Ask HN: Co-founder doesn't produce work, is unrealiable, doesn't want to leave

You have the same person causing two different problems.

1. With regards to the CTO, treat them like an employee. Prove that their performance as an employee is not good enough, and fire them. They now have no reason to interact with the company on a day to day basis.

2. As a 5% owner, treat them like a shareholder. Put together a reasonable offer to buy them out, and do so. If they don't want to sell then that's fine, you'll only have to interact with them during shareholders meetings.

The first action will solve a lot of your problems. The second action can happen later on when you've got the money to do so.

Honestly as a CTO: if you can fire the CTO without it being a disaster the CTO is a terrible CTO.

Yes, this seems to be the way. Fire him, get him away from day to day operations asap. He's already off the board, so that should satisfy your investor right? Does he need to own 0% of the company to put anything more into it?

> it was valuated over $1million, and secured pre-seed investment of $250,000. I currently own 25%, our investor owns 70% and the co-founder CTO owns 5%.

> During our first year, we paid our CTO $84,000 and we spent the rest of the money trying to develop hardware and software.

Why did your investor who gave 250,000 get 70% of the 1,000,000 valued invention?

What is stopping you or your investor from buying out the 5% when it is worth much less than the cash that you paid in the first year?

Where is this located in?

If I read this well, you are founder & CEO.

So, the company under your management burnt 250K in 2 years, produced nothing in 2 years, and kept the CTO for 2 years.

Fire yourself and thank your investor for being so naive.

An investor taking 70% for a 250k pre seed is also indicative of a terrible investor. Those terms are awful for anything in tech.

This company sounds incredibly mismanaged, and I’d seriously consider using it as a learning experience and cutting your losses.

Yeah it's hard to read this as anything other than "I'm an awesome idea and marketing guy and I partnered with this lowly engineer to build something, which is super easy, and a monkey could do. I paid them an ENORMOUS ($84K) salary and granted them a HUGE (5%) amount of equity, and after saddling them with impossible product requirements on zero budget and failing to find product-market fit, his bad attitude ruined all my awesome ideas. Hacker News plz halp me kick this useless CTO out!"

Although the initial plan didn't work out, I can confidently say that kicking out the toxic CTO and throwing another $100k to a different lowly code monkey will definitely fix OP's problems. $100k won't even pay for a proper Shopify migration in 2024, but OP's product ideas are so awesome that they'll change the world, if only it weren't for these toxic 5% co-founder CTOs being paid Burger King Manager wages with their bad attitudes.

Who needs introspection when your ideas are just that awesome?

Somebody's a little bitter

Reality check is better than tips to keep hustling the wrong way

Ugly situation.

Does he have an employment contract and on what terms? In some jurisdictions even no written contract can mean an implicit default contract, so you should consult a lawyer. And you may need to prove that you warned him about performance.

The other part are his 5%, but that usually is no hindrance for ending the employment. He will just stay on the cap sheet and can cash in later when you are successful. If that bothers you or your investor, you can try to make an offer (low, because he did not deliver). This is best to align with the investor and they make take those negotiations so you can focus on delivering.

In the contract it says at-will employment, so we can end his contract. We've asked, over period of 2+ years about the status of work, his availability.

When I have kept asking now for 3 months what the status of work is, if he can upload work done and share it with us so we can evaluate where we are, the response is 'there is nothing to share until it is done', that he has other responsibilities with other work etc, that he's busy and doesn't have time. No idea when he will finish it.

How can we evaluate his shares and give him an offer? what if he refuses?

Would ask myself these questions:

Can he actually stir trouble with the 5%?

His initial stake was worth $50k. How much has the company value changed during his incompetence?

Is there anything else that can motivate him (such as a “left by mutual agreement” clause)? How much would that be worth for you?

Does the investor have any advice or can support?

If you offer a lower amount than 50, will that hamper your next financing round? Can such a deal be made confidentially?

Why have you let it go for so long? This isn’t a new issue and it’s been going on for a long time. What does the CTO have? There has to be something because otherwise there’s no reason this should have festered for so long. Fundamentally, you’re a minority shareholder who has taken cash down to zero while waiting on someone who has never delivered anything. If the CTO has an immense amount of talent, that might be a reasonable reason to keep them employed. But if the CTO has different kinds of leverage over you and/or the patent, it could become a problem.

It would be worth spending a bit of time thinking that over. You’ll learn a lot for the next time you start a company. And in this case, you may be adding to your strategy to get rid of the CTO.

Have you spoken with a lawyer about your potential liability? If not, you should likely delete this thread, talk to an attorney and if you repost this, you should only include the information she tells you to include.

