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We are thinking of raising funds by selling his share, but we're not sure if that's the right way out. What are our best options in dealing with this?
Hi - that's a very good question and before you sell the co-founder's shares, you should probably think about your current and future capital structure, what your ownership and fund raising plans are, and how your co-founder shares are structured.
One key question: will you be raising an angel round or institutional round eventually? Different types of investors come with different expectations with respect to the terms and the class of shares. You'll want to think about the overall cap structure to allow room for future investors with terms that are typical for the type of investor.
For one of my prior start-ups, we were an LLC and had different classes of shares as our company evolved: Class A (co-founders), M (for the next 2 key executives), and B (employees), followed by C, D, etc, for angels then institutions. The classes of units had their own unique "features". For this type of discussion, best to get the advice of a good corporate lawyer.
I'd love to learn more. I've consulted with IDC (a tech research and analytics company) in the past so some of the lessons there may be helpful to you. Just Request a Call if you need help.
Best of luck.
I have been involved in many private companies from startups to large cash flowing enterprises. Lets start with what many companies find useful at the outset-negotiate and execute a shareholders agreement that establishes rights and responsibilities of the founders in case of events like this. So with respect to the founder, and assuming you lack a shareholders agreement, you are limited to the options you can negotiate with him. Repsonding to your question of raising funds by selling his share, that essentially competes with capital for the company. The best solution, assuming capital scarcity, might be to let the founder stay in place with his shares, and make an agreement with him to give the remaining founders the right to vote his shares. If you would like to discuss this further please feel free to get in touch.
I was a founding partner in a venture that had three other partners, so there were four of us in total. One of the partners ended up leaving the company and we had to decide what to do with his share.
We found the simplest approach was to divide his share evenly among the remaining partners. This helped us reestablish a baseline from which we could make other decisions from a firm foundation, reducing the number of variables in a situation that can already be complex by nature and can increase exponentially as each new variable is introduced.
Best of luck and always happy to discuss further on a call!
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