My co-founder left the company in really good terms. We discussed what we would like to do and decided that the company will buy back some of his shares. How do we best do this at this point in time before taking in outside capital which is very soon happening now.
@steve, I am assuming he is buying back shares from the former founder for several reasons including not having a non working founder still attached to the company with a voting position, 2. buying back before a capital infusion which will make the shares worth more than they should be (depending on whether the founder who left influenced investors, should dictate price ethically). 3. tieing up any past lose ends that could come back to haunt. Everyone is happy while there is no money, but when the money comes there is never enough to go around. Wise decision to clean up ownership before taking on a new investor..very smart.
Actually is likely SAVING the company money by buying back pre-investment. If he waits till an investor invests, and they reach the next stage of growth...value of shares goes up, company buys them back..reserve goes down.
Consult with a good attorney who specializes in this. Taking advice from anyone who does not specialize in this will only be wasting your time as they will be giving insight with very limited education and experience. Without knowledge of how your company is structured, it is pointless. Be glad you are doing this under good terms with your former partner.
@Clemens, sounds like you have everything on track. I would be interested to look at your company more if you guys currently have any needs.
Not sure why you are buying stock and also selling stock? It would seem wise to reserve cash for building the company - not enriching a former employee.
Hardest part would be assigning a value to your pre-funding company. It’s unlikely the outgoing founder and the rest are going to come up with a number all agree. If you can, all the power to you. There are couple of ways you can manage this task. Easier would be to get a third-party arbitrator like your lawyer or CPA. They can come up with a number using an expensive 409 valuation or some rough comparables. They can provide an outsiders perspective. Another approach would be to value the outgoing cofounder’s contribution (effort and cash) and put a monetary value to it. If this co-founder was not given shares what would he or she would be compensated. That’s a good starting point. Another option would be to wait until some event like external funding happen. At that point you have a valuation.
I don't know how your company is incorporated and evaluated, but in general, any exchange of shares may require paying a lot of taxes or might not even be allowed. Corporate law is a bitch. It might be easier to annul his shares and give him a large severance pay or something instead. Although, if it's too large, it might look like an attempt of tax evasion... Those are just guesses, based on my vague understanding in this field. You probably should discuss it with a lawyer who specializes in these matters. Any mistake in this area could cause trouble and, in particular, scare away that outside capital you mentioned.
Thanks for your comments. I think you made the right conclusions here. Now is still the time where we can handle these topics with relative ease. The last thing any founder wants is a later damage to the company legal or tax wise that could hurt the company. We are structured as a c-corp.
Overall, I agree that I should be consulting with a specialist in this field to make sure we are best set up for the future.
Normally there is a Co-Founders Agreement providing for such option.Local tax laws have a bearing.The principal followed is --Offer the shares to other founders who must arrange to buy or find a buyer/s.