Private equity · Business planning

Getting incorporation agreements in place

Anthony Massa Software Consultant and Engineering Professional

November 19th, 2015

I started an S-Corp with two other guys. They have 33% each, I have 34%. One of the shareholders is leaving and giving up his shares. I have a few questions.

I was told that those shares need to be owned by someone and not just "put back into the company." I would like to keep the split as the majority shareholder. The other owner keeping shares won't go for that. Any suggestions on options?

I am also wondering if anyone has suggestions or links to buyout agreements and operating agreements. We didn't set them up but need them to protect each other going forward. I want to avoid someone not pulling their weight as either of us gets too busy or doesn't look to create more value in the company.

Thanks.

Ross Meador Business Attorney Specializing in Corporate Law, Contracts, Securities, IP Protection and Licensing

November 19th, 2015

If the company has no assets or value, you could always close it and start over with a newco.  A few simple filings and you are done.

Bill Vanke VP Global Sales & BD | Sales Pipeline Forensics | Business & Society Observer and Commenter | Wireless | M2M

November 19th, 2015

Dear Anthony,

The way you described the situation. you never were the majority owner.  But you can still be the single largest shareholder if you simply split the departing person's shares equally with your remaining Founder, n'est-ce pas?  No money need change hands (well, maybe $1 to show value exchanged) and all is well.  

However, if there is no value to the company right now and no assets, why not just dissolve the corporation and re-launch in the future if you want?  

Lonnie Sciambi

November 20th, 2015

Anthony, this is not an uncommon problem, when one of the partners leave. However, it sounds like you a bigger problem in that you and your remaining partner are not on the same page. 50-50 splits only work in really good marriages and they're hard to come by, let alone in good businesses. This is why choosing the right partner is so critical.  You guys need to sit down and decide how you will govern your business.  Two-headed management will rarely work.  Somebody has to be in charge. If you are "driving the bus," it's probably you, but you and your partner need to work out the particulars.  Figure out how to either return the shares to the treasury (which you can do) and then you own 50.7% of the outstanding shares (34 out of 67, to make it an easier math example) and your partner owns 49.3% (33 out of 67) just the way you originally laid it out. Or you could split the shares as evenly as possible (with you getting 17 and him getting 16, again easier math example).  Then you own 51%, he owns 49%.  The math and legal stuff is simple.  How you to work together and run the company, not so much.

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

November 19th, 2015

Yes, shares can be surrendered to the company, but that's really not your problem. You and your remaining co-founder need to resolve a serious control issue. It used to be 2 out of 3. What will it be now? (Note: It doesn't need to be the same for all decisions.)

I agree you need an agreement going forward; I also recommend you engage an attorney and not try this one yourself.

Andrew Lockley

November 19th, 2015

Company or founders can purchase them. IANAL

Stan Podolski CEO at Nimble Aircraft.

November 19th, 2015

This is why vesting with cliff is better for startups. So if cofounder leaves earlier, he/she doesn't have the stock yet.

In your case you or corp need to buy it back.

Anthony Massa Software Consultant and Engineering Professional

November 19th, 2015

Thanks for the responses. Yeah, we started things quickly for a contract and didn't get things in place. That's why I'm trying to get agreements and understandings in place now. 

The attorney I did talk with said I could eliminate the stock, but I would have to do a recapitalization, which is a bit more involved.  A transfer agreement is much easier.

There are no assets or real value in the company now. The shareholder isn't looking for money for the shares/ownership. I'm just wondering how best to do this and would prefer to keep the split as it is now between the remaining shareholder and me. 

Ross Meador Business Attorney Specializing in Corporate Law, Contracts, Securities, IP Protection and Licensing

November 19th, 2015

Ideally the company would redeem the shares or the remaining shareholders would repurchase them.  Both of these activities may constitute sales of securities, however, and as such are subject to restrictions under the securities laws.  Depending on the share value, there could be significant tax consequences as well.  It is not as simple as you may wish.

Anthony Massa Software Consultant and Engineering Professional

November 19th, 2015

Stan: a vesting cliff wouldn't handle the case of one of the shareholders not participating in building value in the company (for whatever reason). 

Anthony Massa Software Consultant and Engineering Professional

November 19th, 2015

Thanks for the response, Bill. 

Yes, I meant largest shareholder. Problem is that the shares (33) wouldn't split evenly. So, I'm not sure how that would work then. 

I don't want to shut down this company because we completed a contract and could have follow on work. So, shutting down doesn't seem to be a good option.