My #1 rule for ventures, especially with friends, is to create an “ejection seat plan” at the beginning. The ejection seat is designed to save friendships and prevent teams from holding on to ideas too long.

Write down a list of milestones that must be achieved in 1, 2, 3, and then every 3 months up to 48 months. Agree that either partner can choose to eject without blame whenever the milestones aren’t met. Agree how much equity will be retained in the event of ejection. Follow the plan.

I credit five inspirations for the ejection seat plan. (1) Tim Ferris’ “dreamline” concept from 4HWW, (2) news stories about “golden parachutes”, (3) my friends who learned this with me the hard way because we didn’t do it, (4) the Stripe Atlas guide to founders equity, (5) my friend who helped me validate that it can work.

Edit (to add this link): https://stripe.com/atlas/guides/equity

If we are committing to each other, what does it look like if one of us decides we don’t want commitment?

Do we agree to do couples therapy for a X number of months where X is an agreed upon ratio of time spent together?

I really do think an ability to agree to a process you’d go through if you are wanting to leave could be useful.

On the other hand, the emotional distress, distraction, and destruction of personal relationship(s) that can happen from arguing over this sort of thing is tremendous.

Your cofounder probably feels emotions surrounding you leaving. You probably do too.

That emotional context colors the conversation, and you both currently value everything you contributed so far in that context.

I would strongly urge you to consider prioritizing an amicable parting of ways over other considerations.

When you look back years later you probably will realize you were negotiating over such minor things, while risking the truly important stuff, like your personal energy.

- After negotiating a ballpark sale price, I was advised to get an attorney, and that was excellent advice. The attorney cost 10K or 20K, and it was worth every penny. My partner trusted each other enough to share an attorney we had worked with previously. I trusted the attorney to work with both sides, even though the attorney was probably representing the business more than myself.

- Any exit plan that involves deferred compensation should be crystal clear, and I encourage you to focus on discreet payments that do not require you audit the company's finances, as it's a lot easier for both sides if the only thing you have to do is cash a check (e.g. you receive a fixed payment of X regardless of how well the company does, and avoid things like you get X% of sales over a certain period)

- just keep in mind that you and your partner will likely have wildly different ideas about the company valuation

- one option you can consider is staying with the company and offering to buy out your partner. My partner was the one who originally wanted to exit, but she ended up buying me out, and it worked well for both of us!

- be nice (or at least civil) throughout the process, as breaking up will be hard, and you need trust to be preserved to feel good that any deferred payments are likely to happen. Also, you might wanna work with each other again in the future.

- don't negotiate an exit payment so high that the business might not be able to pay it

Jim would never leave me the company and frankly, I have no interest to stay even without him

Right now Jim probably thinks there is serious value in the app. The odds are overwhelming that isn't true. While he believes that, your likelihood of getting paid are dramatically higher, so again go for the 100% immediate payout if you can.

For two years of fulltime work or are we misunderstanding?

You own 40% of this company without encumbrance and you have it in writing in an official corporate registration document filed with your government, correct. If this company is worth anything at all your 40% is worth vastly more than a couple thousand. You could sell your rights to a third party.

Also, everything the partner did, and which you did, as a registered legal partner, is owned by the company. Not by him, not by you. The company. He can not claim it is his and take it elsewhere. That would be illegal. You own 40% of the value of the software code, just as he owns 60% of the work you did.

All the endemic downvoters here should explain why for two years of full time work that brought this company to the point where it can be sold by a cofounder is only worth at most $2000 total and you yourselves (state your legal name) would be happy yourselves with the deal you are pushing to this guy.

Something like (obviously don’t use these exact words) “Hey Jim, I know it’s a drag that I’m leaving the company like this. I’m sad I have to go too. I know it’s messy if I retain equity, but is there any way you could pay me a buyout to reflect some portion of the hours I’ve put in so far? I’m pretty broke and it would make a huge difference.”

