Startups · Entrepreneurship

Only founder left… What do I tell investors?

Syam Vemula Senior BI Consultant at InfoMagnus

September 14th, 2016

My cofounder left the company and now I am the only one that is left in the business. Big problem is that we did not have a vesting schedule in place so he is going to be freeriding. My fear is that potential investors will be turn off by this structure. Thoughts?
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Matt Harrigan President & CEO at PacketSled

September 14th, 2016

Did the company issue him shares? 
If so, tell your investors the plain truth and if you plan to continue with the business, try to work out a plan to buy back his equity. 

Larry Shiller

September 14th, 2016

Syam, If your ex-partner has equity, get a lawyer and explore a) how you can get that equity back; b) start a new business where you're the 100%; or c) something else.

David Johnston 16 Patent Claims Granted in Artificial Intelligence, NLP, IoT & Mobile SMS/Chat/Text Messaging

September 14th, 2016

I went through this. We were able to get an "Exit Agreement" in place with a partial buy-back. Having peacefully settled departures is worth a lot more than the cloud of doom that can hang over your head if you have an ex-founder's potential lawsuit.

Thomas Kaled Business Development Consultant @ thomas.kaled@gmail.com

September 14th, 2016

I think @Matt Harrigan's thoughts are in line with my experience. Structure a 'buy-out' agreement as a part of the cash infusion. If the deal is worth it both your co-founder and the investors should be willing to work with you and if not my guess is someone in the party has an unrealistic expectation. Best of luck.

Ron Warshawsky Founder and CEO of Enteros. Years of successful experience in startup business and database technology.

September 15th, 2016

Get a legal advice. This is an unpleasant, but fully manageable situation.

Frank Tahmasebi-Shaw Agent for Growth - Revenue and Business Development

September 14th, 2016

The reality is, that if your co-founder doesn't cooperate there most often not going to be an infusion of cash. 

Sidenote (reflect on this), I would rid yourself of fear - this is business. In my view having fear, is scarier, for others to get involved with you, invest in you, partner with you... When your business comes from value, it almost always solves the cloud over it.

Back to the point. Most often in these situations, the co-founder/shareholder convert it some other amount that maps to both the work and risk they took in the beginning, as well as some bonus to get them to agree. Similar to offering warrants or grant for work completed. 

It's the usual statement of owning zero percent of zero is nothing... 

The way to get there is by communication. That is key, that's first. 

Shams Juma

September 14th, 2016

Worry about investors later. First priority is to protect the assets of your business. Even though you did not have any "schedules" in place, you need to put an agreement in writing and retro back to the date of when the organization was found. If it's too complicated, my suggestion is that you reach to lawyer and him formulate the right approach.

Justin Calvillo Team and Business Builder

September 14th, 2016

Syam, your instincts are right but it depends on the current equity holdings. Who owns what?

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

September 14th, 2016

Your choices right now are to either buy out the partner, or leave the company an empty shell and start over with a new company. 

Yes potential investors are not going to like the situation so you need to see what you can to fix the situation.

Don Ross Managing Partner Digital Health at Life Science Angels

September 14th, 2016

I have encountered this situation. You are correct, investing in a company with 50% dead equity is unattractive. This is a "case-in-pint" showing why vesting agreements are important from the beginning.
Several pieces of information are important:
--How old is your company and what was the co-founder's contribution to date? There is a big difference between a 10-month contribution and a 10-year contribution. 
--What is your relationship with your co-founder? Is he/she amenable to doing what is best for the business? 
--If you need investment to be successful, this can be a lever.  Unless the co-founder is cooperative, you'll close the doors and move on. He/she will get nothing.  
--What assets belong to the business? Can you close it and simply open a new business on your own?
Hope this helps.