How to fire a co-founder that owns 30% of shares?


2

Co-founder performance in the startup has dropped. He clearly has other priorities in his professional life, like other startups, and he doesn't want to give up his 30% shares.

The only written agreement was an email exchange agreeing on the ownership split, and the work to be done...but maybe it was too vague, without the hours that were supposed to be invested by both parts, for instance.

How to deal with this situation?

Co-Founder Equity

asked Oct 16 '12 at 05:35
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South
176 points
  • I'd say you should talk to a lawyer, and consider diluting him out. – Littleadv 7 years ago

3 Answers


9

If you have no legal agreement that specifies what happens in this case you will need to do several things:

First: Offer him a fair price to buy out his shares.

If he does not accept:

  1. Consult an attorney to see if the following is legal in your juristiction.
  2. Let him know you are going to dilute his shares of stock, and repeat your original offer. If he does not accept:
  3. Issue 100 times as many shares as currently exist to yourself, in payment for your current and future work.
  4. His 30% has now turned into .3 percent ownership. Offer to buy him out again, at 1/100 the initial price. Repeat as necessary.

Or, sell the company to another entity for a fair price. (You own the new company.) Give him 30% of that sale.

And never enter into a partnership or start a new company without a written agreement that covers all your bases.

answered Oct 16 '12 at 06:05
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Gary E
12,510 points
  • that's a great answer – South 7 years ago
  • So, the fair price part is good. The extortion on diluting him, on the other hand, could easily get you on the receiving end of a lawsuit. Here's a somewhat better alternative: Say there are 10 shares and he has 3 of them. Do a 1-for-5 reverse split and pay out fractional shares in cash (at fair market value). Get some legal advice, because whether that's available will depend on where your company is incorporated. – Chris Fulmer 7 years ago
  • See point 1 above, and the "Sell the company advice" above. Both already covered. – Gary E 7 years ago
  • I bet this is the most common problem in our startup world - co-founders starting a company without an operating agreement. Never ends well. – Apollo Sinkevicius 7 years ago
  • I agree, lack of any kind of operating agreement is very bad and when you couple that with a lack of "fairness", you get predictable horrible results. – Gary E 7 years ago

0

You should read the agreement of partnership and act based on that. If the shares aren't vested - you can reclaim the non-vested portion if the vesting conditions are not met. If the partner is not only a shareholder but also an employee - you can fire him to stop paying salary. In any case - get a legal consultation first.

answered Oct 16 '12 at 05:38
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Littleadv
5,090 points
  • the only formal agreement was an exchange e-mail agreeing with shares split and the work to be done...but maybe it was too vague, without the hours that was suppose to be invested from both parts for instance.... – South 7 years ago
  • @South lesson learned... Next startup spend some time and money on the proper legalities. – Littleadv 7 years ago
  • so pretty much, in your oppinion, I have no choice – South 7 years ago
  • from what you've described it sounds like you don't have much. But you have to discuss it with a lawyer, there might be various backdoors and loopholes that a professional would be able to identify. – Littleadv 7 years ago

0

If the documents surrounding his share issuance don't provide for any sort of buy-back or vesting, then there's not much you can do to take them back. Does it matter? The other two founders have a majority of the voting power. Over time, those two founders will have other opportunities to take shares and to dilute the first guy down.

Alternatively, if the existing company hasn't created any assets, then start a different company without him in it.

answered Oct 16 '12 at 05:39
Blank
Chris Fulmer
2,849 points
  • there is no other founders, only me 70% and him 30%. It started very informal and got big... – South 7 years ago

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