Veto Rights In A Startup
As a Colorado Startup Lawyer, I found Norm Brodsky’s The Right Way To Approach A Start-up to be a short but insightful article on a recent experience he had with one of his startups. What I found to be the most interesting item in his story was that among his business partners, he retained “a veto over the location” of the business.
This brings up a great question: “How does one get a veto in a startup?” Well, like anything else you agree on with your partners, you negotiate. But then what do you do? … Write it down! Previously, we wrote about concens that all startups should not avoid doing early on. Number one on the list was choice of business entity. It is during this process that you will best be able to make and memorialize agreements as to how the business will be run. In a Limited Liability Company (LLC), for example, it will come in the form of an Operating Agreement. An operating agreement is the governing document of the company, which, while similar in many respects to a stock corporation’s by-laws, contains the agreement of the members as to how the LLC will conduct its day-to-day business. It is in the operating agreement you could include a provision providing for a “veto” much like Mr. Brodsky had in his startup.
It is best to memorialize any (and all) such agreements early on in the startup to avoid (or at least minimize) disputes at critical points. An agreement for a veto may not be necessary in your situation, but there may be something else you want – or are asked to give. In Mr. Brodsky’s situation, the location of the business was a critical decision to him – so much so that he used his veto a couple of times. I would venture a guess that when Mr. Brosky exercised his veto power, his business partners were at least a little annoyed. But having a solid agreement will help in such situations as reasonable minds can simply point to the agreement and move on.
Certainly, agreements are always up for interpretations, so be as clear and forthright when drafting them. Drafting an operating agreement should be done by a lawyer or even lawyers depending on its scope and the parties involved. If you are asked to give something up, it is always a good idea to consult your own lawyer – i.e., one who represents you and your interests, not the business itself.
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