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Ask HN: How to leave a startup when you own a third of it?

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Re: Ask HN: How to leave a startup when you own a third of it?

#111

Post by j_s »

greglindahl wrote: post #91
j_s wrote: post #88

Earlier quoted context omitted.

Perhaps this is an opportunity then. I looked in YC's Startup Documents and didn't see anything at all related to legal agreements between cofounders; maybe they will put something together someday. The only protection from dilution I saw mentioned in this thread isn't doing so well (gray at this point): https://news.ycombinator.com/item?id=14357964 an agreement from the company that neither of the remaining founders…

Not sure how it's an "opportunity" when it's a red flag that would prevent the startup from raising money!

Thanks for expanding this point a bit further. While dilution protection does sound like a unique opportunity at this time, as you've pointed out it isn't in the best interest of anyone other than departing co-founders.

I don't want this specific point to detract from the original question asking for recommendations of competent template-y resources (legal agreements between cofounders) to build on when starting a startup.

Re: Ask HN: How to leave a startup when you own a third of it?

#112

Post by inputcoffee »

lisper wrote: post #47

If you had done this the Right Way from the beginning you would have had a vesting agreement that specified what would happen in a case like this. A typical vesting agreement would have vested your stock over a 48-month period, so after 18 months you would have vested 33% x 18/48 = 12.375%. So 10% is not unreasonable. However: having 10% of the company owned by a non-particiapting founder is a big red flag for many i…

There is an alternative:

The investors buy up 99.99% of the company for $500k at a $1 premoney, and then give out 75% of the company to current management in order to incentivize them to stay.

I am using extreme numbers here to make the point, but current management almost always gets a carve out.

Re: Ask HN: How to leave a startup when you own a third of it?

#113

Post by logicallee »

beagle3 wrote: post #78
logicallee wrote: post #64

Earlier quoted context omitted.

I think we're saying the same thing. The example wasn't of raising a round - it was raising money for a shotgun buyout, so you can leave a company completely while the company tries with other principals and other investors. Using your money - but not using the guy you're giving your money to, who will go home. That's the scenario that I don't think is very realistic. As a result the poor founder will not be given a…

No, we are not saying the same thing. I say that the situation you described is so far fetched as to be irrelevant to a discussion of "shutgun buyouts" in general. How did the company reach a $7M valuation? They might have sold 1 share out of 7M shares for $1. That, technically, would make it worth $7M. But practically, it isn't. Let's say company raised $3M at $4M pre-money => $7M post money. That's not unreasonable…

Thank you for the detailed write-up! I have some questions, I would like to understand it better. You are a real expert and I appreciate your taking the time to understand my question and help me understand better.

1. Why do you say cash-rich founder's offer of $500K is within 10%-20% of the market price of the shares, when in fact the market has just priced the company at $7M, half of which the market has therefore just priced at $3.5M? It seems to me that $500k is 1/7th of $3.5M, so the offer is only 14% of a fair offer...

For example, what if one partner is greedy and wants to buy out the less greedy, but also poorer, technical founder, after they have some huge windfall that gives huge value to the company. (Some of which is reflected in the $7M valuation they've received - which is not at all low.)

2. You write "that's exactly why investors insist on vesting schedules, first rights of refusals, tag-alongs, bring-alongs, etc". Would you say under the typical clauses offered by VC's, they would allow the remaining founder to spend an unexpected and large amount of money from the company coffers in order to buy out the other partner? (Or repay a debt investment they had raised to do so)? Why would the investors allow that? Especially if it was not envisioned explicitly under "use of funds" and, of course, they'd rather have two partners work on it than one. (But the greedy, cash-rich funder would prefer to own and have the company by himself.)

3. You write - "he might not have access to lenders/investors, which could get him treated unfairly". Would the company be able to raise debt to finance a buyout of one partner by the other or is that not something a company can raise debt for?

Thanks for your answers. I'm pretty shocked at everything you've said. (As you noted at the top of your comment, I misinterpreted you also.) By the way, this does not apply to a situation I am in - and I hope won't apply in the future. I simply do not really understand the clause and its implications in the real world, that well. Thanks for your help.

Re: Ask HN: How to leave a startup when you own a third of it?

#114

Post by austenallred »

anovikov wrote: post #74
nealbozeman wrote: post #67

Earlier quoted context omitted.

Investors will not see his 10% ownership as a red flag any more than they will see a non participating investor owning 25% of the business as a red flag. In this case, he/she delivered 18 months of value that led to a 1.5mm pre money val. The most fair option is already mentioned - to maintain your 33% that makes all three of the founders equal as of today, and then allocate a new share allotment to dilute you out ov…

If i was an investor, i'd see it as a red flag indeed. I'd think: 'so this guy left the boat being a founder, giving up most of his share, so probably he knows that the company is going to tank and don't want to waste his time anymore, and he definitely knows a lot more about it than i could potentially know being an outside guy'.

It's not just about the signaling, it's about very practical realities that come to light when you need to use that equity. If I were an investor and I saw 33% of shares with a former co-founder I'd walk immediately. If I were an investor that saw 33% of shares with a former co-founder and then 25% gone in an initial $500k raise I would run, not walk.

There's just not enough equity left to incentivize, create an options pool, hire, raise future rounds, etc. It is a Huge red flag, and the likelihood of success decreases dramatically.

I tried to raise once with 28% of the company being gone from our seed round, and it was a major, major concern. If this company ever needed to raise again, they'd be dead in the water. Therefore, the founder ends up with 33% of nothing instead of, say, 5-10% of something, and it's in his or her own best interest to take a smaller piece.

Now 5%? Maybe 10%? That stings, but at least it leaves the company something to work with.

Re: Ask HN: How to leave a startup when you own a third of it?

