Ask HN: How to resolve my difficult cofounder situation?

I'm in a difficult situation with my cofounder. We're both developers and we received some grant funding allowing us to work full-time on our product since July. We have reached this point after arguments including, email exchanges, telephone calls and in person meetings. The arguments and other personal distractions effectively paralysed product development for the last two months. We are both fairly ashamed of how little we have achieved. Fortunately, while it has been a close thing at times we still have our friendship intact.

This is where we are at:

1) We have enough money in the company for us both to work full-time on our product until the end of January or for one of us to work full-time until end of March.

2) My cofounder has decided that regardless of the state the product is in, he doesn't want to be part of the company with me after January, he is considering getting a full-time job or switching back to consulting.

3) He wants to spend the next two months until then working remotely on our product while traveling around other parts of the continent we're based in.

4) He says he is committed to making the product profitable by the end of January so he can, one way or another, get some cash value from it.

5) While I trust him as a friend I am struggling to see how he can genuinely work in the best long term interests of the company while 2 & 3 are true.

6) We both own 50% of our company, the product we are working on is owned 50% by that company and 50% by another business that I own the majority of. (I know this is messy, the plan is to eventually spin it out into its own company with a much simpler ownership structure.)

7) These are October's key metrics for the product which is a freemium b2b SaaS aimed at marketers:

% of visitors that use the product => 84.25% (7,823)

% of users that sign up to trial => 3.38% (265)

% of users that became customers* => 3.39% (9)

Total reoccurring revenue => $796

% of customers that cancel# => 42.42% (14)

8) The product's biggest challenges are to fix the terrible retention rate and get back to break even (~$1300). I'm confident that I can overcome these with two months of distraction free work. I've spoken to and received feedback from a wide range of customers and I know what the problems are. I think I can solve the bulk of them by January which I believe is a great time of year for a marketing push for this kind of product. Further to this I'm confident that given four months of distraction free work I can bring revenue up to a level such that it can sustainably support me working on it full-time. Within 6 months we should be making a significant return.

9) Our overall (vanity) metrics for the product which started as a side project of mine in mid 2008 are:

Total number of unique visitors: 208,368

Total number of registered users: 9532

Total revenue since launching in August 2011: ~$3000.

10) As a result of the heated exchanges we've been having over the last few days my cofounder and I have agreed a "shotgun" clause in our partnership agreement. From Wikipedia: "The shotgun clause allows a shareholder to offer a specific price per share for the other shareholder(s)’ shares; the other shareholder(s) must then either accept the offer or buy the offering shareholder’s shares at that price per share."

11) I'm considering making my cofounder an offer for his 50% share of the company which equates to 25% of the product. My challenge is that I'm cash poor and equity rich. If I offer the limit of what I can afford to buy him out I feel I will be radically undervaluing the product and even if he accepted it would mean reducing my cash runway to work on the product down to two months. If with such a low offer he decided, instead of accepting, to buy my shares for that amount it will leave me with the same amount of personal runway to find something different to work on.

12) I could offer high and take on the difference as personal debt but I'm already stretched financially and I don't feel comfortable doing that. Instead I've decided to ask around and see if anyone I know is interested in backing me in attempting to buy my cofounders shares from him.

Three questions for you:

1) What are your thoughts on this situation?

2) Do you think I'm doing the right thing?

3) How much do you think my cofounder's share is worth?

OK, you've got this thing off the ground, and it's bringing in a trivial amount of cash (compared to the salary you'd get at the "normal job" you could obviously get with your skills.) It sounds like you are committed to the product, and want press on and see how big you can build it -- while your cofounder would rather move on to something else, but doesn't want to pass up a share of the winnings if the project ultimately becomes successful. I've read between the lines a bit, but assuming that's right:

I think that life is too short to waste it in dysfunctional working situations. I would fix the team at all costs, and if I couldn't fix the team then I'd walk away ASAP and start something new. You're worth it -- your best is yet to come!

So I'd be bold: I'd tell my cofounder, "You have two options. Either you quit and give up most (but not all) of your stock, or I quit. If you quit, then I will focus entirely on this and work very hard to make it successful, and you might well make a significant amount of money from the small stake you keep. If I quit, then we both know that you're not going to work on the project all that seriously. Neither of us will make any money. It's your choice, but what you don't get to do is to keep your 50% while I bust my ass to make the company succeed, and you slack off."

I would also say, "As a 50% equity holder, I say that if you want to draw a salary, you need to be 100% focused on the product. I don't think you can do that and simultaneously travel around the continent. I won't let us pay dividends under the guise of paying salary, to either of us."

In the the scenario where your cofounder quits, I'd offer to let him keep, say, 7.5% of the company. You started in July and it's now November, so you've done 5 months of work. Assuming that he'd been on a 4-year founder vesting schedule (very common in founder agreements) with generous monthly vesting, he'd have vested 5/48 = 10.4% of his shares, or 5.2% of the company. So 7.5% is a generous offer by one commonly accepted standard.

You can also make an argument around your cofounder's fiduciary responsibility. In making management decisions, he is supposed to do what's best for the company, not what's best for himself as an individual shareholder/employee.

Summary: I think it's worth your time to work on this project if and only if your disinterested cofounder will get out of your way. That means resigning, fixing the cap table, and leaving you the cash in the bank for product development. If your cofounder won't cooperate, don't waste any more time fighting with him -- spend that time productively, on building something even more awesome.

One guy's opinion, HTH. Congratulations on your successes so far and good luck!