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So I've got a startup with a three friends of mine cofounding and on board. We used to have a fourth. When we originally started and got all of our documents in order, the fourth girl received a high equity stake.

Basically, she's on the board with us, holds 25%. She doesn't hold any official position just owns common stock.

Problem is, she didn't do basically anything. Looked "pretty" but added zero to our product. She was from out of state so we barely saw her. Lots of false promises - you get the idea.

We all confronted her a few months in about her lack of motivation and she said (via email) that she'll relinquish her equity back to the company.

The problem is that she said this about six months ago! We sent her documents to sign that would transfer over her shares. Every few weeks we emailed her and she keeps responds saying that she is busy and she'll get to it or that she has to send it to her lawyer to get it reviewed. We don't know what to do, we have investors interested but they won't want to be involved with someone technically owning a high amount of equity.

We don't know what to do about this cause it sort of sounds like she's not signing it out of spite for us kicking her out. We don't want to pay her anything cause like we said she didn't do a single thing. I have a feeling that even though she said by email she's gone and she wants her shares out that that wouldn't hold up in court. Is there anything we can threaten her with? We've tried to reason with her and find out what she wants but looks like she doesn't want anything!

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I don't think this would be a real answer, so I don't want to post it as one. Have your smoothest talking, nicest, but most aggresive co-founder take a flight out there where ever she is and don't leave until she signs the papers. That is at least what I would do. – SpoiledTechie.com Apr 13 '12 at 21:36
to the downvoter: care to explain? – sdchargers Apr 13 '12 at 22:46
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You got what you bargained for. You agreed to give her the equity. Now she has it. Learn your lesson and get on with the business. You might consider starting a new company. – TimJ♦ Apr 14 '12 at 1:24
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Learn from your mistakes. You should have had vesting in place. Fire the person who doesn't contribute. Now, you need to clean up your mess. She has no incentive to play nice, so find one. – Alain Raynaud Apr 14 '12 at 5:33
I agree with @TimJ, you made your deal and now you have to live with the consequences. Vesting is always a good idea in my mind, this gives you the opportunity retain the equity if the person does not perform as anticipated. Not sure what the ramifications of starting a new company would be in terms of possible legal actions but it's worth talking to an attorney in your state about. – Tim Apr 14 '12 at 13:38

3 Answers

up vote 11 down vote

I don't understand why you think she should leave.

It doesn't sound like you brought her on board with high expectations -- as you say, she doesn't hold any official position. She's not your friend, so you can't expect her to act in some socially-ideal way. She's doing what she's always done; and, in return, she got something of value to her -- equity. Now you're asking her to just leave... why should she possibly do that? What do you have to offer her that would incline her to leave?

I think that you've learned a tough lesson about the challenges of starting a company and, probably, a good reason that everyone at your next startup should sit down with an attorney over a period of several days and hash out what real, effective articles of incorporation would be (good articles would have covered this possibility).

Until then, you're stuck with her owning a share of the company. I suggest you set up a bonus system to award additional shares to people who achieve things (you did authorize more shares than you issued, right? Please tell me you at least did that) and dilute her down from her 25% share to some small number that you don't care about.

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And be prepared for her to take a lawyer when you dilute here ;) Seriously - you have NO right to ask for the shares back first place. She stalls you, and rightly so. – NetTecture Apr 14 '12 at 8:17
As long as she only owns a minority, the company can always authorize more shares without her going along with it. – Chris Fulmer Apr 20 '12 at 15:14
Ah - yes. And she can always drap them to court for violation of minority rights, ESPECIALLY when those shares where issued without anything of appropriate value in return, just deluting her. Besides that blocking an investor for years, it also has a VERY good chance to win due to total violation of her property rights. OTOH It MAY save the other founders money for rent and food - while they serve jail time for investment fraud ;) – NetTecture Apr 20 '12 at 15:48
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authorizing additional shares is not a violation of minority rights. You only need a majority of stock holders to go along. Issuing the shares is another matter. – Chris Fulmer Apr 20 '12 at 21:47
up vote 1 down vote

Consult a lawyer. There are lots of ways to get rid of a minority shareholder:

(1) Dilute the ownership, so everybody else has, say, 10x the number of shares, then do a reverse-stock-split, so she only has a fraction of a share.

(2) Merge the company with a new company in which she isn't an owner.

(3) Sell the company's assets to a new company.

Depending on the laws of the state where you're incorporated and on your specific situation, she probably doesn't have the right to continuing ownership of the company, but she probably does have the right to fair compensation for her ownership. That's important.

Talk to your own lawyer. The fact that those things are possible doesn't necessarily mean that they're advisable.

And, in whatever company remains, make sure that ownership is subject to vesting -- i.e. continued participation in the enterprise.

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1: End up in court for stealing her ownership share. You have to respect her property rights- just issuing everyont 10x the share except her without value exchange means - you end up in jail. GOOD advice. – NetTecture Apr 20 '12 at 15:49
2: yes, but then - again, see 1. If you do not do that for an appropriate value, you steal from her. Jail time waiting. – NetTecture Apr 20 '12 at 15:49
3: and again. She owns that, the company HAS to look out for the interest of ALL shareholders. YDO that below fair value - without reason except to get rid of her - and jail is waiting. – NetTecture Apr 20 '12 at 15:49
NetTecture -- I didn't say anything about issuing shares without value or not giving her fair value for her shares. The question of how to value the shares is entirely separate. I did say that she has a right to "fair compensation" – Chris Fulmer Apr 20 '12 at 15:57
AS to the mechanics: (1) Dilution happens any number of ways -- as long as it's fair, you should win that court case. And, you don't end up in jail -- that's criminal law, but it'd only be a civil claim. (2) She has a right to fair compensation, and can enforce that in court if she doesn't think she's being treated fairly. (3) Yes, can't be done in a sham transaction. – Chris Fulmer Apr 20 '12 at 16:06
up vote 0 down vote

Can't you just "kill" your current start up and start a new one ? With the 2 other people and almost the same goal ?

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He could, but then it could be seen as defrauding, especially when the new corp "borrows" elements from the old - stuff like customer data, prospect data, current financial planning, code, all trade secrets of the origincal company. Best way to get hit into a major criminal (!) lawsuit (investment fraud). – NetTecture Apr 14 '12 at 16:26

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