Can we raise funds and sign a term sheet without a shareholders agreement?

My co-founder refuses to complete our shareholders agreement. He has always tried to avoid conflict. Every time we come to a contentious issue in the agreement, he doesn’t want to discuss it. We can’t resolve key issues. The lawyer hasn’t been able to persuade him that this needs to be done.

We now have firm offers for $750K seed investment and we need to sign the term sheet. Can we raise funds and sign a term sheet without a shareholders agreement?

My co-founder was arrested for drunk driving for the fourth time. What can I do?

This was the fourth time my co-founder was arrested for drunk driving. This time his license was taken away and his picture was in the local paper. He was responsible for sales and this meant he did a lot of entertaining and tended to drink too much. We discussed this many times and each time he promised to stop. I am now at the stage where I don’t trust him any more.

There are only two of us on the Board, but I had our lawyer write him a letter saying any repetition of this behavior would result in instant dismissal and forfeiture of all his stock options and incentives. We barely talk to each other now but what else could I have done?

My co-founder benefits from my hard work without doing any himself!!

We co-founded the business and were committed to it, but it didn’t produce enough revenue to support even one of us. We decided to both work part-time on the business until could pay the salary of one person. The other would join when the business could afford it.

It took 18 months for us to get enough volume to support one of us. I quit my job and started working full-time on the business. My co-founder got a promotion, which meant moving to another city and more travel. He was no longer contributing to the business part-time.

Over the next six months, I hardly heard from him and we grew apart. He didn’t really know what was going on with the business and said he couldn’t do both jobs and was going to focus on his career. He wanted to sell his shares but I couldn’t afford them and there wasn’t enough cash in the business to buy them.

I had a real dilemma. The harder I worked and the better the business did, the more he would want for his shares. I tried to get a friend to reason with my co-founder, but he refused to listen. This isn’t fair!!

How did I lose control of my business when it was my idea?

I had a great business idea but knew I could not do it on my own. I found someone to work with on the proposal; her skills complemented mine and we worked well together. We decided to start a business together and that we would each own 50%. Things moved slower than expected, as sometimes happens with a startup. My co-founder then decided that she wanted to concentrate on her full-time job and family. She stopped working on the business and ended up moving to another part of the country for her partner’s job.

I continued to work on the business and brought on someone new as a business partner. We developed a website and started to sell products. We’re doing well and my new partner wants a share of the business, but my original co-founder objects to that. Now she’s not talking to me and my new partner doesn’t want to put in all the work without getting a fair share of equity. This was my idea and now someone who’s not even working on the business is keeping me from going forward. What do I do?

We didn't want to spend any money on legal fees and documents

We entered three business plan competitions and launched a business from the winnings. We did not want to spend any money on legal fees and documents, so we did not register our business. The business started to grow but it could not support two people so my cofounder went to work for a company in our industry while I worked on our business full-time. My cofounder contributed a few hours of work per month while I spent at least 60 hours/week on it. As the business grew, we had to raise money to finance expansion. The investor did due diligence and found that there was no documentation regarding shareholders. We cofounders did not agree on the holdings. I assumed I’d have much more for running the business full-time and my cofounder assumed since we started the business together, it would be 50/50. The investor withdrew their offer. 

I should have paid better attention to the formation documents and shareholder agreements

I thought startup documents were just necessary and standard paperwork. The four of us co-founders went to lawyer who helped us incorporate and gave us a Shareholder’s Agreement and Option Plan. I read all of it but didn’t really understand what it meant and didn’t think it was that important. We each got 25% of the company. These were Restricted Shares, which vested over time – 6.25% for each of us each year for 4 years.

After six months one of the cofounders decided to leave the company and move away. He wanted to take his share of the company, which he thought was 25%. He was told that he did not have any shares as the stock did not vest until after the first year. The situation turned nasty and interpersonal. He hired a lawyer who threatened to sue the company. They claimed that the shareholder agreement was not adequately explained to him and that it was the company’s responsibility to do so. The company did not have any money to meet legal cost and settled by giving him his first year’s shares, 6.25% of the company.

In year 2, at the first fundraising, the absent cofounder refused to agree to the terms. He was able to do this because decision-making called for unanimous approval by shareholders. So, even though the rest of us, who owned 93.75% of the company agreed to the terms, the deal was held up and our investor moved on because of this one guy.