My partner wants out, now what?
About five months ago, my husband and I started a cigar company and online business. We had an individual who wanted to buy in and bought 20% for $4,500. During this period, the businesses have been averaging sales of around $4,000 a month. However, we've been expanding (as agreed upon by our partner as well) and our selection and inventory have grown significantly. While our sales are still pretty good for being a young company, obviously buying inventory has been expensive. Last week, literally, out of the clear blue sky, our 20% partner sent a text informing us that he wants his money back. We were confused and tried calling him and texting him but he won't return any phone calls, which is interesting since we saw him the week before and he was happy - so we're a little lost on that since literally no decisions were even made during that week.
My question is, do I need to give him all of the money he invested back or how do I value the company? I don't have a buy out or dissolution of partnership clause in place outlining any terms. Additionally, how long do I have to give it to him?
*Additional information, about three to four weeks before he decided he wanted out, we had all agreed to order another large batch of house cigars (we manufacture our own as well). The total value on this batch is around $10,000, so needless to say, the business is a little strapped for working capital right now. Thoughts?
The absolute best advice that I can give is to spend a few hundred bucks and talk to a lawyer. It is totally worth the investment and you might kick yourself later for not doing it.
*No legal advice*
1. There is no vesting process in place for his $4500 @ 20%.
2. He basically transferred $4,500 to the company's bank account and you signed a simple agreement that he gets 20% of the stocks? Assuming 1M stocks and you gave him 200K stocks.
3. 20% is the equity division.
4. What is the profit share division? For now, assuming 20% profit share every month.
1. There are three co-founds to the company (you, your husband and him). You and your husband are majority owners and he is a minority owner.
Based on this - he is the owner of the company just like you two. You two together own more than 51% of the company and can make the final decision. If there is no buy back clause then I personally believe there is no reason why the company has to buy back his 200K shares (20%) and return his money.
If he gave $4,500 for 20% using a convertible loan document that had a maturity date to it and a clause that he can recall his investment whenever he wants then HE HAD THE RIGHT. In this case assumption, he doesn't.
If you have the money in the account and want to buy out... you and your husband (51%+ owners) can make the executive decision and buy his shares back. However, if the company is not in a position to do that then again you make an executive decision to not do that. There is no obligation to pay him back at this time.
About the time - I think you have no obligation to return (buyout) and he should know that. Usually, one makes his/her money back from the profit shares or when the company is bought out (exit). In this case, he should expect to make the money back through profit shares (whichever way you have structured it). He invested in the company and bought shares. It seems to be straight up equity for the invested dollars.
No company will be able to work if investors start to ask for their money back whenever they want especially in stages where the company needs money to scale.