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How can I fix a bad cofounder equity agreement?

Didn’t talk about equity with my cofounder when we incorporated – I know, never again. In the beginning, we were just excited to get started. Long story short, the good times did not last long. I put in 60k+ to get this thing launched and to start talking to investors, did all of the work, etc. He put in no money and went to Europe for the last five months, so he has done virtually nothing. After weeks of painful discussions where the cofounder wouldn’t budge, we agreed to go 60/40. Now he won’t sign the new equity agreement unless he gets all 40% upfront. Is there *any* solution to this shitty situation? He thinks he’s entitled to everything…

  • I had a similar situation happen. Talk with an attorney, privately. Does he already have issued and signed for shares? Don’t give him anything or make any offers for anything at all; I’ve been where you are (still am and the guy is avoiding me) and he deserves nothing. At least you know now what kind of person he really is.

    You can most likely make a claim of the the sweat equity, and accounted for financials; to be distributed as such, then again, his time might not even hold any value and you can end up with the 100% you deserve.

    I’m not an attorney though. If he doesn’t have anything in writing, staking his claim to ownership, I wouldn’t even worry about it.

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  • Maybe as a compromise, get him to pay you $24k for 40% of your shares (I presume you have 100% with your initial $60k investment). If he wont and insist on getting 40% equity for free, then go ahead and issue to BOTH of you 40% each at say $100k valuation so you end up with 60k+40k and he with 40k or you with 71.4% and he with 28.6%.

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  • Well, give him what he deserves. If he did nothing (and you didn’t have an agreement in place) give him 0%.

    If you have an agreement in place, follow the agreement.

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      • Was there any email or written trail that would point to that agreement? If not pretend it never happened. If so you could still ignore him but be forewarned if you become a unicorn the snapchat and Facebook problems may beset you as well. But by then you’ll have powerful backers who will take care of it 🙂

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  • Does he add any value to the business? If not, he deserves nothing. Better to get ownership levels and structure right up front. These issues, i can say from experience, will only get worse as the business progresses, and particularly if the business starts to show some success. You’ll resent him for getting such a huge chunk for doing nothing and your motivation will wane, ultimately hurting the business. Its tough, but harder decisions are much easier to make early on and always more complicated as the business grows.

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  • He has to match you on time and finances to get 50. I’m sure that’s what he is thinking… Realistically, 60/40 is not a good split. 80/20 or 90/10 is the best way when one brings money and the other doesn’t.

    All equity should vest, even yours. Four years. No upfront. He has got to be an amateur. Was he on the incorporation docs? If not, he should sign the paperwork fast because legally speaking, he’s not a founder, just an employee… A greedy one at best.

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  • All of you who claim that the founder can just stiff the other founder by “giving him nothing” have absolutely no clue about the legalities of starting a business. If there was ANY record at all that they’re starting this business together, – without any contract that says otherwise, EACH automatically each owns 50%.

    That’s how the LAW works.

    Now of course the law works only if the other guy sues you and wins.

    Yes the other founder is being an asshole. So the solution could be to see who blinks first.

    Here’s my suggestion:

    a) Threaten to quit the business altogether if he doesn’t lower his equity voluntarily. He’ll quickly see 10% of something is better than 40% of nothing.

    b) Offer to pay him a small token amount for lowering his shares or leaving the business. If he treats the business so callously, he might be willing to take a few thousand bucks since he obviously thinks its worth nothing.

    c) Threaten to give him nothing and tell him to sue you to get ANY shares if he won’t negotiate. Many people won’t actually go to the trouble of suing someone – especially a business that’s not yet successful.

    Good luck!

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    • OP here. I think he’ll know I’m bluffing about quitting the business, and I don’t think he wants to leave – he just told me that he wants to become a 50% (!) owner within a year and that also needs to be part of his contract.

      If negotiating with him doesn’t work, I might have to go to option (c). How do you think that would impact our ability to raise a round? A lawyer I spoke to said it would make us un-financeable. Do you think that’s true?

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      • The BEST option you have actually is to get someone both of you respects that will put some sanity into him. That way he won’t feel the other person is trying to pull a fast one on him.

        If you go option c) the lawyer is right to a point. Without traction, just the idea itself you’re probably too risky to get funded with a lawsuit on your head. However here you have options as well.

        One, get funding from friends and family or bootstrap, once you get traction, investors might want to take the risk regardless because you have eliminated OTHER risks. In fact you can structure the investment to take into account that aspect.

        Two. Don’t disclose it. Now I’m not suggesting you take the route, but I wonder if Zuckerberg, Snapchat, RockYou guys disclosed their founding issues to their first investors before it came around and bit them in their ass. Remember all three successfully navigated those problems in the end – although it was a major distraction.

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  • After starting my company I quickly found I was surrounded by vultures who wanted equity for simply having casual conversation (about possibly features/enhancements), one of these was even a big client which made things very difficult!

    Long story short… you have to BE TOUGH with equity and don’t give it away so freely – NO MR NICE GUY as people will try to exploit your good nature.

    If there is no written agreement between both parties and you’ve done all the work then you must have 100% of the business. If he’s investing cash only (as a guide it needs to be at least 50% of the 1st year cost assuming all staff are taking commercial salaries) only then could 50% be justified.

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  • One idea if you arent yet an established brand is to just incorporate another company and move operations to that one. He cannot prevent you from starting that and cannot claim anything either.

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  • It is like you move in with a guy/girl and realize what a shitty person they are…would you want to try to figure out how to work things out or even worse try to “change them” so that you could get married and make YOUR entire life miserable?

    My suggestion is to cut your losses short and exit this relationship.

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