You need to hire an attorney, one who works in business litigation (if you can find someone specializing in minority shareholder disputes, that much the better). Right now. If you're delaying on this point out of some idea of wanting to "try to fix things first" or "not wanting to be the bad guy," you're just shooting yourself in the foot and downing blood thinners to keep the wound from clotting. Working with an attorney is not the same as filing suit, and you will never be worse off in this sort of situation for having sought outside counsel. You also need to find your own attorney; the company's counsel works for the company itself, not for any of its investors, executives, or employees.
Judging from your story, your situation is pretty clear: you're being squeezed-out. Sadly, it's not uncommon. Though he might not be asking you to leave right now, framing it as in a few months is just an effort to (i) get some additional benefit out of you, and (ii) give them the time they need to break you.
There are two possibilities right off the bat: (i) the CEO is involved, which is likely given the difficulty involved in squeezing-out a shareholder + 50% co-founder; (ii) the CTO is working alone, hoping to push you out the door and benefit in some way from the resulting vacuum. In either case, you can't move forward without speaking to an attorney. And don't you dare think for one second that you can "just talk to the CEO first."
Already, you're talking about things as an employee rather than an owner. That's your first mistake. An employee might be able to be kicked to the curb, but you're not just an employee. You've already made a significant investment into the company, and from their perspective, an ideal/successful squeeze-out is one that deprives you of that ownership interest entirely. Most of these efforts are successful because they manage to position the person being targeted in a position where they just roll over. Ideally, they force the person being squeezed out to choose to quit rather than actually be fired. It seems like that's the CTO's goal in your situation.
That said, there are few programmers, in my opinion, whose work is so bad that there is zero potential for future improvement. Considering the costs of pushing you out, you'd have to be doing a hell of a lot more than just writing shit code to justify termination. Given that they want to wait until after additional fundraising rounds are completed, I doubt that your involvement with the company is nearly so problematic. Besides, you already stated that there's been a clear improvement in your code.
I was in a similar situation, once. I was foolish, stupid, and trusted a friend I've known for years. I did the development work, partner A brought his business skills and industry contacts to the table along with his money (and a third partner, B, as well). Did the work, but during that time, there was no sight of their money. One of the earliest clues I was going to be screwed was, when discussing fundraising, A mentioned his own deferred pay. Something I thought slightly peculiar given that he was supposed to be investing his own, significant funds along with B. Plus, I don't believe that he actually did any measurable work during the time period that would justify it based on what I knew at the time. Investors are rightly finicky about deferred salaries, and the bar is pretty high to justify them.
When we were at the end, I found myself being squeezed-out: in the end, they apparently figured that it'd be cheaper to outsource to some ridiculous "startup in the box" type of company rather than deal with my deferred pay and the long-term consequences of a third founder's ownership interests) even though doing so would delay things by a couple of months. They even managed to time things well: the weekend of my grandmother's funeral, after A had been told about it, they dropped their little bomb on me. The only good thing was that they walked away without getting a single line of code that I'd written.
My parting was anything but on good terms. Eventually, I wound up not pursuing the matter in court--talking it over with my attorney, it became quite clear that the legal fees of fighting them would be ruinous. That partner C was a shyster of an attorney, and all evidence suggested that they'd just try to wait out the expensive clock rather than consider settling. After all, the cost of doing so would be pretty minimal. Litigation is uncertain and expensive. Painful though it may be, you never ever litigate on principle. Not if you have any brains at all.
Even though I would have likely prevailed given the facts, I would have come up horribly in the red when it was done. A pyrrhic victory and no more. Choosing not to go down that route was one of the harder decisions of my life, made all the more difficult by the knowledge that they had, quite literally, taken even my grandmother's funeral away from me.
Oddly enough, I'm probably better off for it now that I have some distance and perspective to look back. When they launched, it was unobserved and uneventful. Even now, they're unknown with almost no traffic and engagement. They've also made a number of bad mistakes that I had identified--often through trial and error--that I had told them about. It was a submarine rigged for silent running, deep and quiet, that's never bothered to surface for air. All of partner A's vaunted experience and extensive media contacts in the industry proved for naught in the end. Eventually, they'll simply wither and die on the vine. Had they not squeezed me out, no doubt I'd still be hanging on trying to turn things around. After all, who abandons a friend? It was quite the learning experience, albeit an incredibly expensive one.