As well, you sold 75% of a million dollar company for 1/3 of the value. Is there a reason for that? For example, if you’re close friends with the investor you and the investor may be able to figure out a way to get the patent, defend it from the CTO and roll out a totally new company.

One solution to this, if you would have thought about it ahead of time while writing his shareholder's agreement, might have been a Shotgun Clause[1].

    "The shareholder triggering the clause offers to buy the shares of the others at a specific price per share. The other shareholder(s) must then either accept the offer and sell their shares, or buy the triggering shareholders' shares at that same price."

So the company would offer to buy the CTO's shares at a certain price, but if the CTO refuses, he must instead buy the rest (95%) of the company at that same price. A good way to very carefully decide a fair buyout price for the guy.

1: https://en.wikipedia.org/wiki/Shotgun_clause

The question of who owns the IP sounds like one for you and your investors and a lawyer. If it's you, and there's nothing else in the company of value then dissolving the company shouldn't be difficult. If the company owns the assets, retaining patent protection becomes more complicated and firing him and buying him out as part of the next round (you can raise subsequent rounds at higher valuations...) might be easier...

Assuming the patent wasnt assigned to the startup, what about the remaining work product from the startup? Does one need to start with a clean slate for the new startup?

I invested the patent into the startup when I was founding it. The remaining work is brand design, hardware boards that need another round of redesign (some firmware code can be kept), and app re-development since CTO's work is unusable/not shared. So besides patent and branding, pretty much clean slate. (app design is mostly done)

Sounds like it would be difficult to transfer everything to a new company.

One thing I have seen in the past is people holding the IP separately and licensing the IP to the startup. that can avoid this situation or zombie companies, but hindsight is 20-20.

So the only problem you have with buying him out is that

1) He said it, so you don't like the messenger despite that being the accurate path

2) and no money

you’re conflating both of those with the idea of “rewarding” him more

tough luck

the other side of this is who cares that he’s a shareholder. Its 5%. just ignore him, remove his title, and have someone else do the work. he remains a 5% shareholder and everyone else continues on.

he has literally no power and doesnt prevent you or anyone else investing money into this company except your own pride

I wonder how they're going to find someone to do the dev work. No salary, fired former CTO after 2 years with nothing to show for it. This wouldn't fill me with confidence as a prospective employee working on equity.

they have money, they just wont put more into this venture because their pride is in the way

its an amusing interpersonal problem masqueraded as a business problem

Hopefully someone with more experience can chime in here, but what kind of deal do you have with him (i.e. can you fire him)? Either way, I'd consult with a lawyer to see what your options are

Surely should be doable to buy the co-founder with 5% ownership out? But yes talk to a lawyer no HN help will pale to that of an actual lawyer.

How would we value his 5% shares of a company that has no money now, no product, no revenue. We have some designs, brand design etc, valued patent (although 4 years old now). But we need to do new hardware design, still develop our software.

How was it valued in the first place?...

Talk to a lawyer

Double the initial valuation and give them that divided by 20. Then you can move on. Just a wild thought though.

Guy still doesn't have to sell his shares, he still might want more and you cannot force someone to sell off his shares - only way is to agree on price he will accept. You still might make reasonable arguments but yeah making arguments doesn't make the deal, other guy agreeing makes the deal.

His initial valuation is itself questionable. How is 250k at a 1m valuation equal to 70% for the investor? Sounds like an error on OP's part in the post, or a very painful mistake irl.

Yes we can fire him, but that doesn't solve our issues with his shares. Our investor would put up more money for development, but not while the CTO is involved with the company anymore.

We would much rather continue working on our own without him.

Then talk to a lawyer specializing in start ups asap

> not while the CTO is involved with the company anymore

Fire the CTO and ban him from the premises. You and your investor control 95% of the company, you can more than easily ensure he is a total non-entity to your company forever.

why did you give a seed investor 70pct??????

The primary question. I think he got his valuations f**ed up while drawing up the cap table. 250k at a 1 million valuation is 25% for the investor, not 70%!!

And if he paid $84k to the CTO each year, I would love to be his next cofounder.

Hi, I would like to learn more about you and your company... maybe I could give some advice...

Would you email me?

My email address is:

peter.d.sherman@gmail.com

Just shoot me a simple message introducing yourself, no links or anything, and it should make it through my spam filter...

Maybe I could give you a few ideas on what to do...

Why don’t you give the investor 5% of yours. Sure, the CTO still gets 5% but it came from you, not the investor. Then sack the CTO so he is nothing but a minority shareholder.

