The Many Faces of Business Conflict

The Many Faces of Business Conflict

& why they can bring down the best of businesses if not swiftly handled

Write this down.  Don’t forget it.  Conflict kills great businesses. It erodes productivity, crushes morale, and sends talented employees fleeing for healthier workplaces. Internal disputes divert focus from your core mission, while unresolved issues can lead to costly battles and irreparable reputational damage. Don’t let your company be its next victim. By addressing conflict proactively and strategically, you can protect what you’ve built. Invest in solutions that foster a culture of collaboration and seek expert guidance to navigate legal complexities. The future of your business depends on it.  So, with that pointed warning out of the way, let’s break down the many faces of business conflict so that we can understand what causes them and more importantly how best to resolve them.

Founder / Founder (Business Partners)

Fail Rate w/in 5yr:  Approx. 50%

Common Reasons For Conflict:

• Stress Boilover. Owning a business is very stressful.  Resource constraints or a difficult operating environment heighten that stress.  Scarce resources like budget, manpower, or technology can lead to internal competition and resentment between departments or teams.  If not worked through in a constructive way, sometimes that stress can boil over into the founder relationship leading to fractures that cannot be mended.

• Leadership disputes. Even if business owners/founders start the business in complete alignment, visions naturally change over time and disagreements over vision, strategy, or decision-making can paralyze a company.
• Divergent priorities. Different departments or individuals may have conflicting priorities, making it difficult to align efforts and achieve common goals. This can be more prevalent with one technical and one non-technical partner.
• Value clashes. Differences in values can create tension and impede collaboration. Values are hard to change so if there is a difference in values among founders, it can quickly lead to a point of no return.
• Run Its Course. Over time, a partnership can merely run its course.  People can aspire to do different things and want out of the partnership that is binding them and their time to something different that what they aspire to do.  Those aspirations can be business related or personal (I want to retire or wind down).

Best Actions:

• A partner or partners are bought out and the other(s) continue to operate the business.
• Divide and Prosper. If you are not aligned on the go-forward vision and have divergent priorities, then break up the assets and champion your vision in separate directions.
• If your partnership is on the outs, but you have a great business.  It may be time to sell.  Put your differences aside, keep quiet and run a sale process to allow each person to go their separate way with some added capital.
• Dissolve. Sometimes the best option is simply to shut down the business.

JV / Strategic Alliance Feud

Fail Rate w/in 5yr:  60-70% (yikes!)

Common Reasons For Conflict:

• Underperformance. Companies form joint ventures because they believe that together they will accomplish something great.  However, sometimes the synergies and vision simply don’t come together.  So you are left with an underperforming venture and two companies wishing they had never formed it.
• Bad Actor. Sometimes one party will get greedy and try to take more than their share.  Or in the inverse, fail to deliver on their obligations in the JV agreement.  This breach will often lead to a swift separation, often involving litigation.
• Bankruptcy of Partner. Even if the JV is performing well, sometimes one of the partners struggles and goes bankrupt, leading to a need for the JV to terminate.
• Neglect. Just because partners meet their legal obligations, does not mean the JV is getting the effort it deserves.  Neglect can lead to disdain and ultimately a break up if partners are not active in addressing the issues.

Best Actions

• Buyout. One partner buys out the other’s stake in the venture. This can be negotiated and may involve factoring in valuation, debt, and future profits.
• Asset Division. The assets of the venture are divided between the partners based on their original investment or other agreed-upon terms.
• Liquidation. The venture sells its assets and distributes the proceeds to both partners or eats the investment and closes up shop.

Founder / Investor

Friction/Separation Rate:  Disagreements between founders and investors are quite common, occurring in up to 50% of startups, although not all end in separation or legal battles.  As many as 10% of early stage companies have had secondary sales in the last 5 years, meaning investors exited rather than sticking with a company.

Common Reasons For Conflict:

• Divergence on Vision. The two sides must work early and often to ensure they have alignment on the long term vision before getting into a binding relationship. Divergence in strategy and vision can lead to disagreements on resource allocation, marketing strategies, and even product development.  Naturally, more pivots lead to a higher likelihood of conflict.
• Regular and open communication is essential for trust and successful collaboration. When founders withhold information or fail to keep investors updated, it breeds suspicion and mistrust. This can lead to frustration and conflict, especially if investors feel they are not being kept in the loop about important decisions or challenges.
• Founders often want to retain control of their company, while investors may seek board seats, veto power, or other mechanisms to influence decision-making. This can create a power struggle, particularly if the terms of control are not clearly defined or expectations are not aligned.
• When you take outside capital, your performance is put under a magnifying glass. It can get hot under that magnifying glass when you fail to meet projections or expectations.
• Exit Timing. Most investors have a specific horizon and timeline through which they invest. If the founder is not on board with the typical 5-10yr horizons and investors asking when they will recoup their investment starting as early as year 3 or 4, consider looking elsewhere for capital.  Conflict is all but guaranteed if the timelines or terms of exit are not clearly defined or agreed upon from the beginning.

Best Actions

• Secondary Sale. If you have an investor that is no longer aligned with the founders, replace them with an investor that is aligned via secondary sale.
• Redemption. If the company has the cash (or can take on debt to create the cash) to redeem the investors equity, the investor can be bought out without the need for a third party.
• Buyout. Sometimes the founder has done all he can and the investor has a strong candidate to take over the business. In this case, the investor can buy out the founder and insert their own team while the founder gets a payout.
• Mediation. If there is no money available to buy out the investor or founder, the two sides have to find a way to make it work and not let the disagreement or conflict kill the business. Sometimes this is best handled through a third party mediator or seasoned outsider.