Luckily, you can avoid that sort of experience by acting now to protect yourself. Document everything, save all of your emails, chat logs, download and archive all Github comments on everything that you've worked on, as well as everything else you can. Make sure that you're also grabbing copies of emails off any servers/accounts they might have access to. Even though it will create problems if there's any litigation, there's a high likelihood that they'll do something foolish such as delete them.
You have a lot going for you right now that'll help you. First, you're obviously still needed to help their raise funds. Second, investors are scared to death of founder disputes. If any potential investors even sniff the possibility, they'll run and never look back while your current investors will raise holy hell, even if the CEO+CTO were able to find some fig leaf of justification. It also implies a deviousness that will scare investors; if they're willing to screw a friend and risk such a serious dispute, then it's also possible that they'll wander into similar situations in the future. Particularly in the early stages, investors and VC firms don't have to put up with that sort of bullshit.
This gives you an absurd amount of leverage: you have the ability to single-handedly kill their fundraising efforts now and in the future. You need to call your attorney and start using it. At the very minimum, it'll put the breaks on any plans they're currently working on. At best, it'll help you move forward as a company without having these sorts of problems lurking about in the shadows.
I'd go for a shorter version, but: yes, you are right on. Important points:
1. Have legal counsel
2. Deal with the issue now, not later.
I'd get a lawyer and fire the CTO. Small teams require absolute trust, and that is now breached. You'll find out in the process how the CEO aligns. Give your partner a heads up, but don't let yourself be moved from the task of firing the CTO.
First, the way that the OP has framed his story indicates that he's not sure how he wants the situation to be resolved. One of the first questions any good attorney will ask him is "How would you ideally like the situation resolved?" The attorney can suggest possibilities, but unless the OP knows what he wants, an attorney can only be of so much help.
Second, based on what the OP wrote, it appears that he does question his capabilities. He says he's "not the best coder" and refers to technical and project management "problems we were having" that ostensibly developed while he was leading the company's development efforts. This should not be overlooked.
Third, it's important to note that just because you're a co-founder doesn't mean that your employment can't be terminated, and just because your employment is terminated doesn't necessarily mean that you're going to be screwed out of what you have already earned. There's no indication here one way or the other that the OP's departure would involve funny business.
Finally, and most importantly, it's very unlikely that an experienced CTO would ask a co-founder to leave unless he had the support of the other co-founder. At the end of the day, if the OP's co-founder has lost confidence in him and doesn't believe that he can contribute to the company in other ways going forward, the OP has a very big problem that firing the CTO won't solve. The fact that the co-founder apparently hasn't delivered this message directly and tried to come up with an arrangement that allows the OP and the company to part ways cleanly and fairly suggests that the co-founder lacks the character and moral fortitude to lead a company.
The OP should have a conversation with an attorney, but he shouldn't forget about his opportunity cost. If you discover that you're not dealing with strong, ethical people, sometimes cutting your losses is the best approach. That can be hard to do, and it's not without risk, but people incapable of dealing honestly with their partners and employees, especially in difficult situations, don't usually have what it takes to build successful businesses anyway.
A growing business could easily find a sinecurial position for a founder that had outgrown his or her usefulness: the only reason to jettison this guy in such an amateur fashion is to avoid paying his salary or position him for dilution in future funding rounds.
My guess is that the CEO is dealing with investor pressure and the CTO has been parachuted in by whoever is funding them, likely on the understanding that future funding is contingent on making the hire and "improving the team". The fact that they are worried about keeping him on through the next round suggests that these promises aren't even reliable. In which case this is a malevolent power play and there is no good reason for him to roll over -- the most likely outcome of this all is that the company dies.
And either way -- this is a really horrible decision on the part of the CEO as well. Because what happens to HIM once his technical cofounder is gone? He'll be reliant on raising capital to fund an even more expensive team and won't even have the option of saying no and going back to running the business with the original team, something which is the most likely GOOD outcome for any small business and the only option that gives them any real leverage against outside investors.
don't let yourself be moved from the task of firing the CTO
Would that have a chance of ripping the company apart if the CEO was agreeing with the CTO? It seems like there's probably nothing to gain from the corpse of a company, so would it be better to avoid that?
He's not the only one who has to consider whether or not the company becomes a corpse in this situation though. Sounds like he's one of two founders, likely with some investors on board. All of these people (without the CTO who I'm guessing has no board seat and needs to shut up and learn his place) are tasked with ensuring the company has a future. Given that, the various parties are all equally responsible if they use this situation to tank the company.
