Best way to fire business partner

**bartlebee** · 09-18-2010 12:32 AM

10 months ago I had an idea for a website, but had no experience in web development/design and a fairly tight budget. My cousin happened to own a very small design company and after discussions and promises he would "hook me up" I decided to have him help me start my company. In my excitement I gave him 25% (leaving me with 75%) of the company in order to have him "head up" the technical aspect of the business. Don't bother telling me, because I realize I did a lot of things wrong when I started this - live and learn. He said it would be done in 3 months - 10 months later we are still trying to complete. The worst part is I paid his company for the work, he hasn't invested a dime in the business and based on his price he overcharged me big time for the work he did. Long story short, he is an anchor to the business and we need to part ways. Besides his laziness and poor business ethics our personalities are totally opposite. While I plan on talking to him about these issues and asking him to sign over his shares, I want to know what alternatives I have if he doesn't cooperate.

Just some specifics - This is an LLC. I have put in about $7,500 and he has been paid (to his company) $4,000 and has not invested any money in the business. Majority vote is require for decisions (obviously I have majority vote).

I talked with a couple lawyers who gave me conflicting information. One said I could let my company die (expires next month) and start a new one. He said I could also transfer the name to my new company. The second lawyer I talked to said I could do this, but my cousin could have claim on 25% the new company. Could I just start a new company and let the old one die without any legal repercussions?

Another idea I thought of - I authorized 100,000 shares when we started with 10,000 representing our ownership (2,500 for my cousin and 7,500 for me). We can give the other shares and they dilute our ownership. I thought I may be able to give my wife the other 90,000 shares diluting his ownership down to 2.5% worst case.

I would appreciate some advice on the best way to handle this. Thanks

**KyleXY** · 09-18-2010 07:39 AM

He needs to sign off. An attorney should draft a document where you compensate him some amount of money (could be any amount really) to settle his shares and that he no longer have any rights to the company, IP, etc... If not, it can get ugly. Only other way is to sue. The second attorney is right in that changing entities won't change the rights to the name and if he chooses to pursue legally, it can get ugly. Talk to him about the issues and say things simply aren't working out and he should sign off the rights with X as compensation where X = some dollar amount.

For future reference, always vest ownership

**bartlebee** · 09-18-2010 11:42 AM

Thanks for the response. My fear is knowing his personality type he won't accept an offer to relinquish his shares. You mention the only other way is to sue. What would that entail? Is it not a possibility to distribute the rest of the shares to my wife in order to dilute his ownership? Thanks again.

**bartlebee** · 09-18-2010 01:16 PM

Another thought, what if I completely renamed the new business as well as the site? Would there be a legal way to transfer the code to the new business?

**KyleXY** · 09-19-2010 02:22 AM

A] You can dilute his shares but that won't stop him from suing you on the premise that you made his shares useless... There are numerous factors at play here but that's a risk you're going to take.

B] You can sell the assets of the business to another business but then again, if you're doing so with you being the owner of the new business, or ever involved in any way, that looks shady no matter how you try to play it.

Again, IF he ever decides to sue, it's pretty much open to the judge to decide in who's favor. Realistically you should be talking to an attorney that clearly understands the situation. It makes it a bit more complicated since LLCs don't have stock and shares of ownership and compensation don't align the way they do in shares of ownership in a Corp. Clearly instead of second guessing everything, you should talk to the guy and see where things are first before jumping to all these conclusions.

**Southern_Lenders** · 09-19-2010 01:07 PM

I would sue that little prick for unethical business practices , and damages. I'd make the claim that he grossly over charged for the work required, and that because he said that it would take 3 months instead of the 10+ it has already taken him, I would make the arguement that you lost revenue by not being able to have a working site.

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Another thing you could do is just dump the company all together. Start a new company SEPERATE from the one you have now. He wont have ownership.

If you took the code from the website and moved it to your new one, I dont think theres anything he can do about it. You own 75% of the company, and you paid for the work.

**DerekS** · 09-19-2010 09:18 PM

Two questions:

1.) Do you have an operating agreement for the LLC?
2.) Does the business, (or you personally), have a contract with the design firm spelling out the terms of the site development agreement?

**bartlebee** · 09-19-2010 10:10 PM

Kylexy - I agree I need to talk with him and I am going to consult with a lawyer to confirm what options are available. More than anything I want to have all my options figured out before I break the news to my cousin just in case it goes bad.