Then if Jim honestly feels that is fair, and he (very big consideration) feels like he can actually afford it, he might just do that.

The number, in that case, will probably be lower than you imagine. Because everyone tends to value their time highly and other people’s time less so.

But it would sidestep any fighting, and Jim will feel less resentment because it was genuinely his choice.

Or he will say absolutely no. But again that’s what you’re likely to get no matter how much you fight, the only difference being the damage done by fighting.

And in either event, whatever Jim does, you can focus your mind on your next thing in life.

Edit: Because remember, starting a company always had the risk you would work a whole bunch and end up with nothing to show for it.

Either find some consulting work and work something out with Jim to stay in the game, or cede all the risk and reward to him. Building a company isn’t for wimps. My apologies for my brutality, but I’m actually in your position and see it from my Jim’s perspective.

Then understand that what both of you should have done is 4 years vesting with 12-month cliff.

With that come to an agreement that since you did two years, you should keep only half of your equity (20%), freeing up the remaining 20% so Jim can acquire better talent.

Long version (Excerpt from a post I wrote):

"These are the legal concepts you can use to protect founders from each other, the company from the founders and founders from a hostile board.

Let's run an Example assuming I'll be your co-founder and the company will grant me 48,000 shares for each of the legal concepts (The number 48,000 was chosen to simply math but does not reflect typical number of shares per founder):

1. Cliff

• If founder stays less than 12 months, no equity.

Example: In this case I receive 0 of my 48,000 shares.

• After 12 months 25% of stock is instantly vested.

Example: In this case I receive 12,000 shares of my 48,000 shares.

2.Vesting

• After the cliff, founder vests 1/36th of granted stock each month.

Example: In this case I receive 1,000 shares a month, on top of my previously earned 12,000 shares after the cliff for a total of 48,000 shares over a total of four years. If I leave in month 24 my total number of shares is 24,000.

3. Acceleration Triggers

• Single trigger: all stock is vested upon change of control or sale of the company.

Example: Let's say Google buys our company in my month 24 of vesting, in order to prevent google from firing me right after the acquisition in order to stop my remaining 24,000 shares from vesting, all my shares accelerate are granted immediately, thus accelerating the vesting

• Double trigger: some stock is vested upon termination without just cause.

Example: This provides a dis-incentive from investors, the board, or a co-founder from firing me if I am not done vesting, in order to free up equity to hire a lot more other people, if I am fired and it's not due to committing a crime like fraud then I will earn some stock, normally 12 months, without having to remain at the company for 12 months."

Even longer version: https://www.linkedin.com/pulse/startup-survival-guide-recrui...

However, since OPs cofounder paid out of pocket for the app, I'm not sure what the StartupInc actually owns. But that also means the possibility of piercing the corporate veil - which is also bad.

I'm not a lawyer, but I did have a startup where my cofounder gutted the company after trying to stage a coup - then created a very similar company. He'd signed all the NDAs, non-competes (these ARE enforceable, even in CA, with co-founders/execs) etc.

I never went after him.

Instead, I waited to see: would he be able to steal my idea, connections, and clients to be successful on his own. If so, I planned on getting my share through legal proceedings.

Short version, a few years later one of his 3 co-founders quit, a year later the other did, and now the company is gone.

I'll avoid giving OP advice based on my one story, but another poster made a good point: there is very little to be gained.

Legally, though, I believe that - short of creating a new corporate entity or watering down the stock (both possible, though they come with risks RE getting sued by OP) - OP will retain all of their shares.

Of course, being not a lawyer, there are likely major gaps in my understanding and OP should at least have a chat with one.

Does this mean that if a founder leaves immediately after 12 months, he will own 50% of the shares issued and it will be a further three years before he is back down to 25% (and his remaining co-founder up to 75%).

Also, if all goes well, the shares received towards the end of the four years could be worth a considerable sum, resulting in a large tax bill each month as they are received.

