Words for Entrepreneurs – The Shotgun

A Shotgun Clause can help dissolve a partnership in a fair and orderly fashion… maybe. This article explains the basic mechanic of a Shotgun Clause, illustrated through real-life examples.

The last couple of years, I’ve had the privilege of coaching and mentoring a few young entrepreneurs. This is an activity that I find rewarding on many levels: the opportunity to give back, letting others benefit from my experience (as in: my many many mistakes!), being able to view the world through the eyes of aspiring and inspiring innovators. No matter the age difference, or maybe because of it, I also and always end-up learning a lot from these bright and driven individuals, that are often connected to trends and possibilities that weren’t available to us “back in the days” and which I didn’t even know existed today.

The one thing that always surprises me though is how common wisdom and ideas I used to take for granted, well, they just aren’t that commonly known after all. Oftentimes while discussing with mentees, I would refer to a concept and recognize that glare of puzzlement in their eyes, stop myself and ask them: “you know about that, right?”. “Nope” is the answer I get surprisingly often.

As I was investigating good topics for blogging, I asked myself how many words I can come up with which might not be widely known by people who are just getting started on their entrepreneurial journey. I launched the timer app from my phone and started a list of concepts. Lo and behold, I got over one hundred such ideas flowing to my virtual notepad in just a few minutes. And I know there’s even more where that came from.

Whether or not this turns into an actual series of blogs remains to be seen, but the only way to find out is to get started.

Legal disclaimer: I am not a lawyer and this article should not be considered as, nor used in lieu of, professional legal advice. Ideas expressed here are my own and are meant to help and educate. Seek legal counsel from a licensed and reputable professional before making any decision.

Without further ado, here goes with

The Shotgun

 Paraphrasing from the excellent article on Wikipedia, a Shotgun is a specific type of exit provision that may be included in a shareholders' agreement. The shotgun clause allows a shareholder to offer a specific price per share for the other shareholder(s)' shares; the other shareholder(s) must then either accept the offer or buy the offering shareholder's shares at that price per share.

When you start a business with someone, you never do it expecting things to go south and the partnership to end badly. Yet this happens time and time again, and often due to no fault from any of the involved parties. The Shotgun is an attempt to prepare for a fair and orderly breakup, in case things ever get to such a point.

To keep things simple, suppose this is an equal partnership, with each party having 50% of the voting shares in the business. As long as both parties agree on important decisions, all is well. But when a disagreement arises and attempts to reach a compromise fail, the business can get stuck in a standstill. If left unresolved, this can be the death of the venture. The best thing to do at this point might be for one shareholder to buy the other shareholder’s position. But who will buy who’s shares, and at what price?

The Shotgun answers those two questions in a deceptively simple and elegant way. Let the party who wants to end the partnership (the Triggering Party) make an offer to the other party (the Responding Party). The Triggering Party might be tempted to low-ball its offer, thinking that would allow her to get the whole business on the cheap. But if the offer is too low, then the Responding Party might say “You know what, this price is so cheap I’ll buy you instead for this amount and I’ll be the one making money from this business in the future”. The dilemma for the Triggering party is thus to figure out an offering price high-enough that she’ll be happy to receive it, but low enough that she’s comfortable paying it and still turn a profit by operating or later selling the business.

A friend of mine had a Shotgun clause with his partner. The partnership deteriorated over time, so he decided to trigger the Shotgun. Being the original founder, he felt confident only he could get the necessary financial backing, and he was also convinced his partner would just accept the offered money and leave. To his surprise and chagrin, the partner was able to raise the cash and willing to take over the business. My friend ended-up making some money on the transaction, but he lost the company he had founded and expected to run for the rest of his professional life. Ouch!

Another friend of mine did not have a Shotgun clause. The partnership also deteriorated, but without a clear path to resolve the situation, the business suffered, dwindled and eventually died. A clean Shotgun would have allowed one party to take over the business, and the other to make it out with some cash. Both would have been better off than where things ended.

In a third story I heard about, there was a great asymmetry between the partners means. One had money, the other didn’t. When the party with money triggered the Shotgun at a relatively low price considering the real value of the business, the other party didn’t have the cash and wasn’t able to raise enough funds to match the offer. The not-so-rich partner ended-up squeezed out of the venture for much less, arguably, than what his shares were actually worth.

So, what’s the lesson here? Are Shotgun clauses inherently bad or good? They are neither, of course. There are many situations where such a clause would make perfect sense, and just as many where the consequences could be detrimental to one or both parties. The only lesson is, you should always be prepared for things to go bad with your partners, investors, employees, etc. Entrepreneurship is a risky business, but it is also thrilling and full of all kinds of rewards, monetary or not. Prepare for the worst, and then work as hard as you can to achieve the best.

How about you? Were you involved in an actual Shotgun? How did it end? Please share your experience, thoughts and questions in comments below, or direct-message me!

Francis Dion is a serial tech entrepreneur with over 30 years of experience bringing software innovations to market world-wide.

#Startup #Entrepreneurship #ShotgunClause #Shareholders