#115

Post by JonFish85 »

ares2012 wrote: post #106
nealbozeman wrote: post #67

Earlier quoted context omitted.

Investors will not see his 10% ownership as a red flag any more than they will see a non participating investor owning 25% of the business as a red flag. In this case, he/she delivered 18 months of value that led to a 1.5mm pre money val. The most fair option is already mentioned - to maintain your 33% that makes all three of the founders equal as of today, and then allocate a new share allotment to dilute you out ov…

Investors will see it as an issue because it limits the room on the cap table for future hires. Startup companies take a long time to build so that 10% will make it tough to hire and build a team over 7 years because there is only so much equity to go around. Investors have minimum ownership levels, hiring requires a certain amount of equity so there can be a motivation problem among the remaining team/founders. Inve…

"Startup companies take a long time to build so that 10% will make it tough to hire and build a team over 7 years because there is only so much equity to go around."

Is it still generally the case that the entirety of the options pool for employees is well under 10% (more like 5%)? If that's the case, I get that it may be limiting for the investors, but hiring & building a team is pretty "cheap" from an options standpoint I believe.

Re: Ask HN: How to leave a startup when you own a third of it?

#116

Post by mamon »

pc86 wrote: post #108
nealbozeman wrote: post #71

Earlier quoted context omitted.

It's hard in this case not to argue that he owns 33% of the 1.5mm company that the three have built until today. Diluting him out to effectively zero would be cause for criminal charges against the company. It's theft. In the same vein, they can't raise the $500k and then immediately dilute the investors. That's also theft, called fraud. He seems to have shown a lot of good faith in this matter so far.

It's a serious contract issue but it's not criminal. The two founders own 66%, presumably 2/3 of the board seats (but if they can't even be bothered to write a vesting schedule they probably don't have a board at all). For the sake of argument if each of them own 10k shares (30k total), there is nothing criminal about the board voting to issue 100k new shares to the two remaining founders. So now they each own ~48% a…

You cannot issue 100k new shares out of thin air... If the company is worth $1.5M, split in 30k shares then each share is worth $50. Issuing 100k new shares would require those two founders to invest additional $5M (which I assume they don't have).

Re: Ask HN: How to leave a startup when you own a third of it?

#117

Post by neltnerb »

lisper wrote: post #47

If you had done this the Right Way from the beginning you would have had a vesting agreement that specified what would happen in a case like this. A typical vesting agreement would have vested your stock over a 48-month period, so after 18 months you would have vested 33% x 18/48 = 12.375%. So 10% is not unreasonable. However: having 10% of the company owned by a non-particiapting founder is a big red flag for many i…

If the red flag is related to the founder leaving over a disagreement related to strategy, it sounds like it should be a red flag and be considered by an investor. Even ignoring the cap table issues making it harder to incentivize future employees.

Assuming that they're taking the high road and that the potential investor is well aware that a founder is leaving over a disagreement regarding strategy, which I sure hope they are, the investor is walking in with eyes open and is making a bet that the person leaving is incorrect. That seems to me to be perfectly reasonable.

If you want to be generous (as the person leaving) you can certainly offer to let the investor or co-founders buy you out at the same valuation the investor is getting.

If you want to be extremely generous and a little creative, you can ask for an amount of money that would make you feel you hadn't been cheated in exchange for all of your equity stake. After all, you disagree with their strategy, so perhaps you are skeptical that the equity is worth anything and would rather just get decent back-wages for the work you've done and wash your hands of it.

In that case, perhaps you can just ask for something like $200k for all of it and call it a day. If I disagreed enough with the company direction to leave, I might call that a huge win relative to putting in years more effort and eventually getting nothing at all out of it!

Re: Ask HN: How to leave a startup when you own a third of it?

#118

Post by caseysoftware »

TuringNYC wrote: post #94
caseysoftware wrote: post #76

Earlier quoted context omitted.

> a non participating investor owning 25% of the business That is absolutely a red flag. If someone owns 25% of the business, they better be working to grow, improve, or otherwise assist the business on a daily basis. If nothing else, out of self-preservation to protect and grow their investment. If they're a 1% investor, that's a different story.

Curious how you'd evaluate a 25% (or even 10%) owner who is an Angel investor. They provided capital, perhaps some contacts, but is not actively engaged in growing the business?

I expect investors to fit in at least one of three buckets:

- understand the industry;

- understand the go to market/sales approach; or

- understand the current stage of the company and what it takes to move to the next.

And within each of those, they should have relationships, information, and strategies that accelerate the company in some way. It's not just a "look at my linked in and tell me who you'd like to meet" but a focused "I know A, B, and C who beat the problems that you're dealing with. let me get them right now and see if they can offer advice" and then a while later "Oh, you need X. I know a guy who does that. I'll get back to you."

Re: Ask HN: How to leave a startup when you own a third of it?

#120

Post by danieltillett »

anovikov wrote: post #74
nealbozeman wrote: post #67

Earlier quoted context omitted.

Investors will not see his 10% ownership as a red flag any more than they will see a non participating investor owning 25% of the business as a red flag. In this case, he/she delivered 18 months of value that led to a 1.5mm pre money val. The most fair option is already mentioned - to maintain your 33% that makes all three of the founders equal as of today, and then allocate a new share allotment to dilute you out ov…

If i was an investor, i'd see it as a red flag indeed. I'd think: 'so this guy left the boat being a founder, giving up most of his share, so probably he knows that the company is going to tank and don't want to waste his time anymore, and he definitely knows a lot more about it than i could potentially know being an outside guy'.

I do a bit of angel investing and I would run not walk from any deal with a background like this. When the only people with any deep understanding of the business disagree flashing red sign number 1. When the company has 33% dead weight equity flashing red sign number 2.
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