Assume the stock grant was 48,000 if you have after the day after you completed 12 months, you get to keep 12,000 shares not 24,000.

In terms of taxes, you have to file an “83b election” with the IRS to prevent being liable for “paper wealth” that’s not really cash

Technically you are granted all 48,000 shares at a nominal value like .00001 and the company has the automatic right to buy back the shares you do not vest at that same nominal value

I meant that if the other shareholder also only has 12,000 at that point, that's 50%.

> In terms of taxes, you have to file an “83b election” with the IRS to prevent being liable for “paper wealth” that’s not really cash.

> Technically you are granted all 48,000 shares at a nominal value like .00001 and the company has the automatic right to buy back the shares you do not vest at that same nominal value.

I see, and I guess that explains the first issue too.

You came together a couple years ago with a plan to make something and own it 60/40. Now you have something and you own 40% of that thing. I’m not sure how your continued employment matters at this point. It’s like saying someone needs to be employed at Apple to own Apple stock. They don’t.

Maybe I’m missing something.

That the entity was never capitalized and the 60% founder paid for the app development out of his own pocket and plans to just reincorporate another entity and sell the app that way

Anyway, to echo other people: This is why you use clear contracts and try to deviate from the norm on these things only when you have to. Because otherwise disagreements become complex and expensive to resolve.

If the original company has any value to Jim, then you two should come to some reasonable agreement to settle the matter in a way that's acceptable to both of you.

You appear to own 40% of the company, which means you own 40% of the IP. Whether Jim paid for the development or not isn't super relevant, the relevant part is the contracts between Jim and freelancers. Who is assigned their IP? Who is listing as hiring them on the contract, the company or Jim?

Jim can try to play games by re-incorporating and moving the IP around, but you'd still be entitled to 40% of it. But you might have to sue to get it.

The good news is that you can just walk away now, and if it gets really big later, you can file your lawsuit if it might actually be worth something (see Facebook). In the meantime no need to stress about it.

Of course I'm not a lawyer etc etc, but from my experience this is how it would go down.

BTW if you wanted a fair deal, you'd get 20% of the stock now and forever. That's what you would have vested in with a standard four year vesting agreement.

Actually, I'm going to bet that he owns 100% of the IP he wrote because if they didn't have good documents around something like vesting, they probably don't have good IP documents either. That gives him the upper hand in negotiation.

To the OP: without a vesting schedule or agreement on what happens when you leave, your partner is stuck with you. If you've done most of the work up to this point, don't be bullied or browbeaten into giving up your shares. I wouldn't even give up that 10% you were going to right off the bat—that's giving away something for nothing,

Most attorneys will have a conversation with you and give you at least some background and let you know what general options are. I've been through a situation similar-ish to this one and if it wasn't for the fact that my partners were so completely sloppy with their paperwork I would have been completely screwed out of several years of my life—they certainly weren't looking out for me. As it was, they took more than half of the proceeds when we eventually sold the company even though pretty much everyone but me had ghosted a couple years earlier.

> Jim can try to play games by re-incorporating and moving the IP around, but you'd still be entitled to 40% of it. But you might have to sue to get it.

Remember, if you didn't sign IP assignment papers when you founded the company, you own 100% of what you produced. Copyright goes to the creator in the absence of any agreement to the contrary. That also means Jim can't transfer it to a different company (which he couldn't do anyway without inviting a shareholder lawsuit.)

> BTW if you wanted a fair deal, you'd get 20% of the stock now and forever. That's what you would have vested in with a standard four year vesting agreement.

Agree with this—if you really think the company has a good shot, I"d negotiate a generous buyout (generous to your partner that is) of half your equity and keep the other half.

We have a meeting scheduled for tomorrow, I'd stand my ground as you've and others suggested and we'll see what happens. If it gets really messy maybe I'd think about bringing on a lawyer, but it would have to be certain that I'm not going to lose money because of that since lawyers... well, aren't cheap

> Who is listing as hiring them on the contract, the company or Jim?

