Better to have a clean break. If appropriate the shares can be bought out so that the "co-founder" does receive some compensation for the vested value. Let him leave and do his next thing.
Has it occurred to you that this person is actually entitled to hang on to their shares?
You all made the choice to start the business together. You had the opportunity to work out ironclad provision for founders exiting.
You all worked to get it to this point.
Even if you have lost your respect for this persons contribution, it was part of the deal that they get these shares.
I understand totally if you don't like it, but have you considered that in fact this person might actually be in the right?
Lesson learned, give them the shares, live with the consequences of your decisions. If your company is going as well as you say then it is not the end of the world.
The co-founder you are referring to probably describes you guys as scumbag cofounders unfairly and unjustly booting him out.
Alternatively, get rid of the damn lawyers and ask this person what he wants to make a clean exit deal - it may be less than the full share entitlement and if that is the case then maybe you should take the deal.
And for gods sake stop spending money on lawyers - you are destroying your company firstly via time dilution and secondly by wasting money. Part of running a company successfully is to know exactly what it means to win, to compromise and what it means to take a pragmatic outcome that lets you get on with the job.
Next time start with vesting (which a lot of people are mentioning) so that the other founders continue to earn shares and dilute the departed co-founder's stake over time. Ideally, founder ownership in the company is compensation in lieu of (or in addition to a meager) salary.
The founders who stay on board might try to dilute the departed co-founder's stake to nothing. Mark Zuckerberg did this to Eduardo Saverin. As a minority shareholder, you have to pay attention to the evolving cap table.
I've counseled a number of founders on co-founder breakups.
It's hard to tell you what I think without knowing more detail, but based on what you wrote, and assuming you both signed customary IP assignments and RSPAs at incorporation, the simplest way to move on would be for the other founder to resign as an employee and director.
That would enable the company to repurchase his shares and you would own 100% of the company and the IP that belongs to the company.
Since he wants to start what is essentially a different company, he shouldn't have a problem basically walking away and leaving you with the old company.
You can sweeten the deal a little bit by allowing him to retain some small portion of his equity (like 1% to 5%) in exchange for his resignation.
There may be more details here and I'm going only off what you wrote. I'd recommend working with a lawyer if you're going to try to salvage the old company with your co-founder moving on to other things.
1. Get in touch with your co-founder. It's just not practical to split up any other way. Time is not critical, if it takes 2 weeks, so be it.
2. Once you talk, make sure your co-founder agrees with leaving without creating a mess. The 50/50 split is a potential issue here. Technically, you may not have the power to remove your co-founder.
Did you have vesting in place? Did you incorporate with a decent lawyer?
If I understand your train of thought, you are thinking of leaving the company, ignore it and continue working on the idea. If you do so and later become successful, definitely expect a big lawsuit from your old co-founder claiming his share... Not to mention the fact that investors will not like hearing about such a liability. If at all possible, work out something with your co-founder.
My co-founder (a good friend of mine) came to me back in February with an idea for a platform. He came to me mainly because I'm a coder, and he's not, so he wanted someone to help him implement this idea. I loved the idea that he presented me with, so we joined forces and decided to be co founders of this venture together.
After a few months of working (me on the code, him on... well, nothing really, just asking his friends for advice on business plans and marketing, but he hasn't actually outputted anything yet), I have now come to realize that the two of us really don't see eye to eye on what the platform is about, and I've decided that I no longer want to continue on this venture with him.
We did write up a Founders Agreement (although we never actually printed it up and signed it), and in this agreement, it states that once a corporation is formed then all assets are transferred to the corporation, however, we haven't formed a corporation yet. The agreement also states that if one of us wants to leave before, we should have a mutual separation of assets.
When we originally spoke about if one of us wanted to leave, what would happen, he told me that he believed the person staying should own everything that was created, without any regard to compensation for the person leaving the venture.
So far, I've put in four months of coding work, along with some of my own money in various services (hosting, proxies, buying a domain, etc). If I leave now, I personally think that in this separation of assets, he should pay me back the money that I've spent on this venture, and that he should only get my code if he compensates me in some way (money for four months of work, or a percentage of the company).
I'd like to hear thoughts from everyone here, to see what I should do.
Think of you the owner and you the employee as 2 separate people.
Same thing applies for your co-founder.
If you cease to work as an employee it has no bearing on vested shares held by "you the owner".
If your co-founder is considering leaving (as an employee) the share owning entities (which include "you the owner" and "co-founder the owner") need to decide how much (money from share sales or actual shares) they are willing to part with as added compensation so as to keep your co-founder on and protect the value of the remaining shares they hold.
Increased compensation to your co-founder as a employee should come proportionally from all shareholders (as it would in a dilution) as it is a negotiation between an employee and the company as a whole.
It is best not engage in a deal whereby employees extract compensation from specific shareholders, as, however well intentioned that starts out, it can too easily become a pattern of extortion (or a means to seize ownership).
Definitely do not sell / give away that shareholding.
It may well become 40$ of nothing, but it could also become 3% of nothing or almost-nothing, and the co-founder will have been paying himself a return when the company gets revenue.
I suspect there may be other personal/personality issues here and he may well like the idea of hacking alone on this, now that it appears to be viable. However, he has an agreement with you, and you made commitment, put in effort too. That's why you have a shareholding.
Do not just give that up, unless he makes it worth your while 'now'.
The hazy picture I get is that you are a hustler and surrounded yourself with (as you say) risk averse employees. You made one of those employees a "co-founder" to lock him in? But he doesn't have your hustle mindset. Maybe never will.
