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Co-founder performance in the startup has dropped. He clearly has other priorities in his professional life, like other startups, and he doesn't want to give up his 30% shares.

The only written agreement was an email exchange agreeing on the ownership split, and the work to be done...but maybe it was too vague, without the hours that were supposed to be invested by both parts, for instance.

How to deal with this situation?

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I'd say you should talk to a lawyer, and consider diluting him out. – littleadv Oct 15 '12 at 20:27

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If you have no legal agreement that specifies what happens in this case you will need to do several things:

First: Offer him a fair price to buy out his shares.

If he does not accept:

  1. Consult an attorney to see if the following is legal in your juristiction.
  2. Let him know you are going to dilute his shares of stock, and repeat your original offer. If he does not accept:
  3. Issue 100 times as many shares as currently exist to yourself, in payment for your current and future work.
  4. His 30% has now turned into .3 percent ownership. Offer to buy him out again, at 1/100 the initial price. Repeat as necessary.

Or, sell the company to another entity for a fair price. (You own the new company.) Give him 30% of that sale.

And never enter into a partnership or start a new company without a written agreement that covers all your bases.

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that's a great answer – South Oct 15 '12 at 20:40
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So, the fair price part is good. The extortion on diluting him, on the other hand, could easily get you on the receiving end of a lawsuit. Here's a somewhat better alternative: Say there are 10 shares and he has 3 of them. Do a 1-for-5 reverse split and pay out fractional shares in cash (at fair market value). Get some legal advice, because whether that's available will depend on where your company is incorporated. – Chris Fulmer Oct 15 '12 at 21:06
See point 1 above, and the "Sell the company advice" above. Both already covered. – Gary E♦ Oct 15 '12 at 21:50
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I bet this is the most common problem in our startup world - co-founders starting a company without an operating agreement. Never ends well. – Apollo Sinkevicius Oct 16 '12 at 4:25
I agree, lack of any kind of operating agreement is very bad and when you couple that with a lack of "fairness", you get predictable horrible results. – Gary E♦ Oct 16 '12 at 4:54
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You should read the agreement of partnership and act based on that. If the shares aren't vested - you can reclaim the non-vested portion if the vesting conditions are not met. If the partner is not only a shareholder but also an employee - you can fire him to stop paying salary. In any case - get a legal consultation first.

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the only formal agreement was an exchange e-mail agreeing with shares split and the work to be done...but maybe it was too vague, without the hours that was suppose to be invested from both parts for instance.... – South Oct 15 '12 at 20:16
@South lesson learned... Next startup spend some time and money on the proper legalities. – littleadv Oct 15 '12 at 20:27
so pretty much, in your oppinion, I have no choice – South Oct 15 '12 at 20:32
from what you've described it sounds like you don't have much. But you have to discuss it with a lawyer, there might be various backdoors and loopholes that a professional would be able to identify. – littleadv Oct 15 '12 at 21:01
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If the documents surrounding his share issuance don't provide for any sort of buy-back or vesting, then there's not much you can do to take them back. Does it matter? The other two founders have a majority of the voting power. Over time, those two founders will have other opportunities to take shares and to dilute the first guy down.

Alternatively, if the existing company hasn't created any assets, then start a different company without him in it.

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there is no other founders, only me 70% and him 30%. It started very informal and got big... – South Oct 15 '12 at 20:12

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