Jim is the one. People around here suggested though that it doesn't really matter because for example I've contributed something to the app as well (sketches, app flow, design, etc.) and the app was clearly made for the purposes of the company

- Find an amicable agreement to buy you out in the short term

or

- You'll back up all of your documentation around incorporation and wait until the app gets larger, hire a lawyer and go after 40% of the significantly higher value. You have a solid claim, and this would be much more painful for him. He has a fiduciary duty to protect the value of your share, if he takes action to attempt to devalue your portion he could be personally liable to make you whole for more than 40%. Especially egregious action could rise to the level of criminality.

Either way, probably worth consulting with a lawyer now.

In my opinion, Jim is lazy, but not dumb. It doesn’t sound like you guys have been very good at formalizing things under the company and Jim knows that and has positioned himself quietly as the one with all the power.

Setting my analysis of Jim’s character aside, I think your best bet is to not demand a thing, just keep your already agreed to equity you have documentation on and walk away. The reason being you don’t want to give Jim the chance for a new document to muddy things up more in case of later litigation.

He may restructure or do some sneaky thing to make himself feel as though he’s bested you, but the likelihood whatever is made is going to make a huge amount of money is slim (especially with what I see as severely amateur behavior here coupled with a lacking in ethics). He’ll have a hell of a time raising any funding either way if investors do their due diligence.

If it does succeed sometime in the future, send the whole file to a decent attorney and let them do their jobs then.

In the meantime, just understand the tactics he’s employed and do think defensively, preserving what you do have now. Then store it in case you need it later. After that, move on with your life and forget about it.

I’d probably remove Jim from your life though. Every comment I’ve read from you about him has had the between the lines description that his behavior has never been in your best interest. He doesn’t care about you at all.

This should be small enough that it won't effect him or the bottom line for the business, but provide value to you in the long term if the business does sell or raise significant money.

If you want to retain a working relationship with Jim, and keep some interest in this company moving forward, it sounds like the responsibility is on you, based on the way Jim countered.

Otherwise, it might just be that you walk away and take a hit, but you gain a valuable lesson for next time. Always have a written operating agreement to define how you will both act in situations like this. Codify the ins and outs from the beginning, get it on paper and take the emotion out of the process should you need to separate later.

I would agree with such an equity stake & expiration, that sounds reasonable

If you own part of the company you don't just give that up without there being express wording in the charter (or whatever contract/paperwork you used to create the company). The problem you have is that right now, you own 40% of nothing so you're going to pay the lawyer you talk to (rather than have them work on contingency).

I should also note that this seems like a weird time to leave a startup ... did you really think you could cash out in just two years? Perhaps you haven't been "invested" in some time?

When we were starting the thing I was 19, kind of naive and inexperienced. Now that I'm 20 I've experienced a couple of other things along the road and it made me realize that I'm probably wasting my time here. Also, problems that seemed unlikely in the start arose so I believe this is the best decision right now

By pursuing this startup, what is the value of other opportunities you have to pass up. If you think the value of the startup is higher than those, then stick with the startup. However it sounds like you don't feel that way. If the other opportunities are a higher value, you should pursue those instead.

So far it sounds like you are mostly out time as you can get your cash back. If the business is not profitable and you don't have a good outlook on it. Then your time value so far is is lost, or sunk. Sunk costs, are sunk. You can't get them back, and people have lost a lot more trying to get them back.

As others have mentioned about, try to negotiate are prorated amount of your shares. If you can't get thank, don't keep wasting time here. Cut your losses and learn a lesson from it, then move on.

Realistically, you've likely answered your question regarding if it's worth it to fight it out.

Then again, if you've signed docs that say you own X shares, then Jim can't just take those away (as the parent poster mentioned).

Jim could issue a bunch of new stock (watering you down), or (if it's an LLC/s-corp with pass-through income) generate a bunch of phantom income to drown you in taxes, or create a new corp and sell the IP from oldCorp to newCorp for a pittance (bit of a quagmire there as you'd have good grounds to sue).

