A joint venture split equally between two parties is usually agreed quickly, as a fifty-fifty division signals respect and shared commitment. The difficulty is that equal ownership removes the feature every company relies on to make decisions: a majority. When the founders agree, the structure performs well, but when they do not, nothing in it resolves the disagreement, and the venture’s fate depends on how carefully the documents anticipated that day.
DEADLOCK IS BUILT INTO THE STRUCTURE
Where the board is equally constituted, and decisions require the support of at least one director appointed by each party, either party can block the other. Budgets, senior hires and pricing policy can all stall, and the stall is often more damaging than any single bad decision, as a company without an approved budget frequently cannot spend, hire or fund the growth the venture was formed to pursue. Agreements should identify which matters genuinely warrant a veto and which day-to-day decisions should proceed without unanimity.
DEADLOCK CLAUSES THAT START TOO LATE
Most agreements contain a procedure for resolving deadlock, typically escalating from executives to mediation and then to a forced sale or buyout. A frequent flaw is a waiting period before the final step becomes available, sometimes three years. During that time, the procedure cannot conclude, at the stage when a young venture is most fragile and most likely to disagree over its first budget. The procedure should operate from the outset, or at least cover disputes that threaten the company’s ability to function.
BUYOUT MECHANISMS FAVOUR THE PARTY WITH MORE CASH
A popular tool is the shoot-out, in which one party names a price and the other must either sell at that price or buy at that price. It appears neutral, but it may favour the better-capitalised party, as the less well-funded partner may be unable to credibly exercise the purchase option. Where one party is an established company and the other a startup, a clause intended as protection can become a route to acquiring the startup’s stake. Alternatives reduce this effect, and the right choice depends on the parties’ relative resources and objectives.
EXIT RIGHTS THAT EXIST ONLY ON PAPER
Founders often assume that after an initial holding period each may sell its stake. Agreements frequently constrain that freedom in ways that strand the seller: a requirement to offer the shares to the other party at a valuer’s price before approaching the market, with no ability to sell to a third party at a price the market will pay; no restriction on the identity of the eventual buyer, including a competitor of the remaining partner; and sale processes in which neither party is obliged to accept any offer. Read together, such provisions can leave a party with no dependable route to realise its investment short of a dispute or a default.
OWNERSHIP OF THE CORE ASSET
In technology ventures, the principal asset is usually software or a data-driven product. The agreement should state who owns what the venture creates, who owns what each party contributed, and what happens to each on exit. Where one party builds the product and is paid for it, terms that make the transfer of ownership conditional on full payment can give that party a hold over the venture’s most valuable asset, and payment itself can become subject to the deadlock. These points, together with the commercial terms of any development contract, should be settled before signing.
CROSS-BORDER VENTURES CARRY ADDITIONAL RULES
Where one party is foreign, the exchange control rules of the venture’s home country often regulate the price at which shares may pass between resident and non-resident holders. A buyout formula that appears sensible commercially, such as a premium payable on default, may be unlawful as drafted, and filings or approvals typically attach to each issue and transfer of shares. The agreement should allocate responsibility for these requirements and confirm that its pricing mechanics comply with applicable law.
FUNDING FAILURES
The agreement should also state what happens when a party cannot or will not fund the venture. Provisions that allow a non-paying party to keep full governance rights despite dilution, or that treat a funding failure as both a curable shortfall and a default carrying severe buyout consequences, leave the parties to argue over which consequence applies at the moment cooperation is weakest.
CONCLUSION
Equal ownership can be the right choice, particularly where each party contributes something the other cannot replace. The structure succeeds when the documents were written for the day the parties disagree. The points above indicate not just where to look, but where seemingly straightforward provisions can produce unintended consequences. How each should be resolved depends on the parties’ relative size, contributions, jurisdictions and ambitions, and those judgments are best made before signing, while both sides still share an interest in getting the terms right.
Buyers don’t always pay the full purchase price at closing. Business sales are sometimes structured with deferred consideration, where a portion of the purchase price is paid at a later date rather than upfront at closing. This includes payments made in instalments or contingent on an earn-out.
Authors: Shantanu Mukherjee