No, it's not. It means the relationship between the cofounders is severely damaged. The company may be fine.
Everyone is making the assumption here that what the CTO is doing is wrong. It may have been the right thing to do for the company. It is just the wrong thing for the OP.
I think the OP should lawyer up, try to get fairly compensated for his contributions, and end the relationship.
Business is unemotional. Those that invest their life into a business are emotional. Be true to yourself and it is ok to love what you do and enjoy who you work with and what you work on, but when it comes down to it, it is a job. Founders are no more special than any others. As soon as you start making significant progress from idea to product, ensure that you have clear written contracts setup.
There should really be a site for those beginning their company that provides sample contracts and talk about about the pros and cons of each approach for ensuring that when relationships end, things are handled in manner civil and with prior understanding of how things work. It could only be a good thing, because the incentive will be there to work more effectively in order to contribute in a way that will end in value immediately and/or later, regardless of the outcome. There are a lot of people that specialize in helping people in this regard, but I can't think of a site that is specifically for the purpose I'm speaking of.
> Everyone is making the assumption here that what the CTO is doing is wrong. It may have been the right thing to do for the company. It is just the wrong thing for the OP.
Barring the question of whether the OP is just lying about what's going on (so taking as given that the concerns raised are technical proficiency and that the CTO is asking the OP to leave the company and not just to lay off doing production coding work), I'm curious if you can explain under what circumstances this would be the right thing to do?
Undermining someone like this strikes me as probably almost never the right thing for the company. It's toxic and destroys trust in all directions.
I want to highlight the trust issue. If there is an issue of trust, it must be dealt with immediately and decisively or the company will tank (and you don't want that because you want a successful business more than smug self-satisfaction).
I'm reading the two stories completely differently:
In the OP's case, he's the technical co-founder without sufficient technical skills to launch a company. I think this is actually under-reported in start-up failures and missed as a root cause in debacles like the ObamaCare web-site. So you have to ask whether the company would still exist without the CTO and whether this co-founder was/is a liability.
In your case, you were clearly the technical guy and capable of producing the required product, but you were worse at picking your co-founders.
I'm not disagreeing with the idea of legal representation, but I think your best paragraphs are buried near the end. He should let the CTO take over the technical domain and move onto another area where he can help ... or he should leave.
It's interesting that when it involves a founder we're suddenly no longer considering the obvious scenario that the author is one of the many coders who is simply not good enough and has to go. And the author himself has already admitted his limited competence.
It's perfectly reasonably for the CTO to ask him to leave as a coder. In fact, setting those standards and making those decisions is what you hire a CTO for.
Unless he's been asked to surrender his equity and/or not take up any other non-technical position, everything else about being "squeezed out" is strictly speculative.
This may strictly be a matter of competence.
(Doesn't mean the author shouldn't be taking precautions, those any founder should take from the moment they involve external funding. From whatever angle or for whatever reason, the issue of ditching one of the founders will come up.)
I would really not assume competence on the part of the other people in this arrangement. Once this guy goes, the CEO is locked into an expensive team, and will need to find equity and cash to motivate them. They can dilute this guy's share to start, but why stop there? And how well are future funding rounds going to go when the investors realize this?
No sane startup would ever get rid of a technical cofounder who knows the stack and can be motivated by his ownership stake to keep the servers running in a worst case scenario. So it really sounds like the CEO is incompetent and doesn't realize he needs to preserve his ability to remain independent in order to have leverage with investors.
>>It's interesting that when it involves a founder we're suddenly no longer considering the obvious scenario that the author is one of the many coders who is simply not good enough and has to go.
Sure, Pay up the fair compensation. Then he can have a clean exit.
> There are two possibilities right off the bat: (i) the CEO is involved, which is likely given the difficulty involved in squeezing-out a shareholder + 50% co-founder; (ii) the CTO is working alone, hoping to push you out the door and benefit in some way from the resulting vacuum.
Well aren't you mister negative here. If this guy was just an employee the tone of this thread would be very different. Every CTO knows there's coders that can just drag down the efficiency of the team. Every programmer knows in his bones that some programmers are poisonous to your codebase, even if they get shit done.
So how about a third option: They are just trying to cut out dead weight from the company.
So yes, get an attorney, yes, make sure you get what you deserve. But don't assume your friend (your cofounder is your friend right?) is backstabbing you before you are absolutely certain, no use in getting bitter before the hurt is done. A startup is a business, and businesses need to run efficient to succeed.
