Quora: Can you push out a founder before stock is issued?

*Question was originally posted to Quora on 2 Mar 2014.

As a startup, if no ownership shares have been issued and no documents have been signed by any founder yet, but a lawyer has incorporated the business and drafted the legal documents for review, can the majority push founders out and replace them?

My Answer

This is a question for your attorney, and I am not a lawyer. So, please don't take my answer as legal advice. But I do have some personal experience in a similar situation.

But first off, who is the "majority" you refer to in your question? If you haven't issued any shares, there are no "majority" shareholder(s) because there are no shareholders at all.

My similar situation (in California, 15+ years ago):

I was one one of three co-founders who were trying to force out the fourth co-founder. We had never settled the equity question and thus had never issued shares, even though all our other corporate paperwork was in order (plus officers appointed and board elected) and we had worked on our idea for several months. Our fourth co-founder -- the one we were trying to force out -- believed he should be the 51% shareholder for various reasons. The other three of us didn't agree. Lawsuits and counter-lawsuits were filed.

Our attorney argued that, because we had never issued shares, we were actually a general partnership, NOT a corporation. And that as a general partnership, by default each co-founder had 25% ownership and equal voting rights. So, we could fire our renegade co-founder by buying out his 25% ownership.

The renegade's lawyer's argument was that we WERE a corporation, despite having not issued shares, and that the renegade was the 100% owner because he was the CEO, had filed all the original paperwork with the state, and a few other reasons.

We never found out which argument was stronger, as we settled out of court.

Sue Raisty

Product management geek, born-again engineer, adoptive mother of boys, coach & mentor, mountain trail runner, tinkerer, no-bull communicator, wannabe writer, room mother & compulsive researcher.

Silicon Valley, California http://blog.sueraisty.com