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3 Legal Strategies for Resolving Co-Founder Disputes in New Zealand

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Launching your start up can be an exciting time. However, a common challenge faced by many start ups is co-founder disputes. Disagreements between co-founders can threaten the stability of your start up, making it important that you know how to address these issues when they arise. This article will take you through three legal strategies for resolving co-founder disputes in New Zealand.

Why Do Co-Founder Disputes Happen?

It is first important to understand why co-founder disputes occur. Such issues may arise for various reasons, including differences in:

  • the goals and vision of the business;
  • decision-making approaches;
  • financial strategies, such as opinions on ownership equity; or
  • expectations of the other party

A dispute can range from a small, easily fixable matter to a large conflict that might seriously impact the business.

Irrespective of why a dispute occurs between you and your co-founder, you need to know how to resolve the dispute. If you and your co-founder do not resolve the dispute, your business will likely suffer. Below we discuss three legal strategies, you and your co-founder may rely on, to resolve your dispute. 

1. Establish Clear Legal Agreements

One of the most effective ways to avoid and respond to co-founder disputes is by drafting clear legal agreements at the beginning of the co-founder relationship. 

Such agreements should outline each co-founder’s:

  • roles; 
  • responsibilities; and
  • ownership stakes in the business. 

Key documents to consider include:

  1. Shareholders’ agreement: This is a critical document that outlines the rights and obligations of the co-founders and any other shareholders. It addresses key issues, dispute resolution mechanisms and profit and loss allocation. 
  2. Founders’ agreement: This document sets out the co-founders’ relationship. It details the rules for how the business will be managed and by whom.  

It is important to have all co-founders take part in drafting these documents. Doing so ensures that the expectations of all co-founders are aligned. Having all parties involved in the decision-making process also helps foster a sense of transparency, ultimately enhancing the effectiveness of dispute-resolution mechanisms. 

2. Consider Alternative Dispute Resolution Methods 

Another key strategy for resolving co-founder disputes is prioritising alternative dispute resolution methods. This includes mediation or arbitration. 

Mediation

Mediation is the process of having a neutral third party oversee discussions between the disputing co-founders. The purpose of mediation is to help them reach a resolution that works for them both. The role of the mediator is to help the parties find common ground. The mediator is not there to impose a decision on the co-founders. 

The benefit of mediation is that it is quicker and inexpensive compared to going to court. It also encourages amicable dispute resolution. 

Arbitration

Arbitration is a more formal process than mediation. It refers to having a neutral arbitrator hear both sides of the argument. The arbitrator’s decision is then binding. 

Similar to mediation, the benefit of arbitration is that it is faster and cheaper than going to court. However, issues may arise if one or both parties to the dispute disagree with the arbitrator’s decision.

3. Treat Litigation as a Last Resort 

Co-founder disputes may escalate to a stage where litigation becomes required to resolve the issue. The downsides to litigation include that it can be:

  • expensive;
  • time-consuming; and
  • cause irreparable damage to the co-founders’ relationship.

However, it may be the only option if alternative dispute resolution methods do not work.

Co-founders should seek advice from experienced business lawyers before pursuing mediation to ensure it is the best option.

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Tips for Resolving Co-Founder Disputes 

When navigating co-founder disputes in New Zealand, there are several key considerations to keep in mind:

1. Act Quickly

Leaving conflicts unresolved for too long can make them harder to resolve. Addressing co-founder disputes as early as possible will help prevent conflicts from escalating. This will help reduce damage to the business.

2. Focus on the Business Interests

It is critical to focus on the business’s best interests in a dispute. This means putting the business above personal grievances or differences. Focusing on your start up’s goals can help guide negotiations towards a resolution that works for everyone.

3. Seek Legal Advice

Overcoming co-founder disputes requires a solid understanding of New Zealand’s business laws and regulations. This requires co-founders to seek legal advice from a qualified lawyer who understands the ins and outs of a business dynamic.

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Guide to Resolving NZ Business Disputes

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Key Takeaways

A common challenge faced by many start ups is co-founder disputes. Disagreements between co-founders can threaten the stability of your start up, making it important that you know how to address these issues when they arise. Some strategies for addressing co-founder disputes include: 

  • establishing clear legal agreements;
  • considering alternative dispute resolution methods; and
  • treating litigation as a last resort.

If you need assistance with drafting a dispute resolution clause for your co-founders’ agreement or in resolving an active dispute you have with your co-founder, contact our experienced disputes lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your document. Call us today on 0800 005 570 or visit our membership page.  

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Emily Young

Emily Young

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