
Ask HN: Dropping cofounder from an unincorporated startup, what are my options? - floridageorgia
I&#x27;m working on a startup, for which I&#x27;ve written all the code and done majority of the work (I&#x27;ve put in more than 2 years fulltime). I was in an informal partnership with my non-technical cofounder (who has put in about 3 months fulltime) and for various reasons I&#x27;ve decided to drop my cofounder and pursue the startup on my own. So far I haven&#x27;t incorporated the startup.<p>My goal is to provide closure for my cofounder and me, and avoid further legal ambiguity. My strategy is to incorporate an LLC and have an operating agreement, where my cofounder gets a minor % ownership (and walk away), while I get to run the startup on my own.<p>I have a couple questions:<p>1. Is my strategy sound or am I missing something?<p>2. To pursue this strategy, what are my options: Atlas, Legalzoom, hire a lawyer, etc? I haven&#x27;t used any of these options before, please assume I know nothing.
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hluska
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.

\---

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??

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siegel
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.

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lancewiggs
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.

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awillen
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.

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tmaly
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.

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

~~~
piker
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.

~~~
floridageorgia
Thank you so much for the insight.

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brudgers
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.

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mchannon
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).

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alain94040
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]

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

