Starting a business is an exciting time, but it can be marred by disputes with investors. These disagreements can take the form of management, financial, or ownership issues.
Although stressful, investor disputes can be settled out of court. It’s always wise to consult with a lawyer to understand your situation and select the most favorable outcome.
ContractsCounsel, an online legal network, connects you with experienced and vetted lawyers who can assist you through a range of investor disputes.
Read the rest of this article to learn about the most common types of investor disputes, how to prevent them, how to manage them, and when you should contact a lawyer.
What are the Most Common Investor Disputes?
There are many issues that can get in the way of founder-investor relationships and cause problems. Some of the leading concerns include:
- Expectation disagreements. Investors and founders could have different expectations and goals. For example, investors might seek faster growth opportunities that seem unreasonable to founders.
- Governance issues. Governance refers to how the trust is being managed and controlled. Common issues include board control, or who has the decision-making power.
- Financial issues. Concerns include expenses and financial mismanagement.
- Personality clashes. In some cases, founders and investors simply don’t get along, which can disrupt collaboration.
- Contract breaches. There could be a violation of the terms in the shareholder or investor agreements.
Stay alert for any signs that a dispute could be brewing. If the other party is starting to make accusations or tensions between you are breaking down communication, these are red flags.
Can You Prevent Investor Disputes?
It’s possible to stop a dispute from happening. Here are some strategies to adopt.
Keep Communication Open and Friendly
Although this can be challenging in the case of personality clashes, maintaining open and friendly communication will make it easier for either party to raise concerns and resolve misunderstandings as they arise.
Draft Transparent Agreements
Often, vague or confusing contracts that both parties have signed can land them into disputes. They might disagree over the terms or perceive them differently. This is why it’s crucial to get your contracts drafted by a professional, experienced lawyer on ContractsCounsel.
Simply post a project requesting the drafting of your investor contract on the ContractsCounsel platform. You’ll receive multiple lawyer bids, from which you can hire a lawyer who’s a good match for your requirements. They’ll draft clear, legal, and fair contracts with no loopholes.
Keep Investors Informed
No one wants to be kept in the dark, so strive to provide your investors with regular business updates, such as if there are changes to the business. This prevents uncertainty, which can breed resentment and disputes.
Have Clear Decision-Making Processes
Investors want to feel secure about who has decision-making power and how decisions are made. Being clear and open about this information prevents any ambiguity that could cause problems.
How Can You Resolve an Investor Dispute?
If you’ve found yourself in the middle of an investor dispute, there are ways to deal with it quickly and efficiently.
Communicate with the Other Party
It’s essential to reach out to the investor or founder and discuss the issues that have come to light. This will make resolving them easier than if you let them build up, while preserving your working relationships.
During communication, be empathetic. Listen to what the other party has to say and express your concerns. When you keep things professional and polite, you’ll be more likely to work together to find a solution.
Refer to Your Agreements
If your contract has been well drafted, it will contain all the important terms and clauses you need for your situation. Review your duties and rights, and the outlined dispute-resolution processes for guidance on how to proceed.
Maintain a Record of Communications
Keep a written record of communications between you and the other party. This should include agreements, decisions, and financial activity, as it will help you to strengthen your position.
Consider Mediation
If you can’t communicate one-on-one with the other party, hire a neutral third-party mediator to help you. During mediation, the mediator will oversee communication between both parties and facilitate constructive problem-solving strategies. This works well for both founders and investors because they’ll be in control of the outcome.
Hire an Arbitrator
Should mediation not be successful, you can hire an arbitrator. Similar to a mediator, an arbitrator is a neutral third party. However, they’ll listen to both parties’ cases and evidence, and then make a final binding decision on how the dispute should be resolved. Although more formal than mediation, arbitration is a good way to keep the dispute out of court.
What if Your Investor Dispute Can’t Be Resolved?
In extreme cases, the investor dispute doesn’t get resolved and parties don’t come to an agreement. This could happen because of investors wanting to exit the contract or if they’re in serious violation of it and you’re forced to take legal action.
A buyout or restructuring could be the best way forward. A buyout involves all parties agreeing on an exit strategy so that the dispute can be resolved by parting ways. Restructuring refers to changing the ownership or financial structure.
In such cases, it’s worth contacting a lawyer for assistance so that you make the best decision that prioritizes your business.
Should You Hire a Lawyer for an Investor Dispute?
Since investor disagreements can be challenging and complex, it’s valuable to get legal advice. Hiring a lawyer can help you in various ways. These include:
Reviewing all Documents
Lawyers will go through all the important documents pertaining to your case, such as investor contracts, with an eye for details or nuances you might have missed. They’ll check the parties’ rights, duties, and look for information about dispute-resolution processes.
Negotiating on Your Behalf
Whether it’s a buyout or settlement, a lawyer has the skills to negotiate with the other party. By being a neutral party in the situation, they’ll avoid making hasty or emotional decisions that could make things worse.
Clarifying Your Rights
It can be confusing to know how much of a legal standing you have in the dispute. After reviewing all your agreements and communications, they'll tell you what you can realistically and legally claim in the dispute.
Representing You in Court
A lawyer can support you during mediation, arbitration, or litigation. For the latter, they’ll collect evidence and documents to support your case in court.
Protecting Your Business
There could be collateral damage that occurs during an investor dispute. This could include IP ownership and voting rights. A lawyer will protect your business throughout the dispute-resolution process so you’re not blindsided.
Do you need a lawyer for an investor dispute?
Contact a vetted, experienced lawyer on ContractsCounsel. They’ll be able to help you deal with a stressful investor dispute while preserving your rights and minimizing your risks.
