I'm somewhat of in a pinch and I'd appreciate your insight on how to solve things for the best. We've been operating like a company for about 1 year, and I say "like" because we haven't really got around constituting it as such. We are four partners bound only by our word and we all agreed to certain responsibilities, all but one of us has responded, the COO.
The problem lies in that he seems to forget his position and chooses (perhaps unconsciously) to focus on mundane work. This has gotten us in serious control, organizational and managerial issues and has really gotten to the point that I've personally taken charge for his responsibilities (mainly PM, for 1-2 week periods) where he asks me "what's next?", when it is supposedly his job to answer that. I've told him this personally.
The thing is that he is excellent at doing the everyday work, we are resource crunched and, given that we've all endured all sorts of stuff during all this time, the fact of cutting him loose just because he has an employee's attitude rather than a partner's seems like the wrong thing to do. He is a great worker, but he brings no value to the company other than his work.
It also feels like he is more comfortable asking "what's next" instead of determining it by himself and telling all of us what to do, which we are open and almost begging him to do it.
I'm not really sure how or what he should be doing instead of being a COO. Perhaps we are asking him more than he is ready to give, but I see no scenario where he is demoted (by position and/or equity) and doesn't leave the company. I also have the suspicion that he might have the intention of looking for another job (or at least is thinking about it).
Oh, and he is my best friend.
It sounds like you have given out unnecessary titles early on, and now are judging each other by the title you have. I am guessing you are still just 4 of you (or close to), so it's crazy to have a COO or any other C.. title.
Also, not everyone is a leader, just because you gave him a COO title when you probably shouldn't have, it doesn't sound right to be wanting to demote him. By your post, it sounds like he is working hard, just not doing what you consider to be COO type work.
I would forget about your titles, and just make sure you are all working hard at making the company a success. If everyone is putting in the time, then worry less about who is making the decisions or what type of work they are doing.
You also mention he is your best friend, why compromise that by wanting to demote him? Really demoting would achieve nothing but create tension, you aren't even a real company yet so it has no tangible effect, just creates drama unnecessarily.
I really find this all crazy considering you aren't even a formal company yet, you should be worrying about making profit, not about this.
I would agree with @JoelFriedlaender here that you have given out the titles without the qualification.
I would just present a strategy for dealing with the problem should it persist.
Do away with the impressive job titles and have a series of functions (tasks) that need to be done.
Everyone is expected to pick up a range of these functions as required in order to get the job done. After a while everyone will "gravitate" to the functions they are best suited to without the "this one is more important" thought involved.
Why? Because in 2 years, once you start to get a feel for what it is you really do and the functions you really need, you can then start grouping them together into roles and then job descriptions people can take on.
It is at this point that you want to be able to clearly say "your the Marketing person, he is the operations person" BECAUSE they have been doing the functions that make up the roles you have defined.
If any one person hasn't taken the right functions you have a clear reason to say "you haven't done it, so your not it".
Done properly this approach will have set their own expectations and everyone elses without the ego getting involved saying "I have to be a C level person", its just "i'm good at X, so I will do that" ...
Just have a rule that all the functions must be done, by either choice first, assignment second ... let people rotate around every 2-3 months so that noone is "stuck".