In the early days of building a business from the ground up, third parties, who often are family members or friends, may come together to support your endeavor. These individuals eventually may expect repayment for their services in the form of ownership interests in your company. This issue may not come up until later when your company is fully functional and profitable. When this situation occurs, disputes may arise regarding the degree of ownership that the third party has and the role they will continue to play in your business.
We have years of experience handling disputes that can arise within partnerships, LLCs, and other business entities involving third-party investors. An Arizona commercial litigation attorney at Provident Law® can advise you and your business of your legal rights to ownership and your duties to any third-party investors. We can also represent your interests if litigation ensues. In addition, we can explore the various legal options available to you, determine the best strategy for addressing the situation, and work to resolve the dispute effectively and efficiently.
Communication is Key
When a third party supplies capital or other valuable services to a business in its infancy, the relationship between that third party and the business owner can become complex. Each party may have expectations about their relationship that the other party does not necessarily share. As a result, parties who enter this type of financing arrangement should clarify the role of the third party and their ownership stake, if any, in the company going forward.
Ideally, the parties should address these issues when the financing occurs. However, all too often, in their rush to secure financing and their singular focus on moving the company forward, the parties delay these discussions, which can increase the risk of disputes in the future. You need clear communications to avoid ending up with an unexpected business partner or investor who wishes to take a very active role in your company. Even worse, that person may not wholly share your vision for the company or may not even understand the industry in which your company is operating. Therefore, communicating and documenting these relationships in writing is critical to avoiding misunderstandings and disputes in the future.
When Disputes Arise
If a dispute with a third-party investor arises over ownership in the company, the first step is to look back at any documentation of what occurred at the time of the investment. In some cases, corporate records may reflect the investment, which makes the case more straightforward. In other cases, the evidence may be more subtle or informal, such as emails, text messages, or social media posts. Essentially, you must scrutinize everything in writing about your company, including promotional materials and websites, to determine the existence and extent of the third party’s ownership rights in the company.
Many individuals believe that if a company does not give out formal stock or membership certificates, or execute an operating agreement, then third-party investors and others asserting ownership rights in a company have no such rights. However, that is not the case. Legally, depending on the circumstances, individuals may have ownership rights in companies when they have invested in them if the company founders promised them an ownership stake and they relied on those promises.
You may be able to resolve these disputes through negotiations or alternative dispute resolution. However, if you cannot work out an amicable resolution informally, then litigation may be necessary. In this situation, a judge or jury will determine the ownership rights, if any, the third party has in your company and the extent of those ownership rights. This uncertain outcome underscores the need to document these relationships from the outset to prevent this situation.
Contact Us for Assistance with Your Commercial Law Issue Today
The commercial litigation attorneys at Provident Law® have over 200 years of combined legal experience representing clients in commercial litigation matters. We are well-positioned to help you efficiently and economically resolve all types of commercial disputes, including those concerning non-disclosure agreements. We aim to build a long-term relationship with you as we work together to proactively address and solve the most complex legal problems that your business may face. Contact a commercial litigation attorney today by calling (480) 388-3343 or reach out to us online to set up a time to see what we can do for you.