Ask HN: Co-founder doesn't produce work, is unrealiable, doesn't want to leave
During our first year, we paid our CTO $84,000 and we spent the rest of the money trying to develop hardware and software. There was a period of time when our CTO was unreliable, wouldn't answer and I still paid him $6,000 because I trusted him.
During that year he didn't produce a working software app, in our second year he still didn't produce an app we could show to our investor.
Another year later, we produced few hardware prototype units, that are bugged, but can be worked with a little. He still hasn't been reliable, so we removed him from being a board member. Several months later, when we all decided together he will keep working as a CTO, he received hardware devices, said he will get to work, and 6 months later we still don't have any work from him.
Instead he is toxic, blames everyone, says he put a lot of work into this (though nothing we can use), and will not walk away and is saying we can buy him out.
We have $0 in our bank currently and having him in the company is just toxic at this point creating terrible mood with me and our investor.
What are our options of removing him and making our product? We still need to spend again over at least $100,000 to build the product.
Me and our investor are on great terms, but he won't to put in more money when our CTO is involved. Can we dissolve the company since it has no money anymore and start a new one without him using our current assets?
62 comments
[ 4.9 ms ] story [ 132 ms ] threadTalk to a lawyer
We would much rather continue working on our own without him.
Fire the CTO and ban him from the premises. You and your investor control 95% of the company, you can more than easily ensure he is a total non-entity to your company forever.
Does he have an employment contract and on what terms? In some jurisdictions even no written contract can mean an implicit default contract, so you should consult a lawyer. And you may need to prove that you warned him about performance.
The other part are his 5%, but that usually is no hindrance for ending the employment. He will just stay on the cap sheet and can cash in later when you are successful. If that bothers you or your investor, you can try to make an offer (low, because he did not deliver). This is best to align with the investor and they make take those negotiations so you can focus on delivering.
When I have kept asking now for 3 months what the status of work is, if he can upload work done and share it with us so we can evaluate where we are, the response is 'there is nothing to share until it is done', that he has other responsibilities with other work etc, that he's busy and doesn't have time. No idea when he will finish it.
How can we evaluate his shares and give him an offer? what if he refuses?
Can he actually stir trouble with the 5%?
His initial stake was worth $50k. How much has the company value changed during his incompetence?
Is there anything else that can motivate him (such as a “left by mutual agreement” clause)? How much would that be worth for you?
Does the investor have any advice or can support?
If you offer a lower amount than 50, will that hamper your next financing round? Can such a deal be made confidentially?
It would be worth spending a bit of time thinking that over. You’ll learn a lot for the next time you start a company. And in this case, you may be adding to your strategy to get rid of the CTO.
Have you spoken with a lawyer about your potential liability? If not, you should likely delete this thread, talk to an attorney and if you repost this, you should only include the information she tells you to include.
As well, you sold 75% of a million dollar company for 1/3 of the value. Is there a reason for that? For example, if you’re close friends with the investor you and the investor may be able to figure out a way to get the patent, defend it from the CTO and roll out a totally new company.
1: https://en.wikipedia.org/wiki/Shotgun_clause
> I patented the technology 4 years ago
But it's for me only. You can't use it.
1. With regards to the CTO, treat them like an employee. Prove that their performance as an employee is not good enough, and fire them. They now have no reason to interact with the company on a day to day basis.
2. As a 5% owner, treat them like a shareholder. Put together a reasonable offer to buy them out, and do so. If they don't want to sell then that's fine, you'll only have to interact with them during shareholders meetings.
The first action will solve a lot of your problems. The second action can happen later on when you've got the money to do so.
One thing I have seen in the past is people holding the IP separately and licensing the IP to the startup. that can avoid this situation or zombie companies, but hindsight is 20-20.
Get with the good 95% of your company and start a new entity. Don't tell your cofounder about it.
New entity makes a deal with your current one to exclusively license the technology and branding, and take possession of the assets. Make the deal as one-sided as you can without your toxic CTO catching wind (and without breaking the law or giving grounds for a lawsuit in the event they do catch wind).