All of these present challenges, though.

Your best bet may be to determine a transition period where, at the end, he pays you for your shares and you walk away. Your chances of staying as an equity owner given the capitalization of the biz (~$1000, if I understand correctly, as his $12k was spent outside of the biz).

Of course, this should be in writing, signed, etc.

In the scope of your life, $1000 probably isn’t that much and it’s about the same as a college course. You’ve learned a lot. Those lessons are valuable. This hasn’t been a failure.

It would just feel bad to me to walk away for free from something I was working on that can be tomorrow sold for couple (tens of)thousands (the value doesn't really matter in this case) for free

So frankly there are many people who can start their own companies, but there’s a lot to learn in terms of actually working with people and choosing the right ones to build a company with, too.

The fact that their party can’t be fair regarding their share is already a huge-huge red flag. Many supposedly greedy people I know wouldn’t do that simply because they have respect for the capitalism (or in other words - they know perfectly well that their words are no longer enforceable).

You could just walk away and keep the shares, but as you're a minority shareholder your stake will be diluted to approximately nothing fairly soon.

You're in a really bad position here. If Jim wants to be a %^&% about this then you're going to get screwed.

I don't think it will.

Jim can issue new shares so long as the majority of shareholders agree (which is Jim agreeing with himself) and just not give you any. Consequently the percentage of the available stock you own is diluted, and you end up with less and less of the company. This is how it works in the UK (where I am).

Normally share dilution happens when new investors come on board and put some money in which increases the value of the company so the value of the shares doesn't really change. If there are 100 shares in the company and the company is worth £1000 each share is worth £10. If you own 40% that's 40 shares worth £400. If 100 new shares are issued and sold to an investor for another £1000 then the company is worth £2000 and there are now 200 shares still worth £10 each. Your percentage has dropped to 20% but the value of your investment is still worth £400 (ignoring the value of dividends, voting rights, etc). The same mechanism can be used to screw people though if more shares are issues without a commensurate increase in value.

If Jim issued himself more shares for a nominal fee, he would have to offer the OP the same deal.

Yes, share dilution might happen with genuine investors, but no he can't just dilute out the OP on his own to 'screw' him.

You may feel the value is yet to be realized, but then you should probably stick with the company. Jim's planning to do that, I assume because he thinks his future efforts in addition to what's already been done will make it valuable.

One other thing I'll throw out there. In general, maintaining a complex cap table for an early-stage company is very bad. Jim will have a devil of a time getting investment or funding when he has a 40% share holder who is no longer involved. The optics are bad and will spoil the deal. Given that, I'd consider being willing to part ways for future cash, perhaps cash payable upon closing the first $X in deals or something. Basically converting your equity to debt.

Leaving you 'empty handed', or only paying you the share of the incorporation fee also sounds unreasonable - you did invest time and effort and that largely remains unvalued in that case.

In the past I have dealt with similar situations by agreeing on the amount of hours and effort spend, and attach a market value to that. The leaving party then is paid that amount (either in whole, or stretched out over a period) and no equity is retained.

The thing is that I think it's pretty possible that he will sell the startup in the coming months - the startup itself may not be worth much right now, but since our programmers took far less than they should have, the source code has some value.

If you are primary looking to for the former, you could propose a deal where you get 40% up to whatever you both agree would be a market wage for the effort you put into the startup ($10/hr seems low, but I know nothing of your local economy). That may be more acceptable to Jim, and it keeps you from feeling like you got a raw deal if he has a great exit in a few months.

That's an absurd valuation and what he is willing to pay is irrelevant. Your time for this level and value of investment as a cofounder is worth more like $250/hr. Plus the fact you've been going without salary or compensation for 2 years gives this a risk multiplier. People routinely pay business consultants, legal experts, and other such professional help $300-$500 an hour outright. When the expert accepts equity in lieu of pay, the expected payout to account for risk is much higher. That's why angel investors might spend $10,000 on something and invest 100 hours, and end up with a $100 million return. So their time was worth $1 million per hour.