Asking you to leave, and asking it to be in three to six months, that's quite different than doing it suddenly when your grandmother dies. To me it sounds like they're doing it as classy as they can.
I'd say, if you really want to keep working with them, step up your game, make sure you're the programmer they need.
In any case, lawyer up, you have risked a lot going into a startup, so you most definitely have rights to that slice of the money pie when it comes.
It always pays to take the worst case scenarios seriously. If you refuse to even consider them, when and if they turn out to be true, you find yourself utterly unprepared.
As to dead wood, as a cofounder and director this is his call too. Leaving the business may well be best for the business, and therefore best for him - so long as equity etc. is retained, although that's a dangerous position if you do not have or have only minority voting rights.
I am a 30 in a 30/30/40 company. I am terminally paranoid I'm due for the squeeze, so I plan for it and work against its possibility, as in my experience even your closest and best will apologetically drive in the knife, if the price is right. Pays to wear armour, in the format of contract law.
> So how about a third option: They are just trying to cut out dead weight from the company.
"They?" -> is the non-founder _employee_, with much less stake in company's future than the said founder.
"Dead weight?" -> is the founder who put his life savings in the venture, and is obviously desirable till the next round of funding.
A more reasonable "don't-conflict-ignorance-with-malice" would be that CTO has technical acumen but not business, and is judging the OP harshly on the technical merit.
OP. Just follow it letter-by letter. Make a check-list out of it, if you like. And you probably will be Ok (doesn't necessarily mean that you'll get anything out of it, but it would greatly increase the probability of at least negotiating a clean exit. or at the very least you will know that you've done a good rational move, at least this time around). Do not skip the attorney step. Do not skip the attorney step. (I'm not an attorney myself. I'm just a software developer. And I'm telling you. Do not skip the attorney step).
>Painful though it may be, you never ever litigate on principle. Not if you have any brains at all.
It's not worthwhile to litigate on principle, but it may be worthwhile to be the kind of person who litigates on principle. It really depends on how often you expect a reputation for being litigious to help you out.
Only thing I see you have to be sure what kind of people you are striking partnership with. Checking references however casually is paramount to binding yourself for the long haul.
So if you get a whiff of partner's mischievous behaviour in past business dealings, it might be better striking out on your own or looking for other options.
As in being squeezed out get your partnership drawn up right after starting out on the project, whether you horizon for getting investments/public launch is 6 months or 2 years.
After all you don't want to waste your time. If you don't have iron clad paper work covering you, most likely you have been played. If you are prepared for this then you would not have questions.
If the venture is out to grow big, talk to a lawyer and get the injunction against them so they can't proceed until they sort out your stake in the company, how much they owe and al the other business relates stuff. Also check if you have rights to the property you just might launch your own competitor product if there is nothing that explicitly forbids you from doing so. Savlage what you can, I am sure you can come out on top if you play your cards right and have honor in you intentions.
First and foremost, involving attorneys costs everyone a lot of time and money. Unless you want exactly that (maybe out of a desire to "punish" them), it's better to just leave.
Any competent attorney will tell you that you should never litigate on principle (such as "punishing" them). If that's your only reason, many attorneys will choose not to take you on as a client right then and there. All the court can do is use money to attempt to redress your grievances, assuming you win.
But that's not why you need an attorney right now. Even if you're never going to file suit, an attorney will help you navigate the waters and push for the best possible outcome in your situation. Maybe that's compensation for a clean exit, or simply putting an outright stop to the CTO's machinations. I don't know.
Yes, they cost money. But this is already a legal matter. It became one the moment the CTO started to try and squeeze the OP out. Spending the money on an attorney now is simply an attempt to avoid losing more money later on down the road.
Not talking to an attorney at this point is nothing short of willful ignorance. It won't stop the squeeze-out, nor will being able to say "I didn't bring in the lawyers!" somehow make things all better when you're out the door, up the creek, and without the stupid fucking paddle.
You are suggesting that the lawyer can help in two ways:
1. Negotiations
2. Understanding the legal situation
Regarding the second point, the correct advice is not to sign contracts whose consequences you do not understand. Regarding the first point, engaging a lawyer will destroy whatever trust and mutual understanding is left in the relationship between the founders.
This might be the US way of doing things. But before telling someone to hire a lawyer, you should make sure that the case in question is not taking place in a country where doing this is generally taken as a big offense.
