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Here's the scenario: Myself and 2 partners have been working on a project since January. Since we are all friends (mistake number 1) we orally agreed to split the future company's equity three ways with a 4 year quarterly vest and moved forward without an LLC & Operating Agreement (mistake number 2). We've made significant progress since January, but one of the partners hasn't contributed much of anything (although she thinks she has) and the other partner and I agree that we need to part ways.

We want this "divorce" to be as fair and friendly as possible. The three of us are very close to signing an Operating Agreement and forming an LLC. Should we do this first so everyone understands what happens if a member has to leave? It seems counterintuitive (and somewhat underhanded) to be signing an Op Agreement while we know we're going to part ways with one partner nearly right away. But would this better protect the remaining members? If we don't sign, would the remaining partners be exposed to legal action in the future?

I look forward to and thankful for the community's advice!

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Can you clarify something - does partner #3 know that she is about to be asked to leave the "company"? – Elie Aug 4 '11 at 15:43
Partner #3 doesn't know that she is about to be asked to leave. – Miles Aug 4 '11 at 16:10

5 Answers

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  • Please tell the 3rd partner what are your thoughts, transparency is the key to a successful friendly 'divorce'.

  • Value the business, the 2 partners should buy the leaving partner's share. Since you are friends and you want a friendly 'divorce' i would add a % to compensate for the friendship/time/energy/whatever... for example, 33% of business valuation + 10% or 15% as a prize.

  • Make an official document with the 'divorce' explained and signed by all of you (the 3 partners), to avoid problems/lawsuits/etc. in the future.

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Thanks for your input. Should we bother signing the Operating Agreement first? Seems silly, but do you think it's necessary? – Miles Aug 4 '11 at 17:22
Also, if we don't sign the op. agreement, do we instead value the business and give her what would have been her share had we actually signed the agreement? – Miles Aug 4 '11 at 17:32
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I wouldn't sign the Operating Agreement with her, if she is about to leave, it's pointless. If you are her friend, if you want a friendly divorce then pay her as if you had signed the agreement. Do the things in a way that she feels you don't have hard feelings and want to keep her as a good friend in the future :) – Rui Aug 4 '11 at 18:01
Don't forget to mention in the 'divorce document' that everyone accepts the 'divorce' conditions and she cannot claim any money, stock, share or assets in the future. – Rui Aug 4 '11 at 18:17
And what if she refuses to sign anything? Are we then at risk (legally/monetarily) in the future? How could we mitigate that risk if she doesn't want to sign? – Miles Aug 4 '11 at 18:34
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up vote 1 down vote

I think you're making this a lot more complicated than it really is. If you want to be fair and minimize the possibility of future lawsuits, then you should A) Tell her that you don't have a place for her in the company going forward, B) Let her walk away with the 4% equity that is already vested, C) have her sign the operating agreement of the new LLC, and then D) possibly have the company make an offer to buy back her shares. Letting her keep the 4% equity already vested may seem painful, but that represents the terms of the legal agreement that you all consented to.

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Sounds reasonable and safe to me. – Alain Raynaud Aug 4 '11 at 23:25
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Value the company at a date. If all partners have invested in the company, and one wants to leave. Have the others buy that person out(Pay them what they put into the company). If they haven't bought in. Then, just let them cash out the equity they have in the company.

The trick is really to cash or buy out. Create a paper trail of this transaction & it's purpose. If you do that, they wont have a claim later on. Also you can have them sign a document to release them of liability & Ownership.

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up vote 0 down vote

I am sorry for you and your friendships that the partnership on this endeavor has not worked out as you hoped. It is clearly now creating a challenge for you and confronting it is the right thing to do. It will not get better.

There are lots of strategies if the value of the friendship is to be dismissed. These include the development of a partnership or operating agreement which is setting up the foundation for dismissal or dissolution, create benchmarks for capitalization from all partners with a hope that she doesn't step to the plate, or setting up accountability structures which she can't perform within, or . . .

But the bottom line is that if you want to maintain the relationship you will need to take the ultimate risk and sit down and talk. Here are some pointers you may find valuable in thinking about how to have the talk:

  • Leave very little time between scheduling the talk and having it.
  • Schedule twice the time you think it will take
  • Consider having a neutral facilitator help guide the conversation
  • Honor the involvement and imput made by all
  • Do not blame. There is no blame. People make committments they think they can make. And life happens.
  • Do not gang up. Make the focus the health of the partnership and company. If you gang up-- you lose.
  • Be open to hearing about how you have not helped or supported the endeavor from her experience
  • Consider work out plans that does not involve her leaving at this point
  • Once a problem has been identified -- invite her to propose solutions -- she might surprise you!
  • Have good nutrition food available to eat
  • Allow there to be silence.
  • Do not let much time pass between the talk and getting together to socialize/drink/party
  • Do not let much time pass between getting together after the talk and doing it again.

I wish you the best. I hope you choose the path that honors the relationship! In the end the meaningful relationships we have with people are far more important than successful projects her or there.

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Thank you for your reply. We have talked to her on numerous occations, but performance has not improved. Unfortunately, the next move is to part ways. Do we bother signing the Op. Agreement? Do we instead value the business and give her what would have been her share had we actually signed the agreement? – Miles Aug 4 '11 at 17:30
What was the agreed upon path for the next steps based on your conversation with her? If you didn't have one you "talked to her" rather than talked WITH her. If you value the relationship then she needs to be part of the strategy. If not -- then sign the OA or don't -- I am not sure I see the value either way. – Joseph Barisonzi Aug 4 '11 at 17:42
A couple of weeks back, the other partner and I sat her down to formally define her role and set expectations - it was a constrcutive talk and she was mostly receptive. However, to this day we still have not seen it bear any fruit. This scenario has been replaying itself over the past couple of months, which is why we feel like it's time to part ways. If we don't sign the OA and she doesn't want to sign a formal document stipulating the terms of the separation, are the remaining partners at any legal/monetary risk if the business succeeds? FYI- we haven't launched the 1st vers. of the product. – Miles Aug 4 '11 at 18:30
up vote 0 down vote

Actually You need to discuss this matter with your third friend, and the rest,try to convince why you had taken this decision,Because you want a friendly divorce, not want to break the relation ship, since you all are friends, so better try to talk with #3 friend.

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