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The basics of a ‘shotgun’ clause

On Behalf of | Jun 28, 2017 | Contract Disputes

The beauty of partnerships in startups is that both parties are passionate about making their dreams become reality. There’s a great deal of trust and optimism, and as additional rounds of funding become available, the partnership becomes that much stronger.

But unfortunately, like many successful partnerships, the optimism and good vibes don’t last forever. One (or both) partners may believe that they will be successful on their own and want to break up the company, but neither partner wants to be thrown overboard. So what happens when there is a standoff?

Enter the “shotgun” clause.

Think of those old western films where there’s a showdown between the main villain and the hero; it’s basically an “it’s you or me” scenario. The two partners in a company are daring each other to marshal enough funds to purchase the other’s shares in order to take over the company. Once the shotgun clause is invoked, it is akin to a serious offer for the company and there may be little that can be done to stop the process, much like the wheels of justice turning once a person files for divorce.

If the shotgun clause in a partnership agreement is properly drafted, there should be a specific amount of time allowed for either party to gather their funds and write a check for the company. The quicker the funds are gathered and presented, the better. It’s like one partner saying “here’s your money; if I don’t hear from you in two weeks, I’ll consider our divorce final.”

Of course, shotgun clauses can come in many forms, and it is important that they be drafted to suit your individual circumstances. If you have questions about them, an experienced business law attorney can help.