Co-founder wants to leave, do I pay him back the money he invested into the business?

My co-founder and I have been working on a business idea. We both invested money into getting it to a MVP stage, but it hasn't been launched and does not make any money. (It is basically a modified wordpress site with no IP.) Costs consisted of hiring developers and paying server costs. Since I had 60% equity, I paid 60% of the total costs and he paid 40%. It's also the case that while I paid the costs upfront, he hasn't yet paid his share in full.

Since he now wants to leave, should I pay him back all the costs he put into the business? (We have no contract/agreement stating our equity split.)

Since there is no written agreement, see if he'll take a deal where he just walks away not having to pay the money currently owed and consider it a wash. Since he agreed to take part in a venture, he was agreeing to the risk which is now manifested in the money he has invested, and in the scenario I envision, has lost. I do not believe that you should have to refund his portion of the investment since you both agreed to the risk.

As you now are experiencing, going into a transaction with a partner or any other business entity should always be accompanied by a written agreement. Within this agreement there should be clauses that clearly spell out liability, property ownership and equity stake along with responsibility as well as a plethora of other clauses usually written by an attorney or other agreed upon entity within your state. Anything less can be very very dangerous.

Good luck to you
Tim - VA

If he lent you the money then you have an ethical obligation to pay it back. But he invested it in return for equity. You do not need to pay that back (if you did, he would be exploiting you and wouldn't sleep well at night - don't give him insomnia).

I imagine part of your implicit agreement for that equity was that you would both invest your time and effort too, not just your money? So, if he is going to pull out, my suggestion would be:

1. Reduce his equity share from 40% to 20%
2. Get both the original and new agreement in writing

You're giving conflicting information. Either you agreed the 60/40 equity and investment split or you didn't. Agreements don't have to be written to become valid and binding contracts. My post isn't legal advice - you almost certainly need to consult a lawyer to tie this up.

I'm going to answer on the basis that the agreement you describe is what you both intended.

The money you each invested in the venture has created an asset. The value of that asset isn't necessarily related to the costs of creating it: it could be zero, for example.

It sounds like you still believe in the venture and your cofounder doesn't. And that puts you in the same position as many - possibly even most - startups. (A small proportion of startups fail, and in my experience it's rare that all co-founders drop out at the same moment.)

There's probably nothing to stop you just carrying on. Your cofounder holds a minority interest, so while it might be frustrating to think that the results of your work are partly going to benefit someone who's stopped working, at the end of the day they're bearing some of the risks. In this situation there's no need to return cash (it's been used for the purpose it was invested, after all) - and from a pragmatic point of view the last thing you want to do is to take cash out of the business or out of your pocket at this point.

But most people would probably want to come to some agreement that will put you on a sound footing. You want to establish beyond doubt that you're free to pursue the startup and that the code ownership is clear, and you want your cofounder to transition to a regular shareholder. An offer that took into account the necessary legal costs, and the shares that haven't been paid up (because you paid 100% of some costs) could work out well, with goodwill on both sides.

I would look at it differently. Aren't you a little angry that your partner is walking out on you? Or he may just feel the business will never work out. So what is the business worth today? How much cash is available in the business? Does he want you to come up with more money to buy him out? Great deal if he can get it. But if you can't or don't want to put in more cash and decide to just shut the door, how much does he get? And that may be a choice you should consider - disappointing though it may be. What you are considering may make him whole and leave you poor or even holding the bag, plus it makes it less likely the business will succeed. You need a better solution. Either work something out with him or ask him to find an investor to buy out his 40% - or shut down and walk away with whatever you would get - if anything.

Surely it depends on the amounts your speaking of. In the entrepreneurial environment one of your greatest assets is your reputation so for the sake of an amicable parting and $50 than keeping your reputation in tact is okay. However if the invested money is greater couldn't you identify some middle ground, for example the company will not refund your investment, but instead you'll walk away with a share of it for services rendered. In tech circles the your share in a company is usually vested over 3 years with a 12 month cliff, so you could calculate what share they would get in that way...

Whatever the case, get all the details in writing.

Short answer. Return what he has invested with sufficient interest or incentive and enter into a written agreement with him that clearly extinguishes his rights in the present venture.

The way I see it you have two different paths you can take solving this issue. Path #1 involves paying back a percentage of the money he invested (if possible) as a sign of goodwill, not all of the money perhaps even just 20% of what he invested as a gesture of goodwill. Path #2 involves not paying him a cent, he is walking out after all and you have no formal agreement or contract in place, but no that taking path #2 also means that if your idea ever were to be successful and profitable like Facebook that you might be open to a lawsuit that becomes cheaper to settle than fight (highly unlikely, but probable situation).

I would be more concerned over the fact your co-founder is abandoning you in this venture. If I were in your shoes I wouldn't give him any money back whatsoever, but I am a bitter person. I am willing to bet a large chunk of the money he invested went into operational costs and other non-refundable expenses anyway, it would be somewhat wrong of him to expect the money back.

You said you had no written agreements, did you make any verbal agreements? Because in the eyes of the law a verbal agreement can be just as powerful as a written one.

There's one thing that is most important - you may have agreed a 60/40 split, but if you've put 100% of the money into the business and he's contributed nothing.. then he owns nothing. If he's paid you 10%, then technically he has a 10% equity share, the rest belongs to you as you're the one who put that money in.

Now, in a situation like this, if you've agreed a 60/40 split but you've paid in 100%, then I'd say there is an option where he can pay his debt to you and bring himself up to a 40% equity holding. In this case, it's time to talk to him and ask him if he wants to keep his current (or potential) equity position, and if so, he just keeps it. If you make money in the future, he's entitled to his share - based on the money he has put in. Get this in writing.

Alternatively, you can buy him out - pay him back what he has invested and the entire thing then belongs to you. Again, get this in writing.

The third option is just to junk the whole thing. The entire business is worthless and you then pay him back his equity share (but as the total sum of the business is worth $0, he gets 40% of nothing, and you get 60% of nothing). Note that any business assets will have to be counted, so if you've bought a server, he owns his share of that. He also owns a share of the debts the company has run up too. If you only have debts, then you can demand he pay 40% of them, plus the startup capital he owes you. This latter is probably not worth the hassle unless there is significant sums involved (ie more than it would cost to take it to court).

All in all though, it sounds like he owes you, not the other way round. I wouldn't pay him back anything. If he took on a 40$ stake, that means a 40% risk in losing money. You do not get to receive the rewards of a 40% stake, but simultaneously skip the risks involved at the same time.