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How do I fire the co-founder of my startup?

Mercer Island, WA |

We are a C-Corp and do NOT have a legal agreement regarding our partnership, but I own 80% of the company and this individual owns only 20%. This person is on a 1-year cliff and is not vested on any stock currently (we do have a founder's stock agreement in place). Since this person is NOT an employee or contractor, I'm wondering if I can just let him go (he just isn't putting in the hours I am and keeps missing deadlines), or are there hoops I'll need to jump through in order to terminate the relationship? Thanks for any assistance.

He is a partner (which is why I said partnership) not a W2 employee. We are both solely working for equity so there is no employment tax to pay (we both have 9 to 5 jobs during the day). He vests 25% of his stock IF his "service" is not terminated prior to the anniversary date of issuance. We are an at-will state, but again since he's not a W2 employee, that doesn't apply. He did breach fiduciary responsibilities, however, we don't have a standard clause regarding "termination" which is why I ask if I can just terminate him as a founder. Does that make sense? Please note that I am NOT dissolving the corporation. Thanks again.

Attorney Answers 4

Posted

This person is in an ambiguous position in the company. If you have not been paying him, he is presumably an owner (shareholder, since you are a corporation.) There are really two separate issues here. One is employment at the company (i.e., can you stop him from working there?) and the other is ownership interest (once he leaves, will he still own a share of your company?) The two questions must be addressed separately

You are getting answers to this question that are "all over the map" because these issues are intertwined in your case, and because, with no formal shareholder's agreement, the nature of your agreement with this other person will depend on what was agreed to at an informal level, what evidence there is of this informal agreement, and how each party as acted on that.

You need to speak with an attorney in depth about what sort of agreements have been made, what documents (if any) have been signed, and what each party has contributed to the business, before anyone can give you an answer that will be helpful.

And in my opinion, just dissolving the corporation will raise more problems than it will solve, so I agree with you there.

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Posted

I am puzzled by your statement that he is not an employee. You may be thinking of him as a partner—he would then not be an employee. But your company is a corporation, not a “partnership” as you state, so anyone who works for it is an employee, including you, except for independent contractors such as lawyers and accountants. You must withhold payroll taxes on compensation paid to him and yourself. Also, if he is not an employee, how would he ever become vested in his contingent stock?
Most states laws provide for “at-will” employment, which means that either party may terminate the employment relationship immediately upon notice, unless there is an employment agreement. If this is the law in WA, then there are no hoops—just tell him he is terminated and immediately pay him whatever pay he is owed including vacation and sick pay if your company accrues it. Then he will forfeit his stock and you will be rid of him. Consult a WA lawyer about whether "at-will" applies. If not, you will need his advice on the "hoops."
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DISCLAIMER—This answer is for informational purposes only under the AVVO system, its terms and conditions. It is not intended as specific legal advice regarding your question. The answer could be different if all the facts were known. This answer does not establish an attorney client relationship. I am admitted only in California.
(Bryant) Keith Martin
sbbizlaw.com

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1 lawyer agrees

Posted

You should consult with an attorney who can go over the details of your particular situation with you.
In general, dissolution of a corporation is governed by RCW 23B.14. You can read that through http://www.mrsc.org. Once you dissolve the corporation and pay off your co-founder, you form a new business entity.

Best wishes.

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Posted

You are in an "at will" state. You have a corporation, not a partnership. This individual is not a shareholder and is performing tasks for the company, as you are, in expectation of receiving equity after a year. This constitutes an employment relationship. Unless your founders' agreement contains something to the contrary, you have a "trial" period in place and it speaks for itself. You can terminate your relationship with him with or without cause.

This response is for general purposes, is not legal advice and does not constitute an attorney client relationship with the questioner.

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