My advisor volunteered to give his equity back several months ago after I called him out for not accomplishing what he'd set out to do. He said he wanted to prove he's worthwhile and earn the equity back. I didn't take him up on it at the time as it seemed inappropriate. That was a mistake as the advisor has continued to do next to nothing. Now that my venture is about to land serious investment, I want to square things away with this guy. I clearly don't want to go to court over this, but I'm also not sure if he'll just volunteer to give everything back again. What should I do?
While I can't speak to the thinking of your advisor, I can share an experience which may be relevant:
I was that advisor.
I'd hoped I'd could be helpful to a startup and it seemed like a good fit, but when it came down to it I wasn't a good match with the founder and my schedule wasn't allowing me to invest the time and effort to help in a way that justified the equity that I would receive. My network also ended up not being very valuable to the founder.
It became clear to both of us that it wasn't a fruitful partnership and I offered to relinquish my advisorship and any claim to equity. The founder's lawyer sent a letter over for me to sign and we formally parted ways and remain friendly.
An ounce of prevention is worth a pound of cure. Normally, when providing equity in return for advice, an contract is drafted dispensing equity over time (years), subject to the board or committee's approval. In other words, the equity is earned. That is how I draft those incentives. If you did not, hire a better lawyer, for that lawyer gave you bad advice. Second, if you did indeed vest that stock, tough and got to live with it. I know many companies which underwent the situation.
This is a tricky problem. I had a similar situation a few years ago. Is your adviser able to see reason and also be reasonable?
My first port of call would be to think through what has happened as if you were building a legal case to show why he should give the equity back. Don't make it personal or emotional, but don't hold back or try to make excuses for the partner either. Try to stick to facts. If there was a partnership or other legal agreement, look through that too.
Next, I would take your partner aside and discuss these matters calmly and matter of factly. I'd do it privately. And be calmly insistent on what you want - don't be talked into giving a further chance if that's not what you want.
Hopefully, the adviser will do the right thing, either because of morals or possibly embarrassment. Or they may worry about where they stand legally.
Many people are unreasonable because they don't see other people's point of view, or they are masters at self deception. A few literally don't care at all about morals and decency.
Reward people for accomplishment, not participation.
In other words, set out a vesting period for the equity based on results, effort, attitude, team spirit, good looks, etc. - in other words, anything that proves to be an ongoing value-add to the company.
What was it that he had promised to do for you in the first place?
You probably need to read the terms of your advisor agreement. You can certainly ask him to follow through on his offer, but if you pursue any form of legal alternative (which I do not suggest or recommend), you would need to prove that he did not perform. I've seen plenty of advisor agreements that are general enough that the performance expectations are not explicit.
Is the amount of equity material (advisers with significant equity is unusual) or is this an emotional issue for you? You should have a direct conversation and review the agreement (if it exists) and suggest a plan. Because you have a material event on the horizon, omitting that would be unethical at the least and may be a legal issue. Do not hold that back. If a total rescission is not probable, then entertain a partial give back.
A sad position to be in.
You can use the Slicing Pie model to fix this. Implementing the model will allow you to fairly dilute his holdings in a way that will make it hard to justify keeping his shares. Unless he's an unethical person in which will make it harder, but not impossible...
Is the offer to return the equity in writing? Was an agreement signed?
I am not a lawyer, but have been on both sides of this relationship (retained Advisors and have been an Advisor). The first thing I would ask is whether there was an agreement, and if so, what were the specific performance requirements?
If there was an agreement with specific performance requirements to be met by the Advisor, then I would think the issue resolves itself.
Thus, my assumption is that there wasn't an agreement, or if there was some type of agreement, specific performance requirements were not included. In this case, it becomes much more difficult for you. And assuming the Advisor has vested the equity and won't give it back, I would suggest doing what James Corbishley describes below in order to sit down with the Advisor and negotiate a settlement (reasonable people are usually reasonable).
As an aside, in my experience, pursuing legal remedies are time-consuming, emotionally consuming, and expensive (both financially and as a huge distraction to the business). You can check with a lawyer on the legal merits of a lawsuit (and the likelihood of winning), but I would typically advise it.
Sorry to hear about your situation, but on a worst case basis, its a lesson learned . . . hopefully, not too expensive.