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I run a company that has been in operation for 5 years or so and we have several members who are essentially "dead equity". They are either investors or members who were once working for "sweat equity" and are no longer with the company. It would really be nice if we could gather some of this equity to use on a developer. I was wondering if anyone has a good solution to the problem.

I thought about drafting up a document that would rewarded equity over time to those actively working on the project. Though I'm not sure how legal it is and if they could come back later and reclaim the lost equity.

Any ideas?

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How was the equity agreement drawn up initially? Do you have contracts and whatnot specifying equity? Also, what form of business is this? Partnership, LLC, Corp? Will need a little more information to give you a good answer. – bwasson Aug 30 '11 at 17:50
We absolutely need to know which company structure you have in place. You can't "draft a document" by yourself when it comes to equity! – Alain Raynaud Aug 30 '11 at 18:23

3 Answers

up vote 2 down vote

From what i read here you need to talk to a lawye. Either you have a case somehow, or - you just try to betray people owning a part of your company. Sorry, but there is no such thing as "dead equity". Investors are not "no longer with the company". if an investor pays you money for shares, the shares are his, and seriously, I would be pissed like hell if one of my invetments would come back and demand that I start doing some more stuff like working for them. That said, my investment are more traditional stocks, not startups. But the principle is the same - if whoever owns the equity fulfilled his part of the deal, the equity is not dead. It is active. Equity is not an ongoing payment, it is ownership of a part of the company when paid (either through sweat or money).

I thought about drafting up a document that would rewarded equity over time to those actively working on the project.

The go to jail card?

Here is the point: it is not yours as CEO of the business to decide whether or not the business turns out shares for work. The quorum of owners (i.e. general assembly) can authorize a program for you to do so, but they (i.e. the owners) have to do so, not you. And yes, all alrge companies have such programs - approoved by the owners. If an employee of mine (and a CEO if an employe) decides to turn over part of my stuff to someone else.... ;) This is called theft, you know ;)

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up vote 0 down vote

We have a partnership agreement in place and I can gather the 75% voting approval to draft up an amendment involving equity.

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I hate to tell you, but this may be a point where the blocking minority may come in, as well as your obligations to protect your minority partners ;) – NetTecture Aug 30 '11 at 19:36
My intention isn't to screw over my minority partners, its to ensure the company is moving forward and ultimately doesn't outright die. – user13036 Aug 30 '11 at 19:50
This brings up a new question, if you have a partnership agreement, have you covered dissolution of the partnership? If not, legally if any member of the partnership dies, or leaves the company, the partnership has been dissolved under the law, so you might be in the clear. However, I would strongly suggest you consult qualified legal counsel. – bwasson Aug 30 '11 at 20:15
We had a legal team draft up the partnership agreement. Its pretty comprehensive and does detail what should happen if a member dies – user13036 Aug 30 '11 at 20:20
up vote 0 down vote

But your partnership agreement did not address ownership vesting, owners leaving the company, or any of those critical issues?

At this point, my unqualified opinion is that you're screwed. If you were a C-Corp, or LLC you could just do another stock issue to dilute the shares of stock on the old partners, but as a general partnership there's really nothing you can do. Your best bet would be to vote to dissolve the partnership, and reform as another entity.

But again, talk to your lawyer.

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