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Is there a way to fix a bad co-founder equity arrangement?

I should have read up on founder equity vesting before starting but I didn’t so I’m here I am.

We started the company 6 months back and did not talk about equity – we were so excited about the idea we just decided to incorporate the company and start it.

Now the co-founder has taken a full time job and wants to work on this part time or not being involved at all. Since I’m full time I broached the equity subject. He says he’s entitled to 50% of the company since we both started it together. I’ve tried sending him articles about founder equity vesting and he’s just digging in his heels.

I’ve threatened to quit the company since we’ll both get nothing and he says he doesn’t care. I don’t think starting a new company doing the exact same idea just to “start fresh” is legal or ethical so I’m wondering if anyone else has found a solution to this bad situation? We have a few businesses who have given us some money so I’m hesitant to screw them by walking away too.

  • Call your lawyer already! No matter what you get here, you still need to verify legalities before proceeding. Ask around or on Quora for good lawyer familiar with startups. You might be lucky to get a free consult.

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    • OP here. I’ve met lawyers hanging out at meetups, I might call up one of them to see if they can give me some free/cheap advice on how to go about it. I think my best bet is to convince him to work that its in his best interest to work out something.

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  • Dude… you’re fucked. He owns half of the company and there is no vesting schedule. You’ve incorporated. No lawyer or investor is going to deal with those problems when they have 1000 other startups who haven’t fucked up their cap tables to choose from. You need to dissolve the company and friendship. Move on.

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    • If I had a friend who fucked me up so directly, I’d be dissolving that friendship right along with the company too. He presumably agreed to go fulltime on it with OP, then drops out, then refuses to drop shares, making the company useless (to investors, potential growth, employee stock, etc)? F^^k that.

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      • OP here. I don’t think he was out to f**k me. He just feels that the company is as much his and is mine since we both started it. Basically in his mind, once the company starts generating revenue, I can pull in salary and he won’t so he just comes from a different perspective and he’s never been exposed to the concept of vesting.

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        • Umm I meant profit, not revenue, since we’re generating revenue but not enough to cover operating expenses yet.

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  • You incorporated but did you make a cap table where he has 50%? Did you make a cofounder agreement? This is vital information, being incorporated- even if you did it together DOES NOT give him 50%.

    Talk to a lawyer- you might be screwed here.

    That said, just shut the company down and found one yourself. Don’t be a martyr because you think it is unethical to make a smart business decision. If your cofounder is just pussyfooting around then dump him.

    Or do something called a “pay to play” its where the parties involved need to put in money (or sweat equity) to keep their shares.

    But really, invest in a good lawyer if this company is worth anything. If its not, shut it down and let him sue you if he cares. Most he will get is a smaller equity share than he has now as a settlement.

    Reply

    • OP here. No we didn’t put together any agreement other than get the incorporation papers. Yes totally stupid – lesson learnt.

      Shutting down and start fresh may not be legal (from what I heard) if what I’m doing is merely to get him off the cap table – but you’re right, I need to talk to a lawyer.

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      • You can win this by shutting down, going through the subsequent stress of burning cash (that you don’t have) on lawyers, and having some horrible story to tell. But don’t. It’s just not worth it.

        If I had it to do over, I’d walk with my head held high, straight out of the door and leave the business in his lap.

        Don’t play his game. Apologize personally to your customers (explain to them before he does!) that the deal has soured and you feel it’s time to begin anew. (Do NOT disparage him to them or you’ll lose credit)

        They’ll do business with you in a new company if you want.

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  • I had this issue with my co-founder in the past… It turned out he was concerned I was trying to whittle him down to nothing or screw him in the end, when he was legitimately entitled to at least some measure of equity even if he was going to move on…

    Stop sending him articles and have a real conversation. Tell him that you both want him to end up happy, but it’s not fair that he get 50% of something he’s not devoting his entire focus and energy on. Ask him what he thinks is more equitable solutions.

