He was the original co-founder and was the one who built the beta product. He is not under any contract but when I formed the company, I gave him 20% equity. We are about to look for investors but I’m worried if his involvement and complete refusal will affect our chances.
Your Company Has Three Problems:
- You don’t have a co-founder.
- Twenty percent of your equity is up in smoke.
- You don’t own your intellectual property because your co-founder never signed an agreement assigning the product’s intellectual property to the company. He owns all of the code he has written, not the company.
Right now your company has no worth. In fact, it now has negative worth given that a big chunk of equity is gone.
You Have Two Options:
- Quit and start a new company.
- Try to salvage this one.
(Note: Don’t even worry about bringing on investors at this point. You aren’t ready, and no investor would sign up for this anyway.)
Assuming you want to try to salvage the company, you first need to start a discussion with your co-founder. You need to decide what you want to talk about during the meeting, but it’s important to say that the company cannot move forward unless you get him to agree to three things:
- He has to agree that he is no longer involved with the company.
- He needs to agree to cut way back on his equity. He should walk away with 5% or less, and even that may be too much.
- He needs to sign a document assigning his intellectual property to the company.
You actually have a great deal of leverage in this discussion: The company cannot continue unless he does all three of these things, so if he doesn’t, his equity is worth zero.
If you come to a verbal agreement, you’ll need to get an attorney familiar with startup financing to execute this for you. Do not go back to the attorney you used to form the company in the first place. He did the company a real disservice with the poor advice he gave you.
Now let’s say you manage to get all this done. Congrats, but you still aren’t out of the woods. You still don’t have much—just some code, no team and a chuck of equity missing.
You now need to find new partners, ones who are dedicated to making the company work and talented enough to do it.
Once you have a new founding team, you’ll want to do the following:
- All of you need to sign up for four-year vesting with a one-year cliff. Yes, you too.
- You all need to assign the intellectual property you create to the company. Yes, you too.
- You all need to work like mad to get the company to a point where it is fundable.
This means, working on a compelling product and a growing and loyal user base. There is a pretty good chance you can’t get there from here, but there is nothing wrong with that. Just disband the company and start over. If you do, you really aren’t much worse off than you are now.
I don’t know how some folks are coming to conclusions with so much missing information. We obviously don’t know a lot, but let me point out a few facts that typically apply (and may or may not apply to you). I hope this helps:
Did You Issue Restricted Stock?
If so, what is the vesting language in your RSPA? Commonly, it would be three years with no cliff. If he’s been there for less than full vesting, then you can obviously return some shares to the company.
Your RSPA should also include a technology assignment to the company. If you have that, then the company owns the intellectual property.
Alternatively, is he an employee or consultant to the company? Is the company a legal entity? Did you have him sign an agreement for compensation, including the equity itself? (Surely, you gave him a document of some sort, spelling out the 20% share.) If so, that document should include a section on property ownership for the technology.
If you have any kind of acknowledgement that he was working for the company, or that the 20% was his share of the company, I think you have a good shot at proving ownership. (Note: Him owning 20% of the company, but 100% of the intellectual property doesn’t add up.) But ask a lawyer.
Is He a Board Member?
If so, you’ll need a majority shareholder vote to remove him. If not, you’re good on that point. Is he an officer? If so, you can terminate him with cause—for failing to perform his fiduciary duty.
If you need to, you may be able to issue new shares once he’s out. (No sympathy for squatters.)
I don’t know how anyone can judge your value without more info. And it makes no sense that you’d have “negative worth” simply because he owns a big chunk of equity. That could only be the case if other factors are at play. We know none of that.
Michael Wolfe and John Schenk
Read Michael Wolfe and John Schenk’s answers to, “For the Last 4 Months a Founder in My Startup Has Refused to Answer Any Emails and Has Done No Work for 6 Months. What Do I Do?” on Quora.