Does either of my readers remember Hall & Oates? They were among the most successful pop acts of all time, with hits like ‘She’s Gone,’ ‘Sara Smile,’ ‘Turnaround,’ and ‘Back Together Again.’
But they’re not together anymore. In fact, they recently emerged from painful and expensive litigation. Their saga is one more example of what happens for lack of a good Operating Agreement.
They signed a partnership agreement when they were young, successful, and close friends. As they drifted apart musically their interests were no longer as completely aligned. Disagreements crept into their friendship, disagreements that their partnership agreement hadn’t anticipated. John Oates tried to sell his stake in their business; Daryl Hall sued to stop him. The words they used were typical of this situation, words like “betrayal” and “outlandish.”
The litigation was settled but the friendship is finished and the wounds won’t heal. Both declare they will never work together again.
Their partnership agreement failed to address the most important question that any Operating Agreement should address: how we get away from another if things don’t work out, treating one another fairly and inflicting as little emotional and economic damage as possible?
I’ve seen this play many times, just with different actors. One client didn’t want to spend a few thousand dollars on an Operating Agreement because his partners were close friends. By the time the litigation was finished, he had paid me in the seven figures and both the business and the friendship were destroyed.
A good Operating Agreement should address, among other things:
- Who puts up how much money, when, and what happens if they don’t.
- Who makes decisions.
- How the partners can get away from one another.
- Ownership percentage.
- Compensation.
- How the partners share profits.
- Time commitment.
- Whether partners can compete.
- What happens on death, disability, retirement, etc.
You’ll notice that none of those things is industry specific. Operating Agreements are about people, and people are the same.
Those can be tough issues to discuss at the beginning of a business relationship, like a bride and groom negotiating a pre-nuptial agreement. The good news is that all of them can be dealt with.
Two tech guys come to me asking for documents: a new corporation, a stock option plan, an inventions agreement, an offer letter, corporate resolutions, a contribution agreement, all the things to start a unicorn. What they never ask for is a good Operating Agreement. Because, you know, they’re friends.
In every business, the Operating Agreement is the most important document of all, like the foundation of a sturdy house. Put it in the (digital) drawer and know you’ve saved yourself lots of time and money, and possibly your friendship.
Questions? Let me know.
Markley S. Roderick
Lex Nova Law
10 East Stow Road, Suite 250, Marlton, NJ 08053
P: 856.382.8402 | E: mroderick@lexnovalaw.com
