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I incorporated with a friend turned business partner, probably giving him too much of the company for the amount of work he was putting in simply because he was a friend. Since incorporation, he has become very unproductive, bordering on shirking off his business duties altogether. It's been about 3 months now, and I am looking to get him motivated to get his job done again. I've tried to give him the benefit of the doubt, giving him the chance to make up for it, giving him more to do, but it hasn't worked, and I keep having to pick up the slack.

Other things I've tried:

  • Talking to him directly about it
  • Setting deadlines (which come, and go)
  • Having twice a week status meetings (recorded and emailed to both of us)

I want to give him credit for the work he had done prior to incorporation. After looking around, vesting his shares seemed like a viable solution, but I'm unclear as to whether/how I can do this after incorporation. (All the paperwork was filed, but I have never given him his actual stock certificate, if that matters at all)

Another suggestion I've heard is to forget about him doing more work and require that he put in more equity, but again, how can this be accomplished after the initial incorporation?

Needless to say, I should have thought about this beforehand, but that was my naive former self.

What are the options I have in this matter or am I out of luck?

UPDATE:

My partner's % ownership was fair while he was being productive, but now that he has just stopped working, it's no longer right. Keeping in mind that incorporation papers have been filed and initial shares have been divvied up, I'm curious as to what I can legally do to remedy this and how to go about doing it?

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@Tim: He has 45%, and we'd been working on it for a little more than a year prior to incorporation, but he hasn't really done anything in 3 months. Thanks for the input! – GoodGreif Jan 15 '11 at 21:22
You should talk to him openly about your concerns. Maybe he's done and would like out. Or maybe it will make him consider and he will get back to work. He might just take non voting shares as compensation for work done. – TimJ♦ Jan 15 '11 at 22:58

5 Answers

up vote 4 down vote accepted

Would it be an option to buy his share out before they become more valuable? Another option might be for the company to issue more shares, which you can purchase, which can dilute the share whilst still giving that recognition of a sahre of the business.

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+1 for dilution. Buying him out may be difficult since the terms depend on the operating agreement. – Henry the Hengineer Jan 16 '11 at 9:39
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As far as dilution goes, could that cause some sort of legal action to be taken against me as the majority holder? Didn't Zuckerberg have to settle with his original business partner after doing something similar? (Maybe that's not the case. I'm taking it from "The Social Network", as everyone knows all movies are 100% accurate... ::scoff::) – GoodGreif Jan 17 '11 at 6:19
@GreatGreif You probably should give him the chance to buy some of the new shares, to keep it fair; if he's really lost interest, then he won't buy them. So lets say you've issues 20 shares (11 to you, 9 to him - make sure that is formalised prior) and then the company is to sell 20 more shares, and your friend doesn't want to buy any, then all of a sudden, his share may have halved. Of course, the company could use this injection of cash to pay those undertaking development tasks... – Rowland Shaw Jan 17 '11 at 9:10
Are you referring to Zuckerberg's settlement with Saverin? I'm not sure about the entire details of that case but as I recall Zuckerberg reincorporated in Delaware without Saverin - their initial shared entity was a Florida LLC. I think suit was more about the returns on money Saverin put into the company than dilution, but this merits more research. – Henry the Hengineer Jan 18 '11 at 8:08
up vote 3 down vote

Let me start by saying that vesting should have been in place from the start, so this would be a no-brainer. It sounds like you didn't think of including vesting, but that's ok.

Here's how you proceed from here (after having read all the current legal papers, good advice):

Tell your co-founder that in your opinion, he has given up and his share of the business needs to go down to XYZ (for instance, 10%), based on the work he put into it the year before.

That's your opening statement. How it gets done is the point of the 2-hour discussion you'll have after that.

He could fight it, saying that he is committed to the business. He could agree but think that he deserves 15% rather than 10%. In most cases, you'll come to some agreement by talking, and then you just tell your lawyers to draft the appropriate paperwork to make it happen. So it doesn't matter that much what you have signed so far.

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Gret advice alain. sounds like the lawyers are going to make some money, and both parties here are going to bleed from their asses! – Frank Jan 16 '11 at 13:13
up vote 2 down vote

After looking around, vesting his shares seemed like a viable solution, but I'm unclear as to whether/how I can do this after incorporation.

Vesting is precisely the remedy which would have helped in this situation. But you cannot apply it now, vesting is agreed upon before the company is formed / shares issued.

We cannot tell you what your options are. It all depends on the specifics of the contracts, company bylaws, shareholder's agreements and other documents created when the company was formed. You must bring these to a lawyer and ask him.

Before you go see a lawyer, sit down and read through the papers you signed a couple of times. If these agreements are well made, the will have clauses that stipulate in part or in full how termination, issuing of new shares, etc are to be handled.

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up vote 1 down vote

Initial incorporation does not bind either of you to any obligations, unless a contract was signed - either in the form of a stock purchase agreement or a shareholders agreement. If neither exist, the incorporator(s) listed on the incorporation doc hold all the cards for that entity (which is an empty shell until contracts come into play). It's all about contracts - if your bum business partner does not have a stake in the company on paper, then he's out of luck, not you.

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Thanks for the input. The problem is that he does have an interest on paper, albeit a minority stake. But once the incorporation paperwork came through, he essentially stopped working. It was a fair percentage while he was doing work, but now that he's not, what can I legally do? And how can I do it? I'll update the question to make this more clear – GoodGreif Jan 16 '11 at 7:45
up vote 1 down vote

With unrestricted shares already having been issued, you cannot unilaterally apply vesting or other restrictions to his shares.

If you cannot agree with him concerning how things should be rearranged, and if you cannot live with the current situation, then the alternative is to dissolve the corporation and start over without him.

Whichever course of action you follow, retain a lawyer so you won't make additional mistakes and create an even worse situation.

Disclaimer: This answer does not establish an attorney-client relationship.

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