How to terminate a business parter?

Discussion in 'Growing and Managing a Business' started by Trep117, Mar 3, 2013.

  1. Trep117

    Trep117
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    Hello all,

    I am a full time business owner of a start-up that has been operating for 9 months. I have two business partners and have may have made a mistake. ANY advice will be much appreciated

    1. One of the partners (lets call him Bob)owns 20% equity and has made a capital investment of 65k. He is also a developer that has built a backend admin panel for inventory management and also a front end system that is not yet complete. We set a goal for the front end to be finished and launched by Jan 1st and that deadline was not meant do to some personal issues he was having. He finally resurfaced and came into the office for a meeting. We found out he was manic depressive and had a breakdown but is getting better. Me being the understanding person that I am, told him that I was glad he was safe and that I feel great about the team being back together again. He then agreed to have everything up and running by March 1st and to this date he hasn't made any progress.

    2. The other business partner (lets call him Todd) owns 39% equity. I have given him a few projects that needed to be completed by March 1st and none of it is completed. He is a very negative person and always feels as if he is a victim of the company, not to mention his overwhelming sense of entitlement. He doesn't know how to comunicate or delegate. I have had many talks with him in regards to all of this with verbal understanding from him, but he always falls right back into his old ways. He quit his job to start this business with me and is married with a kid and another on the way and I feel bad for even thinking about terminating him. This business is going in the wrong direction and even though we are already turning profits the moral is really down. Todd also recommended Bob into this company and is good friends with him.

    My question to you professionals is, if you were in this situation how would you handle it? I was thinking of sending an certified letter to "Bob" saying that if he doesn't fullfil is fiduciary responsibilities, I will issue a substantial amount of shares diluting his 20% equity. With Todd, I was going to give him another chance but telling him if things don't turn around within a month he will be terminated. I have until May 15th to take back all of his shares without having to pay for them. I need to be tactful about this whole situation and really need some advice as this is about to be the most difficult decision I have made.

    Thanks for everyones time!
     
  2. ArcSine

    ArcSine
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    The first step must be to consult the partnership agreement. A well-drafted PA always contains provisions which (a) spell out a partner's responsibilities; and (b) specify what rights are granted the other partners in the event a partner doesn't fulfill his/her duties, as defined in (a). Whether you can dilute out a nonperforming partner (as you mention), redeem his shares (and at what price), or any other steps you can take, should be carefully defined in this section of the PA.

    If your PA includes such provisions, then you need look no further.

    If your PA is silent in this area, you should (1) fire the attorney who drafted your PA, as these things should ALWAYS be provided for*; and then (2) consult with a different attorney on the problem at hand. Without these rights and steps spelled out in the PA, I'd imagine (I'm not an attorney, nor do I play one on TV) that you'd have to look to Georgia partnership law for the default rights you have and steps you can take w.r.t. a nonperforming partner. In such case, you want to make sure you only undertake remedies allowed by state law, and hence having legal counsel at your elbow will be valuable.

    *(...you did use an attorney, or at least a darn good PA model, for constructing your PA, right? ;))

    It's a good sign that the understanding among the partners seems to have included specifics, such as target dates and definitions of completed product. When these things are left kinda vague, it makes your remedies a lot harder to defend and execute.

    OK, outside of all the legals and fine print stuff, I get that this is a tough spot for you, particularly given the circumstances you describe. Do you think they've picked up on the fact, from your to-date discussions with 'em, that you're very close to pulling the plug, or are they possibly under a misconception that you're merely annoyed at this stage, and still willing to give them plenty of time to right the ship? If the latter, they certainly need to have their perception updated to the reality of where you are, and perhaps that'd be the wake-up call they need?
     
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  3. Ted

    Ted
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    I would advise you to assemble a new team to move your business forward from here and then cut both of them lose. If you try to patch things up and if you try to change them, then this is going to become an ongoing problem for you that you will have to address on a regular basis again and again and again. People don't change because someone else wants them to. They change when they want to change. You aren't going to change those guys.

    Just consider your decision to partner with them a bad business decision. You tried it. It didn't work. Formulate a new plan to move forward with from here while you still have your own personal momentum. If you keep stringing these guys along with you, most likely they will just drain your mental capital and keep you from achieving your real potential.

    Of course the partnership agreement comes into play when figuring out how to transfer their equity. I assume that you have a good one in place that provides an out for you in a situation like this.

    Find new highly motivated team members with energetic and enthusiastic attitudes. Hire them as employees with a chance to get equity in the company at some point if they prove themselves worthy of it.
     
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  4. Trep117

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    Update: I have recently come across some information coming straight from the horses mouth that my partners were trying to sabotage the business and take it from me. They dont know that I know yet and am going to terminate them both today. I have been preparing the last time I posted on this thread. Wish me luck, these guys are going to be blind sided.
     
  5. ArcSine

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    Thanks for the update, Trep117. That is indeed a completely different scene altogether. Once you've cut the chumps adrift, it's onward and upward to better things. Keep us posted.
     
  6. daytrader

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    Lol I really wanna know after this trep. Update us.
     
  7. Picture

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    If you are a 100% sure they are trying to sabotage the business then the gloves off and no pity about kids on the way and whatnot. Although I'm not sure what advice to give, this is a good example of where a solid contract should be in place from the off.
     
  8. Trep117

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    Update: Everything went surprisingly smooth. I backed them into a corner with paperwork. The termination took only 5 minutes and they were blind sided. Now the developer shut down the website and the backend so that I cannot access it. Little do they know, I have an amazing mentor that recommended me to a new developer. He ripped all the code in full and now can rebuild. Lets hope this doesn't go to court as I dont have a lot of resources being that the company is a start-up. But everything happens for a reason and they made their bed. Now, they must lay in it. Hip-hip Hooray! Now Im going to go drink a beer. Haha
     
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  9. daytrader

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    Oh no..
    Sad to know that it really happened in a manner that it did but seem like a relief.
     

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