OK, so basically our rhythm guitarist can't actually play the guitar. Well he kind of can, but really badly and he never stays in time etc. For the past 4 months, ever since we started the band, our lead guitarist has had to teach him all his parts at every practise, wasting time. At our last gig (supporting a signed band at the Barfly, the second time we've ever played live) he DIDN'T EVEN TURN HIS AMP ON. All the feedback we've had has been positive, but a lot of people have said we should get a new guitarist.

This is easier said than done.

This guy started the band, introduced us all to each other and brought the band together. He is a close family friend of our lead guitarist, and has spent about £1000 buying himself a Gibson and a stage amp etc. He's a crap guitarist who brings nothing musically to the band (all songs are written by our lead guitarist and bass player, who also book the gigs and have sorted out recording time for us) and is frequently late to practises and soundchecks.

The obvious thing would be to kick him out, but for the reasons just said none of us really dare to do it. We know another guitarist who is willing to step in, it's just a case of getting rid of this one. What do we do? Should we wait and see if he gets better, or just kick him out now? HELP PLEASE!!!
Give him an ultimatum, that way it's him kicking himself out, or you guys getting better. Win/win no one's feelings hurt. I mean, if he really didn't even turn his amp on, he's gotta realize he's not good enough.

So just tell him, "you need to either get serious with this and learn your parts and have them ready, or you're just hurting everyone else."
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Confront him at your next bm(band meeting)remember bm's dont involve you jamming so have it at someones house where you dont jam and everyone has to say something to him but you have to say something to everyone in the band or the guitar dude will be like wtf.
Like say for example "John da bassist why dident you move at the show" or "ron the vocalist you nead to get use to your high screamo" you know **** like that ok.

and i wana see your myspace or something / vids mabey a link.

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hahahaha , tell the new guitarist to join , and make it a 3 guitarist band =P
cant you? the **** guitarist could keep his amp shut! or get him out
god damn. tough situation. convince him to get lessons? he already spent like £1000 on it, so he should keep going i guess
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this should be your lead guitarist;s job cause he's the closest to him as you say.Its tough, i couldnt do it, but its the band's future.Or buy him a metronome and thigh him to the bed in his room and make him practice practice ...
Ah cheers guys, me and the rest of the band had a chat and we're gonna do that band meeting thing - you know, criticise everyone so we'll have an excuse to start on him :P Then if he still doesn't get the message, it's ultimatum time. We decided we wouldn't kick him out during exam time anyway (that's just too cruel, and we don't want to be blamed when he fails!!!) Yeah so thanks people

Oh and bt99, can't send you a link because we haven't made one yet - we're gonna wait til we've got some songs recorded next month and then promote our asses off!! Thanks for the ideas though man
let him get better
give the guy some time
but talk to him about the problem
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Yo dyno, I agree with chuck here. Couldn't you become a three guitar band? Give him easier parts until he gets better.

This is a concience thing, man. Put yourself in his shoes: he brings the lot together and you guys wander off without him? This is gonna burn a guilt hole in your hypothetical soul for the rest of your sorry-a$$ days.

Are you guys doing this for fun or are you a business model anyway?
^has the idea, Imagine if you brought a band together, spent lots of $$ and then was kicked out. Just help him out and give him easy parts
If he cannot keep in time he shouldn't be a rhythm guitarist. I think it is a common misconception that lead=good at guitar, rhythm=bad at guitar (not that you said or even implied that).

Tell him that he has to either get good or step out.

Make him get a metronome?
I'm inclined to agree with litus and sno cone here. You can tell him that he's the weakest link in the band and that he has a lot of hard work to do to even start aproaching the level that everyone else in the band has got to, you can encourage him and teach him. When he screws up, you can tell him he screwed up, but as for throwing the guy out of his own band, that's just harsh.
I think your best option would be for the band to take six months off gigging and concentrate on getting him up to speed, practicing as often as you possibly can and even getting the other guitarist to go around to his house and show him note for note how he should be playing all the songs in your current set. Have him play along to a metronome or a drum machine too to tighten up his timing, you'd be amazed what six months of intense playing can do to improve someone.
Let him know why you're doing it and be honest with the guy.
Record one of your practice sessions and play it back to him, just in case he doesn't actualy realise how bad he sounds. Then tell him that it's nothing personal but he's just not cutting it at the moment and that you have the choice between sacking him so that the band can grow and continue, or this, and non of you want to sack him because he's your mate. That way, he'll hopefully appreciate the extra effort you're all putting in for him, and with a bit of luck, he'll put the extra effort in for you.

This will then work by way of an ultimatum, he knows he has to improve drasticaly in the next six months or his position is in jeopardy. Tell him that six months down the line, you will record another practice session and compare his playing to the first recording. If he's drasticaly improved, his position is safe, if not, it's unfortunate but he has to go for the sake of the band.
Another thing that could develop from all of this is that he gets fed up with all the extra work he has to put into it and decides to leave anyway, in which case your problem will have resolved itself.