How to fire my Partner

I started a company in August of 2012 signing up 25 customers as a separate part of a corporation I have had since 2010 and brought in a partner in September. The partner did not put in any money but put in time around his full-time job. I provided all the financing and capital for the company in return I had the partner sign an agreement that he was entitled to 20% restricted stock and a agreed upon amount of compensation once the start-up launched.

We begin working on it and by December my partner begin to complain about working on the start-up for free. I explained to him that I also wasn't getting paid but that this was an investment in our future. He came back stating he was getting push back from his wife because he was working a full-time job and doing this part-time didn't leave a lot of family time. He asked that in order for him not to leave he be compensated which I agreed to for $3000 a month.

After the first month I looked at his contributions and realized that what he brought to the table part-time was not worth the $3000 a month. He stated that if he was going to be involved he would have to be compensated. I told him that it is best we discontinue our venture because we had initially stated that compensation would not come until we had launched. Now he is wanting me to buy out his 20%. We did not have a formal founders agreement all we had is a document we both signed stating that he would get 20% restricted stock and his compensation once the business gets going.

My question is since we have not launched and he was not a technical founder (I had to pay someone to build the site for us his role was more of coordinating with the tech guy who built the site and doing graphic design) what should I do if he doesn't accept the offer I make to him (which he has indicated he will not do) to try and keep the peace. He has not put in any money at all. All financing has come from me to get the site where it is. We have 93 customers ready for us to launch and all but one are from my previous business relationships. I want to be fair but I also realize that with the problems we are having now it is better to end things before a launch than wait until a launch and we actually have receivables.

wow... sorry this appears to be a mess for you. If what you stated is true and you have credible documentation, all I can advise is to contact a lawyer. It sounds like a serious legal battle. If you can prove what you have stated in court you should not have to pay him anything but will endure legal fees. Is the partner formally on any of the company documentation? Does your documentation state that his reimbursement is solely based on the company launch?

From legal perspective, he has 20% of the stock. You can't just take it away from him. It might not be very nice from your side, but can you issue 1B more stocks and assign them to yourself? Basically dilute your partner, so that he has less than 0.000001% of the company? Again, I would try to talk to him first, maybe you can agree on something...

For the future - you should use stock options with at least 1 year cliff period, so that if/when this situation happens - you keep all your stock in the company (well, unless two of you work for more than 1 year together).

Step #1: make him a fair offer for his 20% of the stock.

Step #2A: if he doesn't accept the offer, re-make the offer, and prove it is fair by using the old 'I slice the pie, you choose the piece you want' method. Specifically, offer to either buy his 20%, or sell him your 80% at the price you set. This is a straight offer for the company today: no non-competes attached (it sounds like the business won't go far if he buys it, and nobody says you have to work for him and can't go to your contacts for something else). And/or Step #2B: set up an auction for the company and its assets (assuming it has assets). Offer to split the net proceeds of the auction 20:80 with him as per your agreement. Bid on the company yourself. Make sure he is free to bid as well.

If he's refused or blocked all of this (and feel free to signal that this is the way that the company is going to go), then Step #3: leave the company. Tell him you will enforce your 80% ownership but are no longer working in the company. Leave him to pick up the pieces. When he doesn't, Step #4 start a new company (it sounds like you also don't have an employment agreement, nor do you have a non-compete).

Of course, I'm not a lawyer. You should consult one, to be sure you know what your obligations are. But you should get a good one to give you 1-2 hours advice, and then take steps similar to those outlined here, rather than trying to go to court.

P.S. Yes, this is why you ALWAYS offer shares with vesting.

Restricted stock issued to founders usually includes giving the company a right to repurchase the stock at pre-determined prices upon the occurrence of specified events. Does your agreement have a provision saying that you can buy the stock back at cost if he doesn't meet certain criteria? If not, you could always just try to have the stock appraised and buy it from him at fair market value...which sounds like it wouldn't be that much if the company hasn't really launched much of anything.

Talk to your lawyer. Next time, don't write your own agreements.