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Getting incorporation agreements in place

I started an S-Corp with two other guys. They have 33% each, I have 34%. One of the shareholders is leaving and giving up his shares. I have a few questions.

I was told that those shares need to be owned by someone and not just "put back into the company." I would like to keep the split as the majority shareholder. The other owner keeping shares won't go for that. Any suggestions on options?

I am also wondering if anyone has suggestions or links to buyout agreements and operating agreements. We didn't set them up but need them to protect each other going forward. I want to avoid someone not pulling their weight as either of us gets too busy or doesn't look to create more value in the company.

Thanks.

16 Replies

Neil Gordon
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Neil Gordon Advisor
Board Member, Corporate Finance Advisor and Strategy Consultant
Yes, shares can be surrendered to the company, but that's really not your problem. You and your remaining co-founder need to resolve a serious control issue. It used to be 2 out of 3. What will it be now? (Note: It doesn't need to be the same for all decisions.)

I agree you need an agreement going forward; I also recommend you engage an attorney and not try this one yourself.
Andrew Lockley
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Andrew Lockley Advisor
Investor and strategy consultant
Company or founders can purchase them. IANAL
Stan Podolski
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Stan Podolski Entrepreneur • Advisor
CEO at Nimble Aircraft.
This is why vesting with cliff is better for startups. So if cofounder leaves earlier, he/she doesn't have the stock yet.

In your case you or corp need to buy it back.
Anthony Massa
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Anthony Massa Entrepreneur
Software Consultant and Engineering Professional
Thanks for the responses. Yeah, we started things quickly for a contract and didn't get things in place. That's why I'm trying to get agreements and understandings in place now.

The attorney I did talk with said I couldeliminate the stock, but I would have to do a recapitalization, which is a bit more involved. A transfer agreement is much easier.

There are no assets or real value in the company now. The shareholder isn't looking for money for the shares/ownership. I'm just wondering how best to do this and would prefer to keep the split as it is now between the remaining shareholder and me.

Ross Meador
0
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Ross Meador Advisor
Business Attorney Specializing in Corporate Law, Contracts, Securities, IP Protection and Licensing
Ideally the company would redeem the shares or the remaining shareholders would repurchase them. Both of these activities may constitute sales of securities, however, and as such are subject to restrictions under the securities laws. Depending on the share value, there could be significant tax consequences as well. It is not as simple as you may wish.
Anthony Massa
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0
Anthony Massa Entrepreneur
Software Consultant and Engineering Professional
Stan: a vesting cliff wouldn't handle the case of one of the shareholders not participating in building value in the company (for whatever reason).

Ross Meador
1
0
Ross Meador Advisor
Business Attorney Specializing in Corporate Law, Contracts, Securities, IP Protection and Licensing
If the company has no assets or value, you could always close it and start over with a newco. A few simple filings and you are done.
Bill Vanke
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Bill Vanke Entrepreneur
VP Global Sales & BD | Sales Pipeline Forensics | Business & Society Observer and Commenter | Wireless | M2M
Dear Anthony,

The way you described the situation. you never were the majority owner. But you can still be the single largest shareholder if you simply split the departing person's shares equally with your remaining Founder, n'est-ce pas? No money need change hands (well, maybe $1 to show value exchanged) and all is well.

However, if there is no value to the company right now and no assets, why not just dissolve the corporation and re-launch in the future if you want?
Anthony Massa
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Anthony Massa Entrepreneur
Software Consultant and Engineering Professional
Thanks for the response, Bill.

Yes, I meant largest shareholder. Problem is that the shares (33) wouldn't split evenly. So, I'm not sure how that would work then.

I don't want to shut down this company because we completed a contract and could have follow on work. So, shutting down doesn't seem to be a good option.


Ralph M Ertner
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Ralph M Ertner Entrepreneur
CEO of the Into SA Group
I am not sure in which jurisdiction you are, but please verify what the maximum percentage of shares is the company allows to hold. Some jurisdictions limit the maximum percentage of shares that is allowed to be held by the company itself.
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