Cofounder has been gone for 4 years, still wants equal dilution. What’s right?

6 years ago I started a company with a cofounder (Person A). After 2 years of work, we essentially mothballed the company. Person A moved away, got married, and has been working on his own startup for the past 4 years.

Since we took some friends and family money, I felt obligated to repay what I could by turning the company into something valuable. I worked small jobs to pay my basic bills but worked on the company in my spare time. After about 2 years of working on the business part time (you know, 60 hours a week while holding down other, paying jobs), I found another cofounder (Person B) and returned my full time (ie unpaid) effort to the startup for the following 2 years.

We are now at the point where we need to do a recap (ie dilution) to provide equity to Person B, who has been working similarly unpaid for 2 years. Upon mentioning this to Person A, his position is that everyone should be diluted equally, including me, the founder who could have easily bankrupted the company but felt morally obligated that initial collaborators, including Person A, would earn some return.

Our lawyers think this is a crazy proposition since Person A is getting a massive windfall at my expense. The lawyers’ position is that dilution is a fact of life, and when you’re no longer investing time into the company at the expense of other opportunities you cannot claim the same benefits as someone who has.

I wanted to post this question here for some objective opinions.

Thanks all!

  • Have you prepared a founder’s agreement when you started the company? If yes, then it should have included vesting and protection clauses. If not, then it’s up to the lawyers, unfortunately…

      • So does Person A currently hold half of his initial equity since he left at 2 years. If he already gave up half due to vesting then there is no rationale to dilute him further.

        However should new capital infusion come in startups normally try to issue more shares to existing employees that have the effect of diluting former employees.

        But there is a chance you run into facebook’s problem where the ex founder comes back and sues you for his shares.

        A fairer way to go about it is to purchase the shares from person A. You can do it as a private party transaction and not make the company buy it as it will trigger a valuation exercise.

        • Didn’t know how technical you wanted to go, but Election 83B wasn’t filed in time and Person A fully vested from the get-go (as were all founders). If Person A refuses to sell the shares back, or wants a higher share price for whatever reason, then what?

          • Wait so there was no vesting then? You don’t need 83b to have a vesting schedule. That’s only for the IRS. Vesting is an agreement to sell the shares back at the initial price should the vesting not be completed.

            You could appeal to his senses to sell back half his shares to the company due to “fairness” but other than that I’m not sure you have a recourse.

            If both of you have someone in common that you trust they might be able to broker a fair agreement for both of you. I was in a similar situation and our advisor was super helpful to get a resolution mainly to get my other founder to sell back her shares to the company.

            Like i said you could issue more shares to yourself and person B that has the effect of diluting person A bit you should definitely consult a lawyer to avoid getting sued.

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