One of My Startup Partners Wants Out – and Wants His Investment Back. What Do I Do?
Learning that your startup partner no longer wants to work with you and wants back the money they invested in the startup is not easy. It is also often not easy to determine how to cash out your partner properly. Every partnership and situation are slightly different, but here is a good place to start.
First and foremost, you must review your partnership agreement to determine what it says about the form of your partnership and withdrawal (known legally as “dissociation”) of one partner before termination of the partnership. Your agreement may detail the specific requirements for one partner withdrawing. If the agreement is silent on this topic, then refer to California law or the state law specified in the agreement.
Under the California laws for limited partnerships, limited partners may not withdraw before termination of the partnership at all unless they give notice to the partnership, while general partners may withdraw at any time with notice. California Corporations Code §§ 15906.01, 15906.03. Upon withdrawal, the former partner owns his or her transferrable interest in the partnership as a transferee. California Corporations Code §§ 15906.02(a)(3), 15906.05(a)(5). Transferees, or persons to whom a partnership is transferred, have more limited rights to the partnership than original owners of the partnership interests. For example, transferees only have the right to an accounting of the partnership’s transactions when the partnership dissolves and winds up, but original owners of partnership interests can obtain accountings during the partnership’s operations. California Corporations Code § 15907.02(c).
Laws regarding the withdrawal of one partner from a general partnership are similar to those for withdrawal of a general partner from a limited partnership. California Corporations Code §§ 16601-16603. In one important difference, a partner who withdraws before the partnership is dissolved and wound up must have his or her ownership share bought out by the partnership. The ownership share that the partnership must purchase, in most instances, is the amount that the withdrawing partner would have received “if, on the date of dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern without the dissociated partner and the partnership was wound up as of that date.” California Corporations Code § 16701(b). Further requirements for this buyout abound. See California Corporations Code §§ 16701-16705.
In addition to the basics of paying out your startup partner’s interest in the business, you most likely will need to amend your partnership agreement, change paperwork with the Secretary of State, ensure that the departing partner cannot continue to bind the partnership in business transactions, and cover a host of other issues that may not be addressed explicitly in your partnership agreement.
An experienced business attorney like Michael Leonard, Esq. of San Diego Corporate Law can help you interpret your partnership agreement or California partnerships law. He was named “Best of the Bar” by the San Diego Business Journal in 2016 and has the experience and the insight to resolve partner dissociation issues or prevent them before they arise. To schedule a consultation, visit San Diego Corporate Law online or call Mr. Leonard at (858) 483-9200.