All new R&D goes on at the new entity. All existing staff gradually curtail the hours they spend at the old entity and "resign" here and there, all while working for the acquihiring new entity. Old entity never hires replacements. CTO continues frittering away, you can't afford to pay him, but ensure that his equity in the old firm is acknowledged and protected. At the end of some period (e.g. 3 years), the license agreement ends, everyone but CTO makes a clean break and officially works for the new firm. The old shell of a company gets folded up due to having no money.
Truman Show acquisition.
However, finding a way to buy out the coworkers 5% and fire them may also be a reasonable strategy. The CTO should be aware at this point that your business is close to dead in the water and may believe there’s not much value left for them to extract. If they don’t think the investor is interested in putting more capital in and runway is running out, they could sell that 5% cheap. But you also may run the risk of demoralizing any remaining employees if they also believe the runway is gone.
A new entity should only run you a few hundred dollars through Clerky or similar. Your investor ought to be willing to cough that up, or you can probably put together a pitch deck (freshly inked licensing deal in hand) to attract a new investor in the new entity.
Your terms of licensure would not be strictly monetary, either. Make them $1 plus X percent of new company revenues over the next three years. Even if that X is substantial it's mostly going in and out of the same pocket.
I suppose if you wanted to fold the old entity up now, you could, but murky ownership of IP and assets could be a millstone around a new company's neck in the form of legal exposure from the CTO ("they cheated me out of my equity!"). Better the old entity goes out with a whimper, rather than a bang.
OP currently suffers from oppression by minority shareholder, and needs a solution. I gave one.
This is a buyout. Everything is a buyout with extra steps.
Better for all the worthwhile people to resign and start a new entity with no IP overlap with the old one. It still might get ugly down the road but OP will be in a much better position to defend.
If the CTO has really been that bad, then I don't see much downside to a fresh start.
Fresh start is likely not an option. You forget about the IP and assets of the company. Can’t take those with you in a fresh start and OP and his investor has a lot of sunk cost here.
> During our first year, we paid our CTO $84,000 and we spent the rest of the money trying to develop hardware and software.
Why did your investor who gave 250,000 get 70% of the 1,000,000 valued invention?
What is stopping you or your investor from buying out the 5% when it is worth much less than the cash that you paid in the first year?
Where is this located in?
Would you email me?
My email address is:
peter.d.sherman@gmail.com
Just shoot me a simple message introducing yourself, no links or anything, and it should make it through my spam filter...
Maybe I could give you a few ideas on what to do...
1) He said it, so you don't like the messenger despite that being the accurate path
2) and no money
you’re conflating both of those with the idea of “rewarding” him more
tough luck
the other side of this is who cares that he’s a shareholder. Its 5%. just ignore him, remove his title, and have someone else do the work. he remains a 5% shareholder and everyone else continues on.
he has literally no power and doesnt prevent you or anyone else investing money into this company except your own pride
its an amusing interpersonal problem masqueraded as a business problem
So, the company under your management burnt 250K in 2 years, produced nothing in 2 years, and kept the CTO for 2 years.
Fire yourself and thank your investor for being so naive.
This company sounds incredibly mismanaged, and I’d seriously consider using it as a learning experience and cutting your losses.
Although the initial plan didn't work out, I can confidently say that kicking out the toxic CTO and throwing another $100k to a different lowly code monkey will definitely fix OP's problems. $100k won't even pay for a proper Shopify migration in 2024, but OP's product ideas are so awesome that they'll change the world, if only it weren't for these toxic 5% co-founder CTOs being paid Burger King Manager wages with their bad attitudes.
Who needs introspection when your ideas are just that awesome?
And if he paid $84k to the CTO each year, I would love to be his next cofounder.
If you still think you can save this company somehow, figure out a way to fire the CTO and start fresh. Talk to Lawyers but the investor owning 70% is bothering me the most.
100% of $0 is $0.
Unless you have quite a bit of IP in your company.