Why 50/50 is not fair

Tue, Nov 17, 2009

If you have ever had to negotiate with someone, you have probably experienced the same as I have. We have learned that 50/50 is always a fair deal. I mean, if we do it 50/50 it has to be fair, since we have equally divided whatever it is that needed dividing, right? You’ve guessed it, the answer is no. It is not always fair to divide things 50/50.

Partnerships

Basically if you divide something 50/50 in the world of business we are talking about an equal partnership. If you have 50% of the shares and so do I then at the end of the day we either both walk away with an equal amount of money or we both owe the same amount of money. Sounds pretty fair, and usually, it is.

The problem is not in when both parties agree, but when one party disagrees. The best example I have heard is marriage, or a relationship. You see, let’s assume here that the man wants to have sex (we are just talking stereotypically here). Well, if the woman says ‘No’ then nothing is going to happen. However, since the man wants to have sex, if the woman says ‘Yes’ there is a ‘deal’ so to speak. She is in total control.

The Veto

So the problem of 50/50 arises when one party wants to do something and the other party isn’t sure or doesn’t want to. This is in fact a classic veto. You cannot veto a proposition to go through (the man can’t veto his wife into having sex with him). But you can veto against the proposition. That is a very powerful tool and makes 50/50 a bad deal if both parties do not want the same thing. If you ever go into a partnership, be very aware of this situation.

Solutions

It might not be an issue, but then again, it might. There are many ways to solve this of course, so here are a few tips that I have to avoid such a situation (in order from most to least preferable):

1) Get the majority of shares

Simply put, you want to have the majority of the shares so you can call the shots. You can do this by bringing more to the table than your partner. Does it really have to be more? No, you just have to convince your partner that what you bring is worth more than what he brings. Make sure he cannot turn the table on you if you choose this path.

The reason this is my number one is because this is actually most favorable when you are an investor. It safeguards your investment as much as possible. If you are building a company together with someone, this might not be the way to go.

2) Appoint a director

This solution is very simple. Let shareholders be shareholders, who worry about making their return on investment. The shareholders appoint a director, a single person who is responsible for running the business. This can be a shareholder, the important thing is that it is a different role. The director has the responsibility of satisfying the shareholders, so this takes the decision making away from the shareholder level. Unless, of course, there is a request to invest more into the company.

3) Get a third partner

This is my least favorite, because I feel that the more partners, the more trouble. I know this from experience. Having a company by yourself (you are the only ‘partner’) might be scary, but at least making decisions is easy. Having a company with two partners means you will need to come to an agreement. Having a company with three partners can be a huge problem. It can be that two of the partners out-vote the third partner, which results in bad feelings. You want to avoid people feeling bad. Bad feelings lead to big problems since they linger and grow silently, only to appear when you least expect it and, most importantly, least want it.