Please or Register to create posts and topics.

I Cut, You Choose - The Shotgun Clause in Business Partnerships

Mentioned in the article,
Game Theory Bargaining and Auction Strategies: Review

The "I Cut, You Choose" method reminds me of the shotgun clause in business partnerships.
It's a very important clause both for the interests of the partners and the company.

The Shotgun Clause

You would like to get out of a business partnership.
So you would like to either leave the company or get your partner out of the company.

You pick a price for 1 share.
You can choose any price.
Then your partner can decide whether to buy all your shares from you at that price or sell all his shares to you at that price.

Imagine person A has 40 shares and person B has 60 shares in the company.
Person A decides that 1 share is worth $1.
Person B can either buy all 40 of Person A's shares for $40 or sell all 60 of his shares to Person A for $60.

You can read the Investopedia article or the details.

Is This Fair?

I think on paper it is fair.
However, the concept of utility makes it not very fair.
The person who wants to leave the company probably has an advantage.

Let's use the previous example.
Person A wants to leave the company so naturally, he values the company less. Let's say $1.
Person B wants to stay in the company so he values the company more. Let's say $2.

Person A can declare the price of 1 share to be $1.90, knowing that Person B would rather buy at that price than sell at that price.
So Person A makes $0.90 per share while Person B makes $0.10 per share.

Of course, I exaggerate here about the price differences.
One should seek to value a company more objectively and ask for a third-party valuation.

Lucio Buffalmano has reacted to this post.
Lucio Buffalmano

Cool analysis Matthew, didn't know about this Shotgun Clause.

And I agree with you, what you say makes sense.

Still, there are some limitations to how far the partner who wants to leave can push it.

The person who wants out can also fear that his partner might quit and leave him with the business he doesn't want, just out of spite.

Then he might go to found a similar business, and because he's driven and passionate, he might kick his ass in business, too.

Still, what you say makes a lot of sense.

Have you read the forum guidelines for effective communication already?
Processing...