Handshake Deals Often Go Sour. Don’t Let It Happen to You.

photo - handshake deals by Flazingo PhotosIt’s an all too familiar story. College students with a brilliant idea get together, start a hugely successful business then end up suing each other because handshake agreements end up being broken. These business founders may be brilliant when it comes to technology and marketing, but brilliant legal minds? Not so much. That’s why contracts are needed so the business founders know their rights and responsibilities towards each other and the business.

Whether the companies are Mom & Pop restaurants or budding billion dollar businesses common denominators for feuding founders are that they are friends or family, they optimistically think the close relationships will continue and can substitute for a binding business contract. These relationships often fall apart over money, whether the business is running out of it or is suddenly making a lot of it.

One example is Snapchat. It was founded by two Stanford University students who shook hands in their dormitory in early 2011, agreeing to partner on what they hoped would be the next big technology start-up, according to the Los Angeles Times. They got what they wished for but that didn’t mean the founders are living happily ever after. One co-founder was fired and the company’s foundation of oral agreements, notes on napkins and youthful enthusiasm didn’t stand the test of time. The company’s founders are now involved in litigation over breach of contract claims.

Co-founder disputes can happen in any type of business, large or small, but it’s the lawsuits involving blockbuster internet sensations like Snapchat (it’s in the process of obtaining more funding so the value of the company could grow to $19 billion, according to Bloomberg) that make the news. The feuding of Facebooks’s founders were detailed in the popular book and movie The Social Network. Hopefully the word is getting out that contracts and other documents are needed to sensibly start businesses. They can prevent a lot of emotional distress, time, energy and money being spent with litigating founders at each other’s throats, physically or financially.

One success story cited in the article is that of Tint. It was started in part by University of Southern California student Tim Sae Koo. He graduated a semester early in in 2011 to work full time on a class project that evolved into a business (an app to display social media content). There were five founders. There were disagreements on sales strategy and where offices should be located. Two founders left but kept shares in the company. Because Sae Koo got legal advice early and contracts were drawn up and partners going their different ways didn’t end up with them reuniting in a court room.

If you are starting up a business with others, or are currently a part owner of a business, you need to know the law concerning business ownership and how disagreements can be resolved without the destruction of your company and litigation. We also represent company founders involved in legal disputes with fellow partners or shareholders. Contact our office so we can talk about your business, applicable law and how your interests can be protected.