equity, co-founderI’ve come across the situation where a group of friends and acquaintances get together to build a prototype of a project. This is far prior to incorporating a company or drafting a founders’ agreement so we’re not even close to formulating any contracts for at least 9 months.
However after getting ~70% done, some of the project partners disappear due to lack of desire to continue working so hard or become too “busy” to continue. I know it’s probably no use trying to convince people who aren’t motivated anymore.
Let’s talk about Ronald Wayne, co-founder of Apple Computer and maybe the most infamous flaker of all time. Mr. Wayne decided he “couldn’t risk” owning a stake in Apple and so he sold his equity for $800 in 1976. In 1977, Steve Jobs and Steve Wozniak very wisely paid Wayne an additional $1,500 to relinquish any claims he could possibly have for his contributions to the company. They literally paid him twice as much as they had paid just a year ago for all his equity just to make sure there were no loose ends. In 1978, Apple had $7.8 million in sales and would cross the billion-dollar mark in just four years.
There are two elements to eliminating a co-founder: equity and claims to equity from contributions. If you eliminate both, the flaking founders will write memoirs from a trailer park as did Mr. Wayne.
- Since they’ve contributed towards development of the prototype, could they come back and ask for equity later if the project becomes successful?
Absolutely. Those contributions may one day blossom to a very valuable company and if the founders were never completely bought-out, they could always sue for the value of their contribution. Of course, they will demand the present value once the company is successful which could be very valuable.
- Would the best thing to do be to formally part ways?
Yes. And make sure you have agreements that cover all the bases.
Tom’s answer gives you the why. I’ll go into some of the how.
You are not 9 months away from written agreements, you are 60% of a prototype too late. Rectify it immediately.
If they are friends (and acquaintances) who are still friendly, you can try the friendly negotiation. Phrase it like “Hey, some of us want to keep working on this, but it seems like it isn’t a good fit for you. Let’s clarify everyone’s commitment and contribution to date.”
The prototype is 70% complete so you need to get some certainty. Buy out the flakers at the same time and on similar terms as the remaining developers get on board. Look on startups.SE for guidelines/ideas on how to structure these early pre-prototype agreements.
How to buy out the flakers.
New thought added to this edited answer
In common law countries the development of a prototype in this manner possibly means you have all entered into a partnership at the very least for the development of the prototype.
Ad hoc partnerships are always bad from a risk assessment perspective. Because they have little upside and a whole lot of downside risk.
That is the main reason to document the intent of the developers early on.
As a minimum exchange emails that say something like…
Let’s develop a prototype of this thing and see if it is works.
If anything comes of this prototype we will work out what to do next. In that case we’ll split the business equally between the 8 of us = 12.5% each (or split it based on time involved).
Please document the time you spend on the project and send a weekly timesheet to our project coordinator.
If you agree please reply with “I agree”
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