Ask HN: Dropping cofounder from an unincorporated startup, what are my options?

1.) Talk to your cofounder.

2.) Hope that he/she is willing to give up their share and leave amicably.

3.) If he/she is willing to give up their share and leave amicably, get a lawyer involved. You should pay for this. He/she may want to get a lawyer involved too.

4.) Be prepared to abandon the idea and all the work you did.

5.) Learn from the failure.

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Here is the issue. You have created a situation where your cofounder has all the power. Without any other agreements, you have to assume you are equal partners. Even if he/she leaves amicably, they can always wait. If your startup succeeds, it won't be hard to find a lawyer who will go at you for a percentage of the settlement. If a lawyer goes after you, you should assume that you're fucked, as fighting it will create such a distraction that your company will likely die anyways.

If you can negotiate some kind of pay for work scheme, then incorporate, you might be okay. But, there is a huge power imbalance right now.

Do you have any other ideas??

As an attorney who almost exclusively represents startups and their founders, there's no question you need a lawyer. You pretty much certainly are legally partners with your co-founder. The informality of it is irrelevant.

Having a short meeting with an attorney before you negotiate this is not a bad idea, but I agree that it's not cost effective to have an attorney negotiate this for you. At this point, he may be amenable to an amicable resolution on terms you would be fine with.

The reason to speak with an attorney now is to understand better what resolution you want and how it could impact your business going forward. That depends on a number of factors, including whether you intend to seek outside funding.

If he isn't amenable to a resolution that would not hamper the business, then an attorney becomes critical. You need to figure out what leverage you have to force him into a settlement of some sort. That can be complicated.

Happy to answer any questions, if it would be helpful.

You have an deal to make with each other, and then some work/money to do/spend to make it legal. I would encourage you not to engage a lawyer until the two,of,you have informally agreed, including via an exchange of emails, on the deal. You do not want to pay lawyers to negotiate the overarching deal.

Understand what you need to have to continue. Would you walk away at 50/50? How about at 60/40? What’s the highest percentage share that you are willing to let your co-founder have?

Understand how you value the business. Would you sell your share to your co-founder for $1? $10,000? $100,000? $1m? Similarly would you buy your co-founder our for any of those prices?

Understand how it might work going forward - while the technical work may be done, the hard bit now is getting sales traction. Isn’t this when the other founder starts adding her/his value?

And vice versa - the co-founder needs to understand all this too. And then have a coffee and work it out. Be generous to each other, and if there is no overlap then one person needs to buy out the other.

You need a lawyer. Legalzoom is fine for basic legal tasks where you know exactly what you need (I've used it to form an LLC where I'm holding property), but this is more complex than that. You're soliciting advice on a legal issue from people on an internet forum, which is a pretty clear cut sign you need an attorney. I will obligatorily throw in that I work at a company called UpCounsel that helps you hire qualified business attorneys for less than what a BigLaw firm will charge you, but even if you don't give us a look, please speak to an attorney. Remember that the Winklevii cost Facebook tens of millions of dollars in cash and stock - that's the kind of thing that might well have been avoided with the proper use of a qualified attorney early on.

If you are not currently generating any money, I would avoid adding him to the LLC. There are too many issues to deal with. Maybe you could just offer him a small amount of compensation, 3 months is not really that much time.

Could you elaborate on issues if I add him to the LLC? Just so I know the caveats of going down that path.

It's likely technically a security under federal law, so exchanging the interest for value opens you up to the same types of issues if you just sold it to a third party. That means a lot of risk disclosure, etc. You'll also have some duties to him on an ongoing basis and you'll need to prevent him from being able to transfer, etc. That can get very tricky in the presence of transfers by law (e.g. pursuant to divorce). A good corp lawyer will have precedent addressing these things, but it will cost you. If you have to go this route make sure you have the ability to boot him at your discretion (rendering it basically worthless) or at a minimum, on "cause" by him. You'll need a confi in there in addition to carving out most of the default LLC rights under the relevantly statute (ideally Delaware). Just give the guy cash.

Thank you so much for the insight.

You will have to add him on the IRS form so you will have to deal with tax filings with him involved.

Also, most operating agreements have all these clauses to cover cases where he wants to sell his share to someone else. Say he sells to someone with a lot of money and big lawyers. There is a small possibility in this case that you would be spending most of your time and money in a court setting.

It is best to try to just pay him to walk away.

If I were to recommend a strategy, it would be to talk with your cofounder. See how they react. Listen to their ideas about how to proceed forward. The best reasonable outcome may be anythinge from continuing together to lawyering up to dropping the project for a better opportunity.

I mean, maybe the timing isn't right and two years of fulltime work without generating an ongoing business concern is something to consider dispassionately.

It might prove easiest to start a new LLC on the down-low (out of state might be a nice touch) and then tell your cofounder you've just gotten an offer to acquire the IP (and acquihire you) but not the rest of the company (which you've yet to formalize as an actual company, but still.. it has problems).

That way, you can safely get a feel for how quietly they'll ride off into the sunset. Three months full-time is not nothing, and if I was in that boat, I'd expect to see something for my trouble. At this point, they can rant and scream and you can tell them oh, ok, I'll tell them no, and this way they have nothing to hold against you (other than maybe more faith in the company you're trying to push them out of).

If you appear to be stuck at that point, then make arrangements to where you're going to set up your current company as a licensing firm, where your cofounder gets X percent ownership, and arrange an opaque deal with your new LLC to pay a contingent licensing fee for the IP, maybe 10% of whatever it generates the new LLC after expenses, or whatever. Kick a few nickels through the arrangement to your cofounder and break the news after 3 years that the new entity isn't using the licensed IP anymore (which it probably isn't).

After 3 years, nobody got screwed, nobody felt like they got screwed, and you keep what you make.

Everyone tells you to hire a lawyer but the fact is, lawyers work for who pays them, which means you'll need one, and your new entity will need a separate one. They're incentivized to bill as many hours as possible (which would make things take as long as possible). As long as you do things legally, and do things intelligently, you should be able to do this without a lawyer (though getting free legal advice from a lawyer, which is actually something that exists, is something I would still recommend).

Right there you used the expression “informal partnership”, which legally means you are splitting 50/50. So be very careful what you say and do.

Ideally you want to talk to a lawyer and completely eliminate your underperforming cofounder from the future of your project.

[speaking from experience]

I've struggled with the same thing. I don't think there any legal issue, but I'd like to know what people say.