The simple, but not easy, option is to take back the shares and let him go. Trying to harangue him to stay is only going to make things even messier down the track.
So the right thing by your investors and employees - keep running the business. Perhaps one of the remaining employees could step up to be the team leader - but only as an employee.
By definition a co-founder should be on equal terms with the other co-founder. As co-founders you share the product/service vision and have compatible attitudes to risk, finances, etc. You just cannot promote an employee to co-founder.
But from the OP it sounds like the cofounder might be continuing in the same line of business, but wants to "pivot" and jettison the now-dead weight of the technologist.
If this is the case it seems plausible that his contributions and R&D are still relevant, even if they're throwing out his code, and so perhaps he's entitled to whatever stake he vested over those first two years.
Make sure that the break with your ex-co-founder is a clean one, i.e. ensure that company ownership, IP rights etc is resolved in a way that leaves no room for doubt at some later point.
You should try to avoid a situation where he can return at some later point with a potentially legitimate claim to a part of any business that your company may have evolved into.
The right way to have handled this would have been to have founder vesting with your co-founder, so that if he checked out (as he seems to have) leaving you to do all the work, you would have stopped the clock on his getting additional stock.
In the absence of that, however, he should still be amenable to a negotiated price, perhaps leaving some upside in play for him. Similarly, your investor should be interested in setting up a favorable dynamic whereby you have enough stock to be incentivized to continue to help the company succeed.
A typical way to do this if the co-founder is unwilling to sell all or part of his stake outright is for the new investor to dilute everyone, and then "re-up" the key players (ie you). You will need voting control of the company you can effect this.
To OP: Not sure why you deleted your reply but anyway:
Here's three more thoughts (I'm not a lawyer so please double-check this with one if you think it's relevant):
5) Could you get a loan to fund this? Do you have any valuable assets in the company you could use as mortgage? I don't know how it is in the US (I assume that's where you are based) but should you be victorious in court you can probably recover any legal fees from the ousted co-founder.
6) Depending on how you've set up the operating agreement there may also be the option of issuing more shares to the active members of management, thereby diluting down the ousted co-founder.
7) Depending on how much was invested so far and by whom and depending on whether the business is based on any jointly owned core IP or not, you may be able to shut down the company and re-incorporate later as a new company without the co-founder.
From experience I can also tell you that whatever you decide to do, you need to have a good gut feeling about it. If you settle it needs to be on terms that still make you feel proud of the business and about what you've achieved and you need to feel motivated to move forward.
Firstly, are you sure you describe the situation objectively? If this were a novel, I would consider the storyline under-developed. There must be some reason, however injust, why your co-founder thinks he should get a majority share. For example:
"currently, 100% of the design AND code was created by me."
You may have done the typing, but you also acknowledge that there was a lot of discussion that led to the current design. I guess that this is an area where your co-founder may see things very differently ('(s)he did the technical stuff, but all the ideas are mine')
As to your question, you should decide what you value more: getting back on your co-founder, or having the product succeed. In the first case, go talk to a lawyer; in the second, I think you should get an agreement that includes you leaving the company ASAP. That ASAP is because of phrases such as 'bullied', 'bosses me around', 'belittling' that make me wonder about the 'is' in 'who is a close friend.'
How much you can get out of it depends on the value you have to the company. That will depend on the technical complexity of the product.
If he can't contribute then he should leave. But he founded the damn company so he should walk away with a nice chunk of equity and a generous severance. The company wouldn't exist without the founders.
Is there even a reason the co-founders would do this with malicious intent? Is there possibly any financial gain they could realize out of not telling the other co-founder? Could it be an attempt to make him leave (he only owns 3%) before fully vested?
OK so you dropped the 'cofounder' title and probably was fired from the company altogether, but you still retained stocks right? Stocks are legal term. He couldn't just take your stake away because he is a bro. If anything that sounds like a good deal to me. If he was right and your contribution to the company was insignificant, that won't even harm the exit value much, if he wasn't, bad for him much more than for you (because he will work his ass off in the process and you won't).
I think the idea that they will not be able to work with the co-founder again really depends on the type of person that co-founder is. If the co-founder is just doing this as a strategic move, expecting things are going to become quite valuable soon and considering the 10% cliff it may be that if their strategy does not work they will not have any problem continuing the partnership - although if that is the case I would (when things became profitable/ much improved) negotiate for some kind of exit because obviously the co-founder is not trustworthy.
Are you also a co-founder or just an employee that didn't get taken along. Only matters in terms of standing nothing else, e.g. an employee wouldn't have standing to go after a co-founder for doing this AFAIK, but a fellow co-founder or investor could likely. If you are an employee with vested shares, then technically you might have grounds to go after him for causing a devaluation of your stock. But that only counts if it actually has/had real value at the time he left.
In the end, all this depends, and IANAL but if the IP was developed before the company was legally formed and never properly assigned to the company then it might be a little tougher to go after him if he originally created it. At the same time, if the company paid to develop features etc and was formed legally, then there could be a claim, again it is likely messy.
You can absolutely find some good attorneys to at least sit with you in consultation and figure out where you stand. Honestly, even if it costs you 2-4 hours of their time that would be worth it.
I would like to disagree a bit. Resolving disagreements between co-founders I tricky.
I would request OP to assume good intent and ask the following question.
> What are you giving me in return of my 40% of the stock ? Why is that a fair price ?
I do not know, but it is perfectly possible that the other person might have a good answer. If you have already made up your plan you guys can agree on some kind of plan where you divest your stock over a period in one way to another.
I have a suspicion that the other co-founder probably does not want OP around for whatever reason. But OP can help him by simply taking a break while keeping the stock.
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