Regarding the second point, the correct advice is not to sign contracts whose consequences you do not understand.
Ideally, yes, but it sounds like that ship sailed already.
Regarding the first point, engaging a lawyer will destroy whatever trust and mutual understanding is left in the relationship between the founders.
You don't have to tell them you hired a lawyer at first, when you're just looking for some basic advice about what your situation really is.
If it goes further and your lawyer is actively representing you when dealing with other people in a business context, and those other people take offence at this or it destroys trust, then you never really had a worthwhile relationship with them to begin with and you definitely want a lawyer in your corner.
And when you're screwing someone who holds to the "no lawyers because you're supposed to trust your cofounders" approach that risk is generally greatly diminished.
We don't know whether they want to screw him. All we know is that the hired CTO thinks that he is incompetent and thus should leave the company. The first thing he should do in this situation is to talk to the CEO, and not running to a lawyer or consulting hacker news.
> But before telling someone to hire a lawyer, you should make sure that the case in question is not taking place in a country where doing this is generally taken as a big offense.
Interesting. Can you give an example of such a place, and how things tend to work there? What would be your advice to the founder if they were in that country?
Continental European countries usually work that way. When Germans say "die sprechen nur noch über ihre Anwälte" (translation: they used to have a good relationship but now they only speak through their lawyers to each other), it means that the trust between two parties is broken beyond repair. Generally, by unilaterally involving a lawyer, you signal that there is no hope left to settle disputes on a basis of trust and friendship. Consequently, my advise to the founder would be to discuss the situation with the co-founders and then try to do what's best for the company. The first priority should always be to find a solution by talking directly to each other. Telling the founder to hire a lawyer before having had an open discussion with the CEO is really bad advice.
Not to the same degree. The US spends a much higher share of GDP on lawyers than most other countries.
What I find disgusting is the culture of hiring a lawyer to put as many traps as possible into a contract, which forces the other party to hire another lawyer to remove the traps again. This does not make anyone better off except for the lawyers.
Healthy and lasting business relationships are built on trust. The relationship between McDonald's and Coca-Cola is based on a simple hand-shake. If you want to preserve such a relationship and it comes to a disagreement, the first thing you should do is talking to each other. Once that fails, you can consult the lawyer - which will formalize everything and slow the process down (e.g. "I cannot disuss this today because I have to check with my lawyer first"). And being slow is one of the things one should avoid when being in a startup.
"The relationship between McDonald's and Coca-Cola is based on a simple hand-shake."
...
Look there is no reasonable discourse possible with idiocy like this. If you think a sustainable business is possible without covering your legal grounds, I'm wondering if you'd be interested in this bridge in Brooklyn I have for sale. Blanket statements like 'the US spends a much higher share of its GDP on lawyers' don't mean a thing without a proper understanding of the legal system, business culture etc. It is obvious from your postings in this thread you know nothing about what lawyers actually do for a business, in the US nor in Germany, and that your statements are based on what you see on TV and blind prejudices.
(disclaimers: I have a law degree but have never practiced. I'm not an American, yet I have spend amounts on lawyers the last years that you probably feel are obscene, and this in a country that is considered similar to Germany in its look on lawyers, and they were worth every penny, and then some. I have also paid dearly in the past for not doing things the formal legal way, including in Germany.)
Spoken like someone who's never been involved in a sticky legal situation.
The money you save hiring a good lawyer almost always justifies the money spent, especially in a situation where you have forces mounted against you.
Not only can they help you with "do this, don't do that" advice, they are very strategic in positioning and can offer incredible advice based on years of experience.
Good lawyers generally see situations on both sides of the coin because they have clients on both sides of the coin, and hiring one can give you volumes of insight and perspective. Will it cost you $5K? Yes, but that $5K now might get you $8M two years from now...
Judging from your story, your situation is pretty clear: you're being squeezed-out. Sadly, it's not uncommon. Though he might not be asking you to leave right now, framing it as in a few months is just an effort to (i) get some additional benefit out of you, and (ii) give them the time they need to break you.
There are two possibilities right off the bat: (i) the CEO is involved, which is likely given the difficulty involved in squeezing-out a shareholder + 50% co-founder; (ii) the CTO is working alone, hoping to push you out the door and benefit in some way from the resulting vacuum. In either case, you can't move forward without speaking to an attorney. And don't you dare think for one second that you can "just talk to the CEO first."