At this point it’s hard to argue for any cash value, but he definitely earned some equity.

$10/hr is reasonable for a normal full time developer job somewhere in between.

No.

That is false.

That is false and also a bald faced lie by a bald faced liar.

No full time developer jobs anywhere in the world pay that. Not even China.

In the West, McDonalds pays more, as does WalMart ($142,107 per year average for a Software Engineer).

Most people acknowledge WalMart is a shitty company with shitty pay and sensible people can do better than the miserable $71/hr they offer for software engineers.

Assuming a 40 hour week, that's less than $11/hr. Belarus and Moldova are poorer countries, a figure for Moldova gives $7.

There are junior developer positions advertised in the UK paying £24,000 a year. Expect a 35 or 37 hour week and 6 weeks holiday, but it's not that much higher...

True -- except that's what they agreed to, as far as I can tell...

You have already offered a generous offer to the cofounder to reduce your equity stake over time and without knowing their side of the story, that seems like a great deal to take. You did put in two years of work, at a reduced, or $0 salary, and as a result there should be some equity that you retain.

You could simply just ignore everything and move on, and if the company sells get your 40%. You have already made an offer that he could have accepted, but chose not to for whatever reason.

So why stress more about it?

Agreements should be set in place beforehand as others have mentioned, specifically around vesting schedules and also control structures and so forth, but this is a good learning lesson for both of you.

So if you make a generous offer and instead of accepting it that person comes back and says you should have 0%, why are you continuing to put that person's needs first?

Thanks!

If your co-founder can’t understand this, then maybe it wasn’t meant to be in the first place.

Assuming no vesting / clawback agreement was in place:

Simple option: have Jim buy your shares at fair value, which may be very close to 0.00. If Jim is unwilling / unable to pay with cash, have the company write you a note for the shares. In both cases, Jim ends up with 100% equity, which is what you say he wants, while you are compensated for value created to date.

2) Your work has value, quite possibly more value than the capital put in by Jim.

3) If you own 40%, Jim has to buy your 40%. You position as a shareholder is not related to your position as an employee. Ownership doesn't disappear. I don't quite understand how/why you would reduce to 5% from 40% (without dilution events).

4) Don't sign anything until you talk to a lawyer.

I own 20% of the shares, it’s quite unfair but I really couldn’t care less. All i wanted is to make our startup work.

It might be irrelevant but I just thought I’d write it here

If you are comfortable sharing it - what is the reason the guy leaving the company doesn't want to negotiate something with you? Does he want to retain his full equity?

I'm not a lawyer, but if there's an invention assignment agreement in place the IP would be owned by the company, not Jim, despite his $ in, and thus it would be hard (not impossible) to dissolve and re-form.

Fail fast and move on to something new. Good luck.

The contract to develop an app is between Jim and programmers, so I'm not really sure how this would play out.

Right, I'm happy that I'm moving on now. If nothing else, I will have a very valuable experience

If you walk away right now, you own 40% of the company. There are some business-world dirty tricks Jim can do to cut you out without paying, but they can take some time to pull off, and some are grounds for a civil lawsuit (in the US).

That 85:15 ratio in your favor should have accumulated some sweat equity. The initial cash infusion works out to 7.7% you, 92.3% Jim. In order for that to work out to 40% you, 60% Jim now, the company valuation with minimum-viable product should now be $22333.33, and the value of the work you added via labor should be $7933.33, and the value Jim added by labor should be $1400.

If that seems reasonable, so too should the 40/60 split.

The value produced by the programmer-contractors doesn't count toward equity. They converted cash into company assets as a consequence of the business structure you set up. The only reasonable ways for Jim to ethically increase ownership share after you leave is by putting in more sweat equity, or by infusing more cash directly. But legally, the ownership share was established with the expectation that Jim put in more cash, and you put in more work, and anything happening after would require renegotiating the agreement.