Southern_Lenders - Amen, that's what I'm hoping to do. It sounds like you may have experienced something similar in the past, because you sound just like me. Ideally I would love to cut him off by starting a whole new entity. I like handling things as ethically as possible, but when I have been taken for over 10 months and just like you said, lost the revenue opportunity for the other 7 months past deadline, I don't feel bad in the slightest.

Dereks - 1. Yes we have an operating agreement, I had a lawyer setup the llc. 2. I have multiple emails outlining scope of work for the project and how much of the $7,000 went to my cousin and how much went to the programmer. In the actual operating agreement there is a page that outlines the ownership percentage. It has "capital contribution" and a blank line for me to fill in the amount I have invested. Under my cousins it says "see attached". I'm honestly not sure what the attached is supposed to be, but I figure it is the agreement that outlines the site development.

I don't know if it matters or not, but my cousin has never actually signed anything. I don't have a copy of the operating agreement signed by either of us. The only thing I've signed is the articles.

**bartlebee** · 09-27-2010 12:02 AM

Kylexy,

I met with a lawyer and he pretty much echoed what you said. I did forget to ask him, because I had never got a response from my last post, but does it help at all that he never signed the operating agreement? I am going to talk with him this week, I am just trying to time everything right.

You mentioned in your initial response to make sure to vest shares. I looked into this and this would have been the way to go. I have a different partner I am looking to bring on for a small portion of the company. I would like to vest his shares, but I would also like to use his work as his contribution. In other words, I want a performance contract and for his shares to be vested. Is this possible? I am probably going to give him 10% and I was thinking 3% up front, 3% end of year one, and 4% end of year two. Am I on the right track?

Thanks for all the help!

**KyleXY** · 09-27-2010 07:10 AM

It does and it doesn't. Him not signing an operating agreement put things slightly in your favor but if he has chat logs, emails, or anything that can prove you made the offer or anything, that can be used in a lawsuit as part of the discovery process. And a smart attorney will advise to do so if he hopes to have a case against you for any reason. Although I should say that most of the time a lawsuit never occurs until you get big.

I highly suggest you talking to this guy and convincing him to sign off legally (should be drafted by an attorney) for X amount. It sucks you have to pay even though he is in the wrong and wasted time but given the circumstances, I promise you it'll be better than to do it otherwise. A good attorney will tell you the same thing.

On your other question... First, you shouldn't be operating as an LLC without first consulting an attorney if this is even the right structure. Assuming it is, membership ownership in an LLC as I previously mention have little weight on what they earn out of the LLC. The agreements should cover this if you are going down this route. Typical vesting for founders is base on a 4 year period with a 1 year cliff. Look this up if you have no clue what I'm referring to. Your suggestion would mean a deviation from the standard. This can be done but it is costly to alter the contract which an attorney must do for you. Any time you adjust even one thing in a contract, it costs more in legal fees to structure. It would ideal to stick to the standard.

The way the standard works is of the four year, you have a one year cliff. What this means is if for any reason something happens and he quits, you fire him, you both agree to part, WHATEVER, doesn't matter, if it happens before the first year, he gets zero shares. On the one year anniversary, he gets 25% of his total ownership. So if you want to give him 10% and he agrees, at the end of his first year he would get 2.5% (it is better to count in number of shares rather than percentage btw). For the remaining three years, he would vest monthly meaning he would get the rest of his shares in 1/36th each month that passes by. This is the typical structure but also how we normally do things in a C Corp which is the structure all high growth startups go with.

Obviously your company may not be a high growth startup and therefore things can be a bit atypical since it is an LLC. Talk to an attorney for better advice on that.

**bartlebee** · 09-30-2010 08:16 PM

That definitely seems like the best way to set up a partner. I wish beyond words I would have researched this better before I began. In the future, in any business endeavor, this will be my standard approach if I need a partner.

I'm sorry for all the questions, but hopefully this is my last one. I talked with my partner/cousin and, as expected, he is being stubborn. He wants a buyout that is completely ridiculous. Again, I know legally I can't just start a new company, but what about if my wife started a new company and I licensed the software to her for a small fee? I not only KNOW he doesn't deserve the money, but even if I felt he deserved it I don't have as much as he is expecting.

Again, sorry for all the questions, I am just trying to be creative to get him out as smoothly as possible.

**lawinc** · 10-03-2010 10:07 PM

The neglect claim stems from the "so called" CEO not being an active part of the company for the last three months. He has blown off meetings, made appointments to be in the office only to not show up and we have recently found out (though he has no knowledge) that he is in the process of starting another business with two other business partners (a non-competing business). Recently, he even lied and said he had a tire blowout and could not come to the office to make sales calls when in fact he had a meeting scheduled for his new business.