Considered suing him? if he hasn't really produced anything, a lawsuit might actually scare him to leaving I guess?

You burned quarter of a $mil, span in circles for 3 years, have nothing to show for it and try blaming 5% owner?

If you have $0 in bank, close shop and start fresh without co-founder.

100% of $0 is $0.

Unless you have quite a bit of IP in your company.

Is it just me or the bigger problem is investor owning 70% ? You have a lot of problems from what you wrote and the CTO issue honestly is just a small part of it. You have spent over 4 years and still have nothing to show for ? I think the blame goes on all of you as a team.

If you still think you can save this company somehow, figure out a way to fire the CTO and start fresh. Talk to Lawyers but the investor owning 70% is bothering me the most.

Sounds like your a non tech co founder?

Ask HN:

There's another approach you should consider. I call it a "Truman Show acquisition".

Get with the good 95% of your company and start a new entity. Don't tell your cofounder about it.

New entity makes a deal with your current one to exclusively license the technology and branding, and take possession of the assets. Make the deal as one-sided as you can without your toxic CTO catching wind (and without breaking the law or giving grounds for a lawsuit in the event they do catch wind).

All new R&D goes on at the new entity. All existing staff gradually curtail the hours they spend at the old entity and "resign" here and there, all while working for the acquihiring new entity. Old entity never hires replacements. CTO continues frittering away, you can't afford to pay him, but ensure that his equity in the old firm is acknowledged and protected. At the end of some period (e.g. 3 years), the license agreement ends, everyone but CTO makes a clean break and officially works for the new firm. The old shell of a company gets folded up due to having no money.

Truman Show acquisition.

Since we have currently run out of money at the current company, how does that play a role here?

It’s a nuanced negotiation with uncertain outcome, but if your investor wants this to work out and wants your CTO gone, they may be willing to entertain such a path to realize that vision.

However, finding a way to buy out the coworkers 5% and fire them may also be a reasonable strategy. The CTO should be aware at this point that your business is close to dead in the water and may believe there’s not much value left for them to extract. If they don’t think the investor is interested in putting more capital in and runway is running out, they could sell that 5% cheap. But you also may run the risk of demoralizing any remaining employees if they also believe the runway is gone.

It's possible to let the employees know of the actual game plan, but not the CTO, then execute the structured dissolution of the company. I know this, my former cofounder tried this against me, the only difference being I still had the support of the angel investor and the other cofounder, which contradicted the co-founder's assertions. But I guess it would work in this scenario. The investor is the key player here and he should steadfastly ensure he won't pay a penny more into the current entity and is willing to write it off completely.

It doesn't play a role at all.

A new entity should only run you a few hundred dollars through Clerky or similar. Your investor ought to be willing to cough that up, or you can probably put together a pitch deck (freshly inked licensing deal in hand) to attract a new investor in the new entity.

Your terms of licensure would not be strictly monetary, either. Make them $1 plus X percent of new company revenues over the next three years. Even if that X is substantial it's mostly going in and out of the same pocket.

I suppose if you wanted to fold the old entity up now, you could, but murky ownership of IP and assets could be a millstone around a new company's neck in the form of legal exposure from the CTO ("they cheated me out of my equity!"). Better the old entity goes out with a whimper, rather than a bang.

This sounds like a great way to get sued for minority shareholder oppression.

The goal is to structure the deal such that the minority shareholder doesn't "feel" oppressed. There is a value for X where that likely won't happen.

OP currently suffers from oppression by minority shareholder, and needs a solution. I gave one.

What is X in this equation? The bullshit factor?

> goal is to structure the deal such that the minority shareholder doesn't "feel" oppressed

This is a buyout. Everything is a buyout with extra steps.

Buyouts involve cash and they have no cash.

This is a breach of fiduciary duties. Maybe OP can get away with it for some time, but if the new venture goes well, it will be very ugly.

Better for all the worthwhile people to resign and start a new entity with no IP overlap with the old one. It still might get ugly down the road but OP will be in a much better position to defend.

If the CTO has really been that bad, then I don't see much downside to a fresh start.

I disagree about it being a breach of fiduciary duty. The company can’t move forward with this carbuncle, and the CTO still gets their equity respected in the form of the licensing deal. A suicide pact would be an inferior execution of fiduciary duty.

Fresh start is likely not an option. You forget about the IP and assets of the company. Can’t take those with you in a fresh start and OP and his investor has a lot of sunk cost here.

You rarely fail to miss the point

I have a technique for solving your problem.

> I patented the technology 4 years ago

But it's for me only. You can't use it.

I invested it into the company when I was founding it. At that time, we were good friends.