Case Study #2 - Group 2
Equity can become a major point of contention, especially if it is not agreed upon prior to the formation of the company and the drafting of a contract. In this scenario, Brooks created Erbe as a sole proprietorship. Later, Tyler joined under the assumption that he would receive the same amount of equity as Brooks. Unfortunately, Tyler never signed a formal contract when he joined Erbe, and as a result, never officially owned any equity in the company. Although Tyler played a significant role in growing Erbe, he does not deserve an equal stake as Brooks has in the company. Ultimately, because Brooks founded the company and assumed the initial risk, he should remain the majority owner.
Tyler did play an important role; without his marketing, gathering of investors, and event planning, Erbe would likely not be what it is today. However, Erbe was not founded by Tyler; it was established by Brooks as a sole proprietorship and remains his company. He quit his job and tested products for a year before Tyler joined the company. In order to do what is best for Erbe as a company, Brooks needs to stay in control. Brooks has been responsible for things such as dealing with the distillers/manufacturers, regulators, environmental boards, lawyers, and banks. While Tyler was working on the marketing and design of their products, Brooks was working behind-the-scenes on the “legal backbone” of the company. For Erbe to succeed, Brooks needs to continue with what he has been doing, as it obviously has been working and his company has been continuing to grow since it was founded.
This case study highlights the importance of agreeing upon contracts before a company is launched. In Erbe and other small companies, the lack of this legal framework can lead to internal disputes and division. While every role in a business is important, including marketing, companies do not exist without a founder. Brooks’ entrepreneurship should therefore be valued higher than Tyler’s contributions and reflected in the equity split.