Your Employee Left. Their Equity Did Not.
Leaving the job and leaving the ownership structure are different events. The cost of confusing them may arrive when the business most needs to move.
An employee can stop working. A cofounder can be removed from a role. A partner can announce that the relationship is over.
None of those events necessarily answers who still owns the business or whose approval it needs next.
The distinction matters long before a sale. The company may need an investor, a loan or a change in direction. Someone who no longer works there may still have a right to participate in that decision.
The original equity conversation was about rewarding contribution. The later dispute is about whether the business can move.
The company can operate and still be unable to progress
Consider a hypothetical company whose governing documents permit ordinary business decisions by majority vote but require every owner’s consent to admit a new investor.
One owner leaves the business. The remaining owners can keep serving customers and paying employees. But they cannot assume that their majority also authorizes the financing they need.
The departing owner’s consent matters because of the approval rule, not simply because the person owns equity.
That distinction is easy to miss when the relationship is good. A unanimity provision may feel like a promise that nobody will be pushed aside. After a rupture, the same protection may become the condition on which the company’s next move depends.
Employment, ownership, a board or management seat, and approval rights need to be examined separately. Ending one role does not necessarily end the others.
New money may refuse to pay for the old disagreement
Now assume a prospective investor is interested, but only if the ownership dispute is resolved and the investment funds the business.
The departing owner wants a buyout. The company needs capital. The investor does not want the investment consumed by the separation.
Each position can be understandable. Together, they can prevent a transaction.
There are two problems here. First, can the company obtain the approvals required to accept the investment? Second, will the investor accept the unresolved claims and proposed use of proceeds?
Fixing the vote does not necessarily fix investor confidence. Even a properly authorized investment may be unattractive if the money will pay for a dispute, or if the investor expects the dispute to follow the business.
A cap table tells the investor who owns what. It does not, by itself, establish that the company can close the proposed deal.
Excluding an owner does not make the ownership disappear
The problem also runs in the other direction.
A founder who has been shut out may have earned the interest and retained rights the remaining management would prefer to ignore. Describing that person as “disgruntled” does not resolve those rights.
The person running the business may control its systems and daily activity without holding all the approvals required for a particular corporate action. Equally, a person holding half the shares does not automatically have a veto over every operating decision.
In a Delaware corporation, management generally rests with or under the board. The analysis therefore starts with the actual board, the charter and bylaws, the stockholder arrangements, and the approval required for the disputed act. It cannot stop at “equal shareholders.” Delaware General Corporation Law § 141(a)
An employee’s departure, an officer’s removal, a director’s removal and a transfer of shares are distinct questions. Whether any of them occurred validly requires its own analysis.
The practical lesson applies to both sides: protect the company’s ability to act, and respect the rights that were actually granted.
A dissolution threat changes the negotiation. It does not decide the outcome.
An unresolved ownership dispute can move from a discussion about price to a court proceeding about the business itself.
For a California LLC, statutory grounds for judicial dissolution include management deadlock or internal dissension and circumstances in which carrying on the business under its governing documents is not reasonably practicable. The statute also provides a procedure through which other members may avoid dissolution by purchasing the initiating members’ interests for cash at fair market value, subject to its requirements. California Corporations Code § 17707.03
That does not mean an unhappy owner can automatically force the company to close. Nor does a potential buyout procedure answer where the money will come from.
Delaware corporate remedies differ. Section 226 permits the Court of Chancery to appoint a custodian in specified circumstances involving failed director elections or board deadlock. A custodian generally continues the business rather than liquidating it, subject to statutory exceptions and court orders. Delaware General Corporation Law § 226
A California LLC dispute and a Delaware corporate dispute may share a commercial problem without sharing the same legal route out.
A buyout needs more than a price
A repurchase provision is useful only if the parties understand its trigger, payment terms and limits.
What value does it measure? Who purchases the interest? Is payment immediate or spread over time? What happens if the company cannot lawfully make the payment or its financing documents restrict it?
A capital account, a negotiated buyout price and a valuation implied by a proposed investment are different measures. The documents should identify the applicable measure rather than leaving the parties to choose the most favorable one after a dispute.
The separation may also require more than an equity transfer: resignation from other roles, releases, records, authority over assets and intellectual property, and treatment of guarantees or other obligations.
For the departing owner, an indefinite payment promise may make earned value difficult to realize. For the company, an immediate cash obligation may consume the resources needed to continue. The exit terms need to address both.
Choose the relationship before choosing the instrument
Actual equity may be the right arrangement. It can reward lasting contribution and give someone a durable stake in the business.
But participation in value and participation in control are separate design questions. Voting rights, reserved decisions, management appointments and exit provisions should reflect the relationship the parties intend.
A profits interest in an LLC taxed as a partnership remains a partnership interest with tax and documentation requirements. Calling it an incentive does not make it merely a bonus. IRS Publication 541
A cash-settled phantom award can provide value participation without making the recipient an owner through the award itself. It still creates a payment obligation. The formula, departure treatment, payment trigger and funding matter, and Section 409A may apply unless an exception fits. IRS, Nonqualified Deferred Compensation Audit Technique Guide
Actual equity grants also require securities-law analysis. Rule 701 is available for certain private-company compensatory offerings, subject to its conditions; it is not a universal exemption for every founder or partner arrangement. SEC, Rule 701 overview
No instrument removes the need to decide what happens when the working relationship ends.
Test the arrangement under disagreement
Before granting equity, test four events:
The person stops working, voluntarily or involuntarily.
The company needs new capital while that person still owns the interest.
The parties cannot agree on a separation price or payment terms.
The company receives an acquisition proposal before the dispute is resolved.
For each event, identify who can act, whose consent is required, what value survives and who must supply cash.
The objective is not to make an owner powerless after departure. It is to avoid leaving the company’s next decision, and the owner’s earned value, dependent on a relationship that no longer works.
For an existing or proposed arrangement, discuss ownership and compensation design with Tolbert Legal.
Educational information only; not legal, tax, accounting, securities or investment advice. The hypothetical is illustrative and does not describe an identified matter. Results depend on the entity, documents, facts and applicable law.
Comments