Investor / Investor

Friction/Separation Rate:  Boardroom blowups happen more than you might think.  While not all escalate to major conflicts, disagreements between co-investors are common, potentially occurring in 30-50% of companies.

Common Reasons For Conflict:

• Differing Opinion On Key Decision. Investors are used to being heard and getting their way because they are the one’s writing checks.  Many have voting rights, whether at the board level or investor level to ensure that they have a say in key decisions.  When investors are aligned, board meetings are smooth.  But when opinions deviate, boards…and thereby companies…can quickly reach an impasse on important matters.
• Asymmetric treatment. If one investor is getting treated differently than another, whether that be subtle like the way in which they are pandered to in a board meeting, or more obvious like receiving more frequent updates or more detailed information.  No one likes to feel like they are treated as a lesser, even if they are a smaller investor, and this feeling can breed negative sentiment leading to co-investor conflicts.
• Divergence on Vision. Investors have different harvest horizons.  They have different reasons for investing in companies.  Different reasons for wanting a company to take more or less risk.  If investors diverge on the long term vision of the company, that will indirectly affect the companies ability to operate and grow in a unified fashion.

Best Actions

• Secondary Sale. If you have an investor that is no longer aligned with the group or two investors that simply cannot work together anymore, replace one or both with an investor that is better aligned and less likely to create conflict via secondary sale.
• Board Shuffle. Boards in many companies are dynamic.  Whether new board members are voted on each year, or there is an opportunity to shuffle a board via a new round of funding.  If board meetings are no longer productive, use corporate governance procedures or outside funding as an opportunity to shuffle the deck and get a new board in place.  If trouble persists…you have a bigger problem.
• Buyout. If investors have personal issues with each other and claim that the other is creating issues or not pulling their weight. Make them settle it themselves.  Rather than looking to the outside via secondary sale, encourage them to have one buy out the other, thereby eliminating the conflict for both.
• Time. Delay next board meeting. Sometimes issues blow over in time. Winning often cures everything.  No one wants to disrupt or exit a moonshot of an investment.

Founder/ Key Exec

Friction/Separation Rate:  According to a 2020 Korn Ferry report, the average tenure for executives across various positions is 4.9 years.  And while, data suggests that a majority of executives stay at a company for more than three years, job hopping is growing more prevalent and the executive ranks are not immune to friction and employee exits.

Common Reasons For Conflict:

• Business struggles. There are always two sides to every story.  When a business or aspect of the business struggles to meet expectations, pressures mount.  If the founder/CEO believes an executive consistently underperforms or fails to meet expectations, they might pressure the executive to improve or resign.  If an executive believes that they are not in an environment to succeed or uncontrollable outside forces are causing the struggles rather than their own efforts, founder/CEO pressure without acknowledgement of those outside causes can cause a huge rift.  Those rifts are noticed by the whole company, compounding the problem.
• Work-life balance. The demanding nature of executive positions can lead to burnout and a desire to achieve a better balance between work and personal life.
• Compensation and benefits. Dissatisfaction with salary, bonuses, or other job perks will influence an executive’s level of satisfaction with the job.
• Culture/Acknowledgement. A toxic or unsupportive company culture can significantly impact executives.  This can bubble up in a direct or passive way and lead to further culture issues if not settled at the top.  But as the great author Robert Greene says, culture can only be affected from the very top.  Even most key executives have limited control over culture building.  That too can be problematic in furthering the divide.
• Lack of confidence in leadership. If executives lose faith in the vision, strategy, or leadership of the company, they might be more likely to be disgruntled.
• Mergers and acquisitions. Post-merger or acquisition periods often involve restructuring, which can lead to uncertainty and shifts in responsibility, potentially forming lasting issues in executive satisfaction. Many of the listed reasons for conflict are amplified in these M&A integration environments.

Best Actions

• Clear the air meeting. Executives are highly successful.  They have had to succeed over a long period of time to reach the executive ranks.  They understand the job and responsibilities.  Many know when they are underperforming.  Rather than let issues fester and tensions build.  Parties should just have a clear the air meeting and do their best to resolve any malcontent and issues in a frank and honest private conversation.  It sounds obvious, but this simple resolution tactic often goes unused.
• Throw Money At The Problem. This one can backfire, no doubt.  But sometimes money talks and simply paying the executive more will immediately resolve the issue.  That said, money is often just a patch if underlying causes are not resolved.
• Mediation. Key executive departures can be messy. They can affect momentum, create lingering cap table issues and even lead to litigation.  If an executive is valuable to the company, founders/CEOs should work to try and resolve the conflict if possible.  Often that means bringing in outside help to foster the resolution.
• Termination. Ultimately, founders/owners cannot let an employee derail a company. Sometimes it’s better to fire fast and move on, even if the employee is valuable.

Conflict kills great businesses.  Do not let your company be its next victim.  At Transition Point Law, we combine deep legal expertise with firsthand experience as founders and executives to resolve complex business conflicts . Our unique perspective allows us to understand your challenges fully, aligning legal solutions with your business goals for optimal outcomes.