With respect to Jim contracting the developers directly, that would not matter in the US (with a decent lawyer). Clearly, he was doing that as an owner/officer of the company, so the work product belongs to the company. In business shorthand, he loaned the cash to the company he owns, and then immediately paid it out as majority owner to a contractor. The work product goes on the books as belonging to the company, along with a zero-interest debt to Jim. Or perhaps the initial capitalization was in the form of IOUs from Jim to the company, and in paying the contractors, he simultaneously redeems those IOUs. We can't say for certain without seeing the incorporation documents.

You are actually being too reasonable. Demand an independent valuation of the company. Take 40% of that as cash buyout. If the company valuation grows over time, take 40% of that, whenever Jim feels like buying you out. Jim is trying to lowball the current value of the company, in order to screw you out of the value you put in after the initial investment.

Remember that whatever deal Jim may propose to you, you could use the same valuation strategy to buy him out. If you could be bought out by paying your share of the incorporation fee, would it be fair if you paid him his share to buy him out?

Now, that is but a tiny legal detail -- I think the other comments on interpersonal relationships are much more important. He can screw you if he really wants to, and so can you.

So retaining your equity may not be free.

[1] https://en.wikipedia.org/wiki/Paul_Allen#Microsoft

Yeah, toxik also pointed to the fact I co-own the code (app), although from a different perspective. Thanks a lot!

I was a co-founder in a startup. It was split 50/50. I did all the development work and my partner did the business development work.

I had to drop out due to health reasons. I retained 1%, which I felt was fair. The main thing is they needed to bring in new people to replace me and needed equity to offer them. We did formalize it, and I have the legal documentation showing my shares in the company.

They have gotten investment so I'm sure my share is diluted quite a bit by now.

That was about 5 years ago that I left. At this point I'm ok if I don't get anything out of it.

I think it is important to honestly look at it. Not with what if, but how likely something is to happen. How likely is it that it can be sold as is in a month? How likely is it is that it is going to be profitable? How likely is it that more development work needs to be done? My gut tells that the answer to the first two questions is pretty low, as if there was a really good chance of making a profit or selling, you wouldn't be wanting to leave. Instead you'd be looking forward to the incoming money.

Do you have any sort of a written agreement, or was it a handshake deal.

The funny thing is that the only way it would make sense for Jim to sell the company in a month is when I leave. Otherwise it doesn't in such time frame.

Yeah, we have a company together that operates the app, but as I've mentioned before it's unclear whether Jim couldn't simply establish a new company and operate the app under it (since the app development itself was paid for by Jim + has a contract about it stating that he's the one requesting the development)

Your offer is generous, but I can see why Jim would rather own the entire company. He would have to buy you out though, and I can see how just the cost of your incorporation fee is hardly enticing.

If he starts running the app by himself with a different company though, I think that’s a case for lawyers. A fairly clear cut one too.

I think you should absolutely be paid for your time and effort, preferably in equity. Given the structure of your corporation (and how the app was paid for), you may have few options.

Contact a lawyer.

What do you want? I thought it was equity when I first read this, but some of your comments read like you'd be ok with some money. I would think carefully about this before moving any further.

Someone made the point that the equity isn't likely to be worth much. I agree, but for me I'd be digging my heels in because of fairness. At the same time, maybe that doesn't matter as much to you right now.

The question remains whether he can simply take the app & create a new company since technically he paid for the app and the contract with programmers is only between Jim and programmers

For U.S. law this could be considered extortion, slander, or at best bad faith.

Also consider that op wants a job in the future, maybe even to talk to investors in the future.

https://www.businessinsider.com/how-to-allocate-ownership-fa...

https://seths.blog/2006/11/dont_make_a_bad/

1. This is why 4 year vests are critical. For co-founders, IMO, 4 year really should be 6 year. So 40% should really be 10-20%.

