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.
I have a couple questions:
1. Is my strategy sound or am I missing something?
2. To pursue this strategy, what are my options: Atlas, Legalzoom, hire a lawyer, etc? I haven't used any of these options before, please assume I know nothing.
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.
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??
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.
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.
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.
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).
Ideally you want to talk to a lawyer and completely eliminate your underperforming cofounder from the future of your project.
[speaking from experience]
