initially have the same status, including equality of capital, investments, personal time and competencies. If “volume” or the degree of importance of each partner’s voice will be divided equally, colleagues will inevitably face situations where the parties cannot overcome each other. Partnership turns into a rivalry, and such relations have two ways of development:

  1. One of the co-owners alone makes decisions, seizing power under assistance of additional resources. For example, at the business formation stage, with bilateral consent, one of the company’s partners took the position of CEO – in this case, the 50/50 distribution may play a cruel joke with the second partner. The CEO will take up this post indefinitely, since it can only be replaced by a majority vote, including his own voice – this is what causes at the same time the comical and tragic nature of the situation.
  2. With mutual agreement on ethical behavior, both partners will hold neutrality without the opportunity to convince each other. As a result, there are omissions, and partnerships and business suffer from stagnation.

So why is the failing likelihood of a business, which is divided in equal shares between partners, much higher? The answer is simple: partners chose “equal shares” not because they discussed everything in detail and calculated shares, but because it was more convenient to avoid an awkward conversation. But time and changing circumstances put everything in place. In a situation where one of the partners acts by force, the second will leave this business. And in the case when co-owners block each other’s decisions and remain inactive, business dies – the market (competitors) eats it.

And what if we default to treating shares as a ratio of invested monetary or human capital, connections and resources?

The ratio of capital is the size of the share, which indicates a percentage of profit, proceeds from the sale of the company and contribution to co-financing. It is not worth for effective partnership cooperation to introduce the question of headship into the distribution of shares. Sharing power with direct conversation about the decision-making system is much more effective and more useful than using shares separation.

So, the size of the share in its classical sense (that is, the headship of the voice, as well as dividends, and the division of money when selling a business) should not be 50/50.

Such business separation will sooner or later lead to conflict and end of partnership. Equal shares are acceptable and will not cause problems in the future only if the partners agree separately on who and in what matters is the main person (regardless of the size of the shares in the company).

By Dmitry Grits, Expert in building business partnerships, author of the “Partner Session” technology

Previous ArticleNext Article