Already, you're talking about things as an employee rather than an owner. That's your first mistake. An employee might be able to be kicked to the curb, but you're not just an employee. You've already made a significant investment into the company, and from their perspective, an ideal/successful squeeze-out is one that deprives you of that ownership interest entirely. Most of these efforts are successful because they manage to position the person being targeted in a position where they just roll over. Ideally, they force the person being squeezed out to choose to quit rather than actually be fired. It seems like that's the CTO's goal in your situation.
That said, there are few programmers, in my opinion, whose work is so bad that there is zero potential for future improvement. Considering the costs of pushing you out, you'd have to be doing a hell of a lot more than just writing shit code to justify termination. Given that they want to wait until after additional fundraising rounds are completed, I doubt that your involvement with the company is nearly so problematic. Besides, you already stated that there's been a clear improvement in your code.
I was in a similar situation, once. I was foolish, stupid, and trusted a friend I've known for years. I did the development work, partner A brought his business skills and industry contacts to the table along with his money (and a third partner, B, as well). Did the work, but during that time, there was no sight of their money. One of the earliest clues I was going to be screwed was, when discussing fundraising, A mentioned his own deferred pay. Something I thought slightly peculiar given that he was supposed to be investing his own, significant funds along with B. Plus, I don't believe that he actually did any measurable work during the time period that would justify it based on what I knew at the time. Investors are rightly finicky about deferred salaries, and the bar is pretty high to justify them.
When we were at the end, I found myself being squeezed-out: in the end, they apparently figured that it'd be cheaper to outsource to some ridiculous "startup in the box" type of company rather than deal with my deferred pay and the long-term consequences of a third founder's ownership interests) even though doing so would delay things by a couple of months. They even managed to time things well: the weekend of my grandmother's funeral, after A had been told about it, they dropped their little bomb on me. The only good thing was that they walked away without getting a single line of code that I'd written.
My parting was anything but on good terms. Eventually, I wound up not pursuing the matter in court--talking it over with my attorney, it became quite clear that the legal fees of fighting them would be ruinous. That partner C was a shyster of an attorney, and all evidence suggested that they'd just try to wait out the expensive clock rather than consider settling. After all, the cost of doing so would be pretty minimal. Litigation is uncertain and expensive. Painful though it may be, you never ever litigate on principle. Not if you have any brains at all.
Even though I would have likely prevailed given the facts, I would have come up horribly in the red when it was done. A pyrrhic victory and no more. Choosing not to go down that route was one of the harder decisions of my life, made all the more difficult by the knowledge that they had, quite literally, taken even my grandmother's funeral away from me.
Oddly enough, I'm probably better off for it now that I have some distance and perspective to look back. When they launched, it was unobserved and uneventful. Even now, they're unknown with almost no traffic and engagement. They've also made a number of bad mistakes that I had identified--often through trial and error--that I had told them about. It was a submarine rigged for silent running, deep and quiet, that's never bothered to surface for air. All of partner A's vaunted experience and extensive media contacts in the industry proved for naught in the end. Eventually, they'll simply wither and die on the vine. Had they not squeezed me out, no doubt I'd still be hanging on trying to turn things around. After all, who abandons a friend? It was quite the learning experience, albeit an incredibly expensive one.
Luckily, you can avoid that sort of experience by acting now to protect yourself. Document everything, save all of your emails, chat logs, download and archive all Github comments on everything that you've worked on, as well as everything else you can. Make sure that you're also grabbing copies of emails off any servers/accounts they might have access to. Even though it will create problems if there's any litigation, there's a high likelihood that they'll do something foolish such as delete them.
You have a lot going for you right now that'll help you. First, you're obviously still needed to help their raise funds. Second, investors are scared to death of founder disputes. If any potential investors even sniff the possibility, they'll run and never look back while your current investors will raise holy hell, even if the CEO+CTO were able to find some fig leaf of justification. It also implies a deviousness that will scare investors; if they're willing to screw a friend and risk such a serious dispute, then it's also possible that they'll wander into similar situations in the future. Particularly in the early stages, investors and VC firms don't have to put up with that sort of bullshit.
This gives you an absurd amount of leverage: you have the ability to single-handedly kill their fundraising efforts now and in the future. You need to call your attorney and start using it. At the very minimum, it'll put the breaks on any plans they're currently working on. At best, it'll help you move forward as a company without having these sorts of problems lurking about in the shadows.