    So far it sounds like you’ve been passively aggressively bullshitting around and then went nuclear… Which I did too… So, don’t feel bad, just realize it’s not constructive…

    What you’ve presented to this person is two options: Not what he wants, or nothing… So, of course he tells you he doesn’t care… Give him the option to contribute to the conversation with his take on it, and see where that leads you.

    If he really thinks 50% is fair when he’s not going to be doing 50% of the work… then you should just say “OK”, hang up the phone, and start working with a lawyer immediately… If he’s going to be an ass, don’t let him make you be an ass back… Take the high road, and let his ass-ness shine through in court.

    You can also start a new company and sell the company you own half of to the company you own 100% of… and then take control of it… and, if he doesn’t like it, then he will have to challenge it in court himself, and try to prove why you weren’t entitled to take that action, etc. etc.

    There’s plenty of ways out of this hole… Give the person real chances to not be a shitty person… If they decline, and continue on with shittyness… then don’t give them any more effort or mental energy than it takes to step over their dying corpse in the road and carry on. Anything more is waste of effort and time.

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    • OP here. Once your former co-founder realized you weren’t out to dilute him to zero, did you guys come to an arrangement both of you were satisfied with or did you feel you had to give more just to get this situation off your back?

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      • We both ended up satisfied. We went over the books together, came up with a reasonable determination of what his shares were worth in a company that hadn’t made it yet, and an undetermined future, and I found investors that were willing to buy his shares away for that value down to his minimum satisfactory equity holding percentage.

        I even gave him special protections on his shares, just so he would be less concerned about how he would be treated by myself or anyone else that ends up controlling the company in the future.

        His primary concern was that he had invested a great deal of time and effort into something that had so far produced little fruit, but was going to be continuing on without his direct influence. He was afraid of ending up like the guy from Victoria’s Secret that jumped off the bridge because he got so screwed in that deal. I told him we could work together to make sure he never ended up feeling that way. Then we got constructive.

        You WILL feel shitty about how it all went down, no matter what… And, you will likely still have moments in the future where you wonder whether or not you should just go nuclear at that time… Those options are always there, and they are always tempting. The trick is to catch yourself focusing in on too narrow a band of solutions, and force yourself to consider ways to tackle your problem more creatively than you initially thought up…

        Just do your best, be the kind of person that you can live with being and be proud of being for the rest of your life, and no matter what, you will have that to hold up as an accomplishment… It is the only accomplishment that nobody and no circumstance can take away from you… Money, things, status, they’ll all disappear eventually… But, nothing can force you to choose any one behavior or decision over the other. Just make sure that no matter where you land, you can stand tall and feel good about who you are. It’s the moments where you fail at that, which plague you for the rest of your days.

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  • You don’t have to dilute him to zero. You don’t have to be fucked.

    Here’s a way that is ‘pay to play’, but equitable:

    1) Define the value of the business at the time he made the choice to gat another gig

    2) agree he owned 50% at that time

    3) issue new shares in a pool that will be granted to employees (you) in exchange for work as compensation (structured so you won’t get hosed immediately on taxes)

    4) you may need a board with enough votes and support to do this, depending on how you incorporated

    5) work for those shares (can best quickly and at whatever pace you’re granted

    6) dilute him down to a reasonable amount (10%?)

    7) once there, you have a clean cap table and you own 90% (or whatever you think is fair)

    8) now you can raise a round and continue with co founder who is persona non grata (and he can save face, still own something of the upside and call himself a co-founder with skin in the game.

    You WILL want an attorney for this. Not for free, but this process is not legally hard and you can find someone with boilerplate docs to get this done so your bill should only be a few grand (well worth getting this right).

    Should only take a few weeks to complete.

    Go.

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  • If it makes you feel better I worked with my co-founder to renegotiate our agreement. It was an awkward conversation but once it was all said and done we felt better for it.

    This is a long process and I’m at the end of revising it – thank god.

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    • Can I ask did you have a form written up specifically for your case by a lawyer or did you use a standard purchase agreement found on a legal site?

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