By Douglas D. Morris
For the Oregon Beer Growler
One of the founding members of your brewery, or any business, is going to leave at some point. In the early years, some people discover that they are not as entrepreneurial as they thought. Owning and running a startup company is not a good fit for them. In later years, some people are simply ready to move on to their next challenges in life. And the company's needs will evolve and grow over time, but some founders may no longer be able to contribute.
The inevitable transition will be unexpected and difficult in many cases. Yet with some advance planning, the company can survive a transition.
Repurchase the Ownership Interest
The founding owners should have a plan for what to do with a departing founder's ownership interest. No single plan works for every company, but there are several things that the owners can consider.
The owners can agree that if a founder leaves, the company or the remaining founders have the right to buy the interest from the departing founder. Otherwise, if a founder were to leave the company but remain an owner, the departed founder would get a "free ride" on the other founders' continuing efforts.
If the owners have the right to purchase the interest, it helps to have an agreement on the purchase price and payment terms while finding the right balance. If the price is too low, it might create an incentive to drive out a founder and purchase that individual’s shares at a low-ball price. But if the price is too high, then a founder might remain with the company even though he or she is no longer contributing.
There are many ways to value the interest, ranging from collaborative to dramatic. The founders can negotiate and agree among themselves. They can agree to a formula, such as a multiple of last year's profits or sales. They can hire an independent appraiser. Or, if they can't reach any other agreement, they can use a "shoot-out" provision under which one person or group offers a price, and the other person or group decides whether they will sell out, or buy everyone else out, at that price.
The owners can also set up a schedule so that their ownership interests vest over time. The vesting schedule reflects the minimum time commitment the founders expect from each other in starting the business — it might be three to five years, or whatever the founders agree. If a founder leaves early, the unvested interests can be simply canceled and the vested interests can be purchased for the valuation mentioned before.
Protect the Company's Assets
The owners should also have a plan for how to manage and protect the brewery's important assets if a founder leaves. Various tools exist for protecting different types of assets.
A brewery has important relationships with its employees, distributors and customers. The founders could agree that a departing founder cannot interfere with those relationships for a period of time after departure. A non-solicitation or non-competition agreement could prevent a departed founder from recruiting company employees, interfering with the distributing relationship or setting up a competing brewery right across the street.
Additionally, the brewery’s valuable recipes, brand names, trade secrets, trademarks and intellectual property belong to the company — not to any founder personally. The company should have agreements with the founders confirming the company's ownership of intellectual property.
A brewery also has operating procedures and details to protect, such as bank accounts, social media accounts and too many other items to list. The company should set up these accounts (and other company assets) so that no one person has control of them. If a founder leaves, then daily operations need to continue smoothly.
A transition can be difficult, but these tools can help companies be better prepared for the departure of a founder. Some of the tools might not be needed for certain companies or might not be a good fit. Although these tools may be included in the original founding documents, they can be added and revised at any time as the company grows. If the founders periodically discuss and review these issues, they can make sure that they are still on the same page with each other and that the brewery is well prepared for a smooth transition.
Doug Morris is a member of Miller Nash Graham & Dunn’s business and alcoholic beverage law teams in Portland. His practice focuses on general corporate representation of businesses from high-technology and high-growth companies to breweries, nonprofits and social enterprises. Doug can be reached by phone at 503-205-2533 or by email at firstname.lastname@example.org.