2. Focus on good/bad cases. Frankly, the value of OP's contrib is high wrt current company, and low wrt the necessary work to be done and effort/risk compensation for the people to do it:

a. Failure -- who cares. This is the 95% case.

b. Small exit -- so let's say they get releaseable (tech), enough micro-pivots to solve early product/market fit (product), get early traction (marketing), some sales, some hiring & management, and given current state, more investment by co-founder. WOW that's a lot of time/$/work still to be done, say another 2 years and maybe now it's Jim and a few contractors or ever 5-20 people, to get to a small M&A. Those folks will be taking low pay, hard hours, & a ton of risk, and they can't all get 10%. If a $5-10M exit through that many other people and investors, how much is OP really responsible for, $1M? $500K? IMO most of the hard work is still to be done: initial app launch is pre-product-market fit and pre-traction. This is the 4% case.

c. Big exit -- First they need to do above product/market fit iterations, could be a couple years. Then they need to build the actual business. So they bring in investment and build an operational & growing business. Let's say 1-3 rounds @ 20% dilution each. Takes another 5-9 years over ^^^: figure out sales/marketing, turn that crank, hiring, a pivot mid-way through, etc.. And exit at 50-200 employees for say $100M. So much more work to be done. A lot of people's work to pay out on: if everyone got 1%, wouldn't be enough. Arguably your 2yrs is worth than a senior infrastructure engineer spending nights and weekends for 2yrs replacing your code so it could scale to 10M people, but is it worth 10X more? 100X more? Riding the labor of others to the tune of $1-2M is just 1-2%, so starting with 5% now is still great.

3. Future investors and acquirers may look at the cap table and see OP's dead weight on it. It's very solvable.

"5%? That'd be equity for 10-50 employees, who is this person? Let's agree to a smaller acquisition with small/zero payout, and invest in that new company."

Or "5%? As an acquirer, we want to pay the people we're trying to sign on to our team, not some dude on a beach who wrote some stupid app that isn't even what the company does today, let's shift proceeds to sign-on bonuses." So weirdly, in your favor not to be big dead weight. Even 10% is dead weight.

4. For remaining founder, so much heavy lift & investment & risk is still to go -- esp if a 5-9 year journey from here -- that 20-30% is demoralizing. Let's say they want to hire another CTO and give them say 20-40% (VESTING!!!). So your remaining cofounder has to do a huge years long lift for... 20%?

I guess the turning point was when we were talking to a journalist and he asked us what are our KPIs (key performance indicators). Jim had no idea what that is, so he just told him some nonsense - I had to step in to make it clear. I just don't want to imagine the embarassment if we were sitting with investors instead

In other words, you're leaving because you believe the value of your shares are approximately $0.

Why are you spending your valuable time, energy, and creativity fighting to retain your 40% of $0, rather than moving on to doing something more useful?

If we aren't talking about $3x,xxx or more USD, then the acquisition isn't really very financially significant.

As such I would tell the cofounder that litigiation is a waste of time for both parties and that he really should just give you 12% or etc before you are forced to ruin a relationship and pursue legal action, which would be a net loss for everyone except the lawyers.

It's just that Jim owns 60% and I own 40%, that's it

well that seems pretty cut and dry.

Speaking of lawyers, I'm not sure who did your incorporation work but it's honestly pretty disappointing to see that they didn't even suggest a vesting schedule. This is startups 101 stuff; any competent lawyer would have told you this.

I guess another lesson for me other than having a vesting schedule is having a responsible lawyer.

Your situation where your contract gives you 40% ownership of the business without a vesting schedule is massively preferable from your standpoint legally and vastly superior than one where you have restrictions on equity. You are in as they say, in the cat-bird seat.

Why do you continue to side against yourself and with those who seek to harm you? I don't need an answer nor can I answer that for you. It's something you need to resolve for yourself.