Tell me more ×
Answers OnStartups is a question and answer site for entrepreneurs looking to start or run a new business. It's 100% free, no registration required.
up vote 12 down vote favorite
1

I co-founded a consulting company in Vancouver 4 years ago with 2 partners. One of us is working full-time with the company and getting a modest salary. Me and my other partner are doing couple of hours of work per week for this business, and have yet to make more then 15k in dividends in last 4 years. I'm full-time employed in another company.

Our annual revenue is around 100k flat for last 2 years, and this barely covers our office and salary expenses.

We tried hard to grow the business, tried to expand internationally, hired more people for sales & marketing. However, we realized our niche was too small and it's extremely hard to grow a service-oriented business.

I want to quit as I failed to convince my partners to transform our business to a product-based company from a service-oriented business. Since I initiated the business, own 1/3 of the company, and built a well-known brand in our niche, I'm having hard time making this decision. I lost my motivation, and have other ideas to work on.

What happens when I quit? I guess I'll still own 1/3 of the shares, and the company will continue to operate. Will I still have legal liabilities? What's the best way to quit?

share|improve this question
Just wondering how this turned out today... Can you update us, Boolean? – Cawas Aug 5 '11 at 14:23
3  
Interestingly, things are getting finalized this week (1 year later). Instead of leaving the company, me and my other partner bought out the 3rd partner. Luckily, we easily agreed on the price considering we didn't have a shareholder agreement. Note to self and all: Have a shareholder agreement first thing after incorporating. – Boolean Aug 17 '11 at 18:34

4 Answers

up vote 10 down vote accepted

When a co-founder leaves a company what usually happens is that the other co-founders buyout the leaving founder's shares, which from the sound of your question won't be much. You will no longer own your current shares, you won't have any voting rights or management duties, and will have no legal liabilities. You will have no connection to the company.

Another option is to bring in another person to buyout your shares, but that is less common, and again you will have no connection to the company.

share|improve this answer
1  
Yes, buyout won't bring much money, and I'd rather keep my shares for potential upturn in the future. However, I do want to get rid of management duties and legal/financial liabilities. Is this possible while keeping my equity? – Boolean Sep 26 '10 at 9:41
3  
No. Your co-founders would be crazy to agree to something like this. One option might be to quit as an employee, and stay on as an owner. This lets you keep your shares (although maybe not all of them), but you will still be liable for any actions. – Zuly Gonzalez♦ Sep 26 '10 at 14:01
up vote 3 down vote

You mention shares, are you organized as a corporation? What do your founding documents say about your ability to sell your shares?

When we organized our company, we drew up a buy-sell agreement that outlined what happens when someone:

  • wanted to quit,
  • died,
  • got divorced,
  • declared bankruptcy,
  • or experienced some other major financial-live-altering event (I forget the other specific examples at the moment).

These things are much easier to agree on up-front. Not that this helps you now.

You'll need to talk to your personal attorney to see what your options are. If your bylaws allow it, you could just stop working for the company. You could force your co-owners to buy you out, possibly by loaning them money. You could force the company to buy back your shares. You could sell your shares to a third party.

share|improve this answer
up vote 1 down vote

You may want to talk to your personal attorney (not the company's attorney). There's a lot of variables here that depend on your situation specifically with the company. Are you vesting?

I do start-ups for equity upside. If I were in your shoes, I'd want to keep that equity for eventual upside if the team does manage to make it work. But if you're not vesting, then it sounds like the capital structure might not have the built-ins needed to bring in new team members to make that happen. If the existing team wants to buy you out and the price is right, go for it. Or perhaps you sell just part of your equity now and hang on to the rest, just in case.

share|improve this answer
We didn't do vesting, so I own 33%. It's very hard to valuate the company since the profits are very low. I don't think me and my partners can agree on a price to sell my shares to my team members. They wouldn't (and probably can't afford to) buy me out. – Boolean Sep 26 '10 at 4:00
up vote 1 down vote

From your reference to shares, I assume that a corporation was formed (despite the references to "partners"). I believe that the short answer to your question is:

  • Resign as an employee, officer and director (each as applicable) of the company in writing to the board of directors.
  • Ensure that filings with the applicable governmental entity (e.g., Secretary of State) are updated to reflect your resignation.

You will remain a shareholder. As long as the corporation complies with applicable formalities (please see "Beware Your alter Ego"), you should have no personal liabilities arising from the corporation's business.

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.

share|improve this answer

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.