Disclaimer: As with many client case studies, the names of the people have been changed to protect the attorney client information. However, the facts and laws are real and should be considered accordingly.
Starting a business is an exciting adventure, but getting everything set up can feel overwhelming. In some instances, entrepreneurs become blinded by their optimism and avoid dealing with certain tasks that are critically important to the long-term future and viability of the business. This case study details the story of Matt and Ben, Harvard roommates with big ideas to launch a tech startup and how failure to have a hard conversation led to distrust and division in their once collaborative relationship.
The Case of the Start-Up Partnership Breakdown
In the early days of their tech start-up, college roommates Matt and Ben agreed to split ownership 50/50 and discuss the division of profits later. The business was off to a great start with $100,000 in savings and financial backing from friends, family, and investors. It was during the building stage that tension started to develop.
Matt worked tirelessly on tech for the company, pouring his time into product development day and night. Ben, on the other hand, stepped back after funding was secured, drifting away from all day-to-day operations. Neither anticipated that their differing roles would fracture the partnership.
It was when the startup reached success and the money hit that the tensions arose between the two partners. Matt believed his full-time commitment to and investment in managing the business warranted a larger share of the earnings. Ben, who had been critical to securing the initial funding, expected an equal distribution as originally contemplated. The problem? With no prior discussion on salaries, profit distributions, equity-based compensation, basically, how each would earn their fair share, they were now having to have “hard conversations” with very real financial consequences.
Understanding Partner Compensation Challenges
Although the partnership between Matt and Ben began with optimism, it was fractured as a result of the lack of clearly defined roles and contributions. The imbalance in workload led to resentment and growing tension. With no clear understanding of how or when earnings would be distributed, Matt and Ben struggled to reconcile their differing levels of involvement with fair financial rewards. The growing feelings of inequity caused each of them to view the other’s expectations as unreasonable.
To further complicate matters, their operating agreement failed to include critical topics like compensation, equity allocation, and decision-making authority. Without a written framework to navigate these disputes, the partners were left to negotiate in an atmosphere of mistrust and frustration. Their misaligned expectations about their roles and rewards were never addressed, leaving both partners blindsided when the financial discussions finally came to a head.
Building a Legal Framework to Address Partnership Issues
The issues faced by Matt and Ben are common among startups and small businesses. Our experience in working with similar situations emphasizes the importance of establishing a strong legal foundation early in the business relationship. To accomplish this, we use a structured approach to address four critical areas:
- Cost
- Compensation
- Control
- Contingencies
Matt and Ben’s story broke down through their failure to deal with the Compensation discussion.
Defining Partner Roles and Responsibilities
One of the most effective steps in resolving conflicts like these is to define each partner’s role and responsibilities. A clear agreement outlining the time commitments, operational duties, and leadership expectations for each partner helps set realistic standards for contribution and accountability.
Tailoring a Compensation Model
Equally important is the establishment of a compensation model tailored to the business’s unique dynamics such as:
- A fixed salary based on defined roles.
- A profit-sharing arrangement tied to the company’s financial success.
- A hybrid model combining salary with equity incentives.
Choosing the right structure ensures that compensation reflects the value each partner brings to the business while maintaining financial sustainability.
How Written Agreements Protect Your Business
Formalizing these agreements in writing is another essential step. A well-drafted operating agreement should include detailed provisions for compensation, equity splits, and processes for resolving disputes or accommodating changes in roles. Neglecting this documentation leaves the business vulnerable to internal conflict and legal uncertainty, as was demonstrated in Matt and Ben’s case.
By tackling these foundational issues early, partners can create a business environment that fosters trust, clarity, and sustainable growth. This approach not only protects the enterprise but also preserves the personal relationships that are often at the heart of successful partnerships.
The Outcome
The lack of a structured approach to compensation ultimately led to irreparable conflict between Matt and Ben. Without a resolution, the business faltered, and both eventually stepped away. While their professional relationship ended, so too did their personal friendship—a stark reminder of how unresolved business issues can strain personal connections.
Legal Takeaways for Determining Partner Compensation
Below are some key legal takeaways for partners building a business:
- Clarify Roles Early: Founders should address compensation, roles, and expectations before revenue starts flowing.
- Get it in Writing: Equity split alone is not enough. Salary, vesting, decision rights, and what happens if someone underperforms—everything requires a written agreement. A formal agreement and compensation model ensures everyone understands their rights and responsibilities from the beginning.
- Expect Evolving Dynamics: As businesses grow, roles may change, and compensation structures should be able to adapt accordingly.
- Have the Hard Conversations at the Beginning: Avoiding tough discussions early only makes them harder down the line.
Navigate Partner Compensation Models with ByrdAdatto
If you are entering a business partnership it is important to get legal advice early. Our legal team can help you navigate the intricacies of compensation and roles to maintain the health of the collaborative partnership. Contact ByrdAdatto to help you protect your business and relationships by having these necessary conversations at the start.
