The five operating agreement clauses founders regret skipping

Connecticut's LLC statute supplies default rules for any topic an operating agreement does not address. Those defaults are designed to be neutral, not to fit your company, and they are often the opposite of what founders assume. In our litigation practice, the same missing clauses appear in dispute after dispute. Adding them at formation costs a fraction of what fighting over them costs later.

1. What happens when a founder leaves

Without a buy-sell provision, a departing member usually keeps their full ownership interest. A co-founder who worked for six months can hold a third of the company for decades while the remaining owners build its value. Vesting schedules and repurchase rights solve this. A common structure vests ownership over four years with a one-year cliff, and gives the company the right to buy unvested units at cost and vested units at fair value.

2. How the company is valued in a buyout

Buyout rights are only useful if the owners can agree on a price. Agreements that say 'fair market value as agreed by the members' simply move the dispute. Better options include an annual agreed value certificate, a formula tied to trailing revenue or earnings, or an independent appraiser chosen by a defined process, with a clear rule on discounts for minority interests.

A buyout clause without a valuation method is an invitation to litigate.

3. Deadlock between equal owners

Fifty-fifty companies are common and perfectly workable until the owners disagree on something fundamental. A deadlock clause provides the exit: mediation first, then a mechanism such as a shotgun buy-sell, where one owner names a price and the other chooses whether to buy or sell at that price.

4. Death and disability

If an owner dies, their interest passes under their estate plan, possibly to a spouse or child with no role in the business. Most founders want the company or the surviving owners to buy that interest, often funded by life insurance. Disability deserves the same treatment, with a clear definition and waiting period.

• Mandatory or optional purchase on death
• Life or disability insurance to fund the purchase
• Payment terms if insurance does not cover the full price
• Coordination with each owner's estate plan

5. Drag-along and tag-along rights

When a buyer wants the whole company, a single minority owner can block the sale. A drag-along right lets owners of a set majority require everyone to sell on the same terms. The matching tag-along right protects minority owners by letting them join any sale by the majority on the same terms.

None of these clauses is complicated to draft at formation. All of them are expensive to negotiate once owners disagree. If your company was formed with a template, a review of the operating agreement is one of the most cost-effective legal steps you can take this year.

This article is general information, not legal advice, and reading it does not create an attorney-client relationship. Laws change; talk to a lawyer about your specific situation. Learn more about our business formation practice.