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I am seeking help in how to handle an underperforming partner / friend that is resigning from an early phase of a startup.

Two friends and I began an equal partnership startup with the following roles & responsibilities:

Me: Loan money to company. Partner A: Original idea, networking, marketing, subject matter expert. Partner B: Manage tech decisions & developers.

The agreement was verbal and has not yet been put into writing. Partner B provided a budget which advised a need of between $8,000 and $15,000, plus monthly maintenance. Development costs have now surpassed $20,000 and we don't have a minimum viable product.

Partner B has communicated slowly, caused major delays to the project, and under budgeted. Partner B wishes to resign due to lack of ambition for the project. He feels his time spent so far is worth $10,000, and wishes to be compensated for this. Doing so would increase my stake to 67%. I disagreed with him and refused to give him a counter offer until I conducted more research.

My other tech consultant (who is extremely sharp) analyzed our project today and informed me he could have had the same development done for just $2,000 using his extensive software libraries, or $5,000 if he began from scratch.

Add $1,300 in graphic design and we essentially have $3,300 (low) - $6,300 (high) worth of assets and over $20,000 in liabilities right now. I do not feel that Partner B is owed anything in this situation, but I don't know how to approach this considering that he is a friend that I wish to keep.

Any pointers on how I should approach this? I don't want to alienate and lose a friend, but I am also unwilling to pay him any substantial amount of money for something that could have very well been developed for no more than $6,300.

Thanks!

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What is the agreement in shares - is there vesting or did you all get 100% of your ownership right away? Were there expectations of performance? Does he own any of the work/copyrights or is it all from developers you paid? If it were me I would negotiate HARD with him and have him take an IOU. – TimJ♦ Sep 6 '12 at 16:19
Regards for friendship should be both sided. If he is not considering friendship and blatantly claiming $10k, then you should also play number game and tell him his worth (what your other guy analyzed). If he really is your friend, then he should be able to understand what your tech. consultant is suggesting. Probably your tech. consultant knows more than your friend and your friend can learn a thing or two from him also. – Pradeep Dec 2 '12 at 10:46

2 Answers

up vote 7 down vote

Well the advice would generally be to not get started until you have this situation worked out - as in - what will we do if someone leaves?

The general way to handle that is everyone starts off with shares of the company - you said it was an equal split so, let's say there were 900k shares, everyone would have 300k. The shares are valued at something like $0.001, or $300 total for all 300k shares. Then you put put a vesting plan of sorts in to play. For example, if someone leaves within the first year, the company can buy back their shares at the same $300 price tag. That's the cliff. If you were on a 4/1 vesting schedule (4 year vesting with a 1 year cliff) then, after the first year they vest 25% and continue to vest a percentage of the total every month.

The vesting in this case is really reducing the amount of shares the company can buy back if they decide to leave. It's agreed upon by everyone when the company starts and it makes it very clear what the options are if someone leaves.

Since you didn't do that you're somewhat stuck. There are definitely ways to get the person out or reduce their ownership to be negligible but you'll have to just talk with them and see what you can work out if you want to stay friends.

I would remind him that you're not paying him for his work, you're paying him for his portion of the value of the company. It doesn't sound like the company even has a positive value at the moment.

The company is currently worth X (you'll have to figure that out) and since he owns a third of the company, he could reasonably expect to get X/3 in a buyout. It shouldn't matter what his time was worth. That's a different issue. If he had been working under the assumption that he was being paid for his time and not for the value he was building then he shouldn't have ownership. Think of it like this - if suddenly someone came and bought the company for $3 million would he still want $10k or would he want $1 million?

Figure out what the company is worth and offer him something based around that. It sounds like you may have to just explain that the company is in a financial hole and can't afford to pay him anything. It also sounds like you need to actually structure your company with some rules going forward.

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up vote 4 down vote

If he wasn't your friend I would say he gets zero. Half build software has a value of zero so why should he get anything for it?

But as he is your friend you need to handle this a bit more dedicatedly. I would suggest you draw up a written agreement whereby if the company earns over X amount profit in the next 5 years you will pay him a fair amount (~10k). After all in this case his contributions would have helped with the success if you do earn the threshold amount. Also this way you get hit with a bill when your start-up is successful and you can afford it rather than the early stages where money is tight.

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