Operating Agreements: Clauses That Prevent Founder Fallouts

A well-drafted operating agreement prevents disputes before they happen. These clauses address the issues that commonly cause founder conflicts.

Essential Clauses

• Capital contributions and ownership percentages
• Distributions and profit allocation
• Voting rights and thresholds
• Buyout provisions and valuation methods
• Non-compete and non-solicitation
• Dispute resolution process

Deadlock Provisions: When Partners Disagree

What happens in a 50/50 partnership when you disagree on a critical decision? Without a "Deadlock Provision," the business freezes. A good agreement includes a mechanism to resolve this—whether it's a "Shotgun Clause" (one partner names a price, the other must buy or sell), mediation, or a coin flip (rare, but it exists).

Drag-Along and Tag-Along Rights

These protect minority and majority shareholders during a sale:

• Drag-Along: If the majority owner finds a buyer for the whole company, they can "drag" the minority owners into the deal, forcing them to sell their shares at the same price. This ensures a clean exit.
• Tag-Along: If the majority owner sells their stake, the minority owner has the right to "tag along" and sell their shares to the same buyer at the same price, preventing them from being stuck with a new, unknown partner.

The "Deadlock" Provision

In a 50/50 partnership, what happens when you disagree? Without a deadlock provision, the business freezes. You cannot pay bills, hire staff, or sign contracts.

Solution: We draft "Shotgun Clauses" or "Buy-Sell" triggers. For example: Partner A names a price. Partner B must either BUY Partner A's shares at that price or SELL their own shares at that price. This forces fair valuation and guarantees a way out.

Tag-Along and Drag-Along Rights

These protect minority and majority owners respectively.
Drag-Along: If the majority (60%) wants to sell the company to Google, they can force the minority to sell too. This prevents one small shareholder from holding the deal hostage.
Tag-Along: If the majority sells their stake, the minority has the right to "tag along" and sell their shares at the same price, so they aren't left behind with a new, unknown partner.

Is an Operating Agreement filed with the state?

Generally, no. It is an internal private contract. However, banks will ask for it to open an account, and investors will demand to see it.

Can I change it later?

Yes, by amendment. The agreement itself states what vote is required to amend it (e.g., unanimous or majority).

Disclaimer: This article is for general information only and is not legal advice.