Business Start-ups: What you need to know

Although the volatile modern economy has left many millennials unable to secure meaningful employment, advances in technology and the advent of social media have created an emboldening platform for those who wish to create their own destinies as entrepreneurs. Most businesses start off small, with a good idea and a group of friends or colleagues who believe in developing and growing that idea. You need only to look at your phone for the proof. Names such as Evan Spiegel, Bobby Murphy and Reggie Brown of Snapchat come to mind or Kevin Systrom and Mike Krieger of Instagram.

However, forming and operating a start-up business requires more than just passion and drive. It also requires the right tools to be in place. All too often, young entrepreneurs view the formalities associated with starting a business as an unnecessary obstacle, particularly, if all those involved have a long standing friendship or relationship prior to the formation of the business relationship. However, without careful planning, there are many unknown contingencies that may occur in the future, which will not only affect the business, but the friendships that existed prior to the business.

A recent example of this can be seen in the on-going legal battle involving Raj Peter Bhakta and his farm-to-bottle whiskey brand, WhistlePig. Bhakta launched the company in 2007 and, after experiencing significant growth, began taking on investors, including longtime friends. Today, WhistlePig is estimated to be worth about $100 million dollars.

In April of 2016, the board of managers of WhistlePig, consisting, in-part, of Bhakta’s friends, notified Bhakta that they believe he violated his duty as operating manager of the company. A basis for the board’s decision included Bhakta being cited on suspicion for driving under the influence of alcohol. The board called an extraordinary board meeting to discuss and vote upon Bhatka’s removal from his position as operating manager. While Bhatka’s potential removal would not strip him of his 50% ownership in the company, eliminating him from his position would allow the remaining members to authorize selling the company, the operations of which are located on a Virginia farm where Bhatka lives with his children and wife.

Certain basic formalities, such as operating agreements and shareholders’ agreements, govern the operation of a business, and answer imperative questions such as when an owner can be or must be bought out by the company or whether former owners are free to compete with the business. In addition, the governing agreement can limit the legal avenues and remedies available to avoid costly litigation. Resolutions, formal documents that endorse actions taken on behalf of the business entity, can limit future challenges on such actions. The old adage “it’s not personal, it’s business” still resonates in today’s society and adhering to business formalities can ease the potential troubles of operating a business with friends or colleagues. In the long run, the costs of properly documenting your business relationships with friends and investors are outweighed by the costs of fighting with them and the incalculable cost of losing a friend.  Contact Julia Wu at jw@mbm-law.net or John Prorok at jhp@mbm-law.net if you have any questions relating to this article.