If there was no paperwork done between the co-founders and one of them decides to leave all of a sudden, can the remaining co-founder still continue building that business?
Could the founder who left come back later if the business is successful and claim that they are owed 50% of the company?
Needless to say, I will doing paperwork from the beginning from next time. But for this venture I have spend way too much time and resources already.
Yeah, the cofounder absolutely could have a case, even if they wouldn't win the case. It could come down to details and perhaps who can get the best lawyer.
But the reality is though, you don't want a legal battle as a new company. It gets expensive and time consuming very fast. And even if an actual legal battle never plays out, the looming threat of one can haunt you as a founder.
At this point though, you still want to clear the air with the old cofounder. You need start by getting an understanding of what's going on in their head, and explain to them how you see things. I could see this going in any of a number of ways:
1. It's possible they became uninterested in it and walked away knowing they'd never see anything from it. In this case, you can probably get them to sign an agreement that they've cut ties with the company and won't come after you.
2. If that doesn't work, you might be able to find a way to essentially buy them out. I'd explain to them that equity can only go to people who are committed to it long-term, and they aren't. Perhaps you can offer them some cash now to leave, or some sort of agreement for X% of the profits until $Y is reached, or perhaps even something like a reduced amount of equity (like 3% or 5%) to just be done. Just make sure it's abundantly clear that after this transaction that they have no further say or involvement in the business. They're out.
3. If that doesn't work, then perhaps the two of you can agree to some sort of immediate shotgun option or "cake cutting" option where one of you gives the company a valuation, and the other gets to decide whether to buy the other's share of the company at that rate or sell their share to the other at that rate. ("You cut the cake in half, and I'll pick which half I want.") Keep in mind, this could result in you having to walk away from the company (with cash).
4. If the person doesn't agree to any of this, you've got a hard choice to make. Are you willing to start the legal battle? You can try to take it before a mediator or before a judge. If you've put a lot into this, and feel you've got a convincing case, this is a viable option.
5. The last option you have might be to just walk away yourself. Most entrepreneurs have a ton of potential ideas that they've got in the works, and just moving on to a different idea and learning your lesson can be the best move.
Whatever happens, I do think it's in your best interest to come to a resolution on what happens to the company before continuing with it. The mental burden of a potential legal battle just isn't worth it.