car startupOn May 13, 2016, General Motors officially acquired self-driving car startup Cruise for approximately $1 billion, however, the sale almost fell through because the company failed to document properly the scope and involvement of an alleged co-founder, Jeremy Guillory. On May 8, just five days before the official date of purchase, Cruise CEO and founder, Kyle Vogt, sued Guillory to obtain a ruling that Guillory possessed no equity whatsoever in Cruise, and therefore, would not be entitled to any proceeds from GM’s looming acquisition. Guillory, who was listed on Cruise’s application to Y Combinator for seed funding, argued that although he had parted ways with Cruise, he had formerly been involved as a co-founder and therefore was entitled to at least a 50 percent equity stake in the California company. Ultimately, the parties reached a settlement with Guillory receiving a confidential amount and proper acknowledgment as an initial co-founder of Cruise. The settlement allowed GM’s acquisition of Cruise to close officially on May 13.

The need for a last-minute lawsuit and eventual settlement between Guillory and Vogt may have been avoided if the company had at the outset implemented a formal shareholder agreement that expressly laid out the roles, responsibilities, equity stakes, decision-making authority, dispute resolution protocols, and exit procedures for all shareholders of the business. In this case, Cruise could have clarified from the very beginning the scope of Guillory’s involvement and corresponding ownership of equity, if any, as well as his power to make decisions and proper procedures for his exit and resolution of potential disputes.

To learn more about how a thorough, well-defined shareholder agreement can protect the present and future of your existing business or startup, please read more about shareholder agreements or contact Your Contract Lawyer today.