We're a 1.5 yearold startup with 3 founders. I started the company, and then brought in the second founder two months in, and finally brought in the third founder about 7 months in.

When we brought in the third founder we were pretty desperate. We didn't have funding, we barely had a proof of concept product, and minimal market traction. So just having another warm body to help with the work was very valuable. Pretty much since the very beginning she produced really mediocre work. Better than nothing, but far below the level of work produced by myself and the second founder.

Since then we've moved lightyears ahead of where we were then. We got a beta out, we got a decent round of angel funding, we got customers, and now we're about a month away from being cash flow positive with 11 people full time (not ramen profitable, but actually making enough to pay everyone a decent wage.)

As for the third founder, she has now moved into a low level employee role. Quite frankly if she were just an employee I would have let her go by now, simply because we could easily find someone better.

Here's my dilemma: I feel like it would be a really evil thing to do to fire her. I would be taking away all her equity (since all three founders have 3 year vesting.) Not only that but to be fair, she was there at the very beginning, and did work for minimum wage for 3 months before we finally got funding. But at the same time, it's just not good for the company to keep an under-performing employee around.

I've thought about just giving her 1/3 of her equity (which would be 4%), some severance pay, and letting her go. I feel this would be fair, but still it doesn't sit well with me.

I'm sure there are people that have had to deal with this kind of thing before. I would really appreciate any advice you guys have.