Β #StartupDrama #CoFounderIssues #LegalAdviceNeeded
Hey fellow founders! π Have you ever found yourself in a situation where a co-founder just isn’t pulling their weight? πΌπ I recently had to let go of a co-founder due to underperformance, and now I’m facing the dilemma of whether or not to refund him his initial investment. π€πΈ
Here’s a quick rundown of my situation:
– Co-founder agreed to certain responsibilities, but failed to deliver on them π
– I ended up doing most of the work myself π οΈ
– Co-founder focused more on raising funds than growing our platform π
– I decided to part ways and offered to refund his investment as a gesture of goodwill π°
– Co-founder responded by threatening legal action and contacting business partners and YC π
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Now I’m wondering:
– Is he legally entitled to a refund if he was fired for performance? π€·ββοΈπΌ
– What are my options if I choose not to refund him? ππ°
While I don’t want to escalate things to court, I want to handle this situation in a fair and amicable way. Any insights or advice on how to proceed would be greatly appreciated! π Let’s share our experiences and help each other navigate these tricky co-founder waters together. π‘π¬π
I have some bad news for you β as things stand you probably owe this guy half your company. Depending on the state. A verbal agreement can be binding, especially if you both performed on the agreement after (and you did; you just donβt like the results of your cofounder).
There are probably four basic paths here: some of which involve some legal work, but not a lot.
1. Amicable Breakup, no cash involved: Tell him youβre sorry, even if you hate saying it, and offer to part ways in a way that leaves him in a good place. Iβd suggest you just literally agree that each of you could have a copy of the code and the decks and etc, and can do whatever you want with it as a start β if heβs ineffective, then youβve given up nothing, and he can say heβs running his own company now. If youβre worried he might succeed, you could do a 90/10 split each way.
2. Amicable breakup, cash involved: ask him what he wants for his part of the company. Before he gives a price, Iβd suggest you try and talk him into a βmutual buyoutβ scenario, where each of you gives a number for the whole company, and the winner (higher number) has to buy out the other guy for their half. This will keep numbers low and reasonable.
3. Quit, keep your equity β Phase 1: βYouβre right, letβs get the shareholder agreement and cap table done.β Once signed: Phase 2: βSorry about this, but I canβt keep working here, Iβm just not sure it makes sense to me. Of course, Iβm keeping my stock, and a board seat, letβs have our first meeting, Iβm looking forward to supporting you and your progress.β
4. Winddown (as a strategy to renegotiate, or just because itβs simplest and life is short): βCool, Iβm winding down the company; Iβll be selling the assets, and will send you half the valueβ.
These, remember, are *tactics* β you offered this guy half your company, he put some time and money in, and youβre not going to like what happens if you donβt resolve this soon and just happen to make some money or get investment β you owe him based on that agreement, and youβll look like the bad guy if he hires even a moderately competent attorney.
Obviously, Iβd get agreement on a non-disparagement, and also that he send out a note to whomever he complained to saying βsorry, got heated, we worked it out, OP is a good guyβ.
I was in this situation a while ago and stupidly refused to pay. I was right about not needing to paying the guy, but he ended up suing and the case dragged on for 3 years because the magistrate was a dumbass and didnt understand basic corporate law so she ruled in favor of the plaintiff and told me Id need to argue my case in district court because she wasnβt a corporate lawyer and couldnβt make an informed decision. It ended up costing me a lot more money, time and stress than if I just paid the guy from the start and moved on with my life. We ended up settling before district court but the court messed up the paperwork and that caused us both to have to travel to the courthouse together on multiple occasions and eventually do a zoom hearing at 6am my time and explain to the guy the court messed up the paperwork and we had stamped copies of all the proper paperwork. My lawyer probably hated dealing with it, I think he only made a few hundred from the case through my insurance and it dragged on for a long time
Do you really want to overthink a few hundred bucks over a clean break (given you really did hold him out as your co-founder) and perhaps a written agreement documenting there are no more claims and liabilities?
If you want to be a founder, think bigger.
If itβs a few hundred bucks? Just give it to him
Not sure what youβre supposed to owe him, is it equity? Did you not do a 4 year delayed equity plan like youβre supposed to, if you did, he should get nothing
This all complaining and no details. What did you agree to? Was it on paper? Who put what in?
There is generally no such thing as a βrefundβ. Either they hold equity or believe they hold equity or they donβt.
If they hold equity you canβt just refund them. You have make an offer and they have to accept.
If they donβt hold formal equity it may just be a case of seeing if they can sue you.
Based on what you have said here it seems like you have nothing on paper so maybe it is best to return the money and they relinquish claims.
You should build together and get to know each other for at least 3 months before putting in any money
Typically thereβs a year cliff in signed founder agreements. This is a good example of why these terms are important.
If you don’t run, not walk as a co-founder then you are not a good fit. Instead of solving any issues by yourselves, he went public. What other proof you want?
I’d get him to sign a contract in exchange for the money. Put all the good stuff in there: NDA, no legal action, handover of all work product.
As for whether or not he’s entitled to a refund: IANAL, but, I’m sure it depends on what legal documents you guys have signed. How did he “give” it to the company? A loan? Purchased equity?
I donβt think yc founder match is good at all, generally you want a cofounder with many years of relationship not thisβ¦
Off topic: Just today I have read 3 different post regarding founder issues and all of them met in YC cofounder. Is hiring from YC cofounder not a good option? Asking genuinely.