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If you have any agreement (already, or a new one), if there's an agreed change in your vesting schedule, if you just give up your shares - you might have tax consequences, such as gift tax, other income, losses, etc - all depending on circumstances. Make sure you have a good tax person to consult with before signing anything.
I exited my business of ten years due to a combination of slow death by stress, strategic disagreement, and brexit.
At the time of my departure, I owned 30% of the business - 30% was held by my cofounder, 40% by an investor.
Long story short I sold 20%, with the company buying back the equity using cash reserves at what we collectively agreed was a fair market value, and I still hold 10% of the business in class B stock with equal voting and dilution rights to class A.
How you play this is critical, and I followed a few ground rules to get myself the best possible deal.
1) be amiable. Parting on good terms inevitably works out better.
2) determine your own terms and state them clearly and concisely.
3) make those terms realistic. Don't shoot for the moon, put yourself in the shoes of the guys who are remaining and think about what you would accept on their side of the table.
4) don't be shy. If what you've determined is genuinely fair, stick to your guns.
5) if you haven't, sit down with the other stakeholders and be frank.
6) consider your tax implications. In the U.K., it's critical to retain voting rights if you want entrepreneurs relief and still have a stake in the company. Ymmv.
7) avoid lawyers. They (particularly with a fairly small transaction) will gobble up an awful lot. The company should pay your minimal legal fees and transfer duty.
8) be prepared to walk away with nothing, or to leave things in a deadlock. They'll have to make a move as a major absentee voting shareholder is what we call an embuggerance.
Of course, all of this depends on the particulars of your contract and articles. I ensured, when the investor came on board 6 years in, that I held some power cards (tag/drag/pre-empt/tribunal/arbitration) which discouraged untoward behaviour on the other principals' parts.
That all said, consider your position - you want to leave as you've lost faith but you want to retain equity - you'll need a justification as to why you want to retain that. In my case I downplayed my disagreement over strategy and emphasised my personal needs, hence they agreed to me retaining some stock.
Good luck.
Keep the 1/3rd of the company you are entitled to today, and make sure the other two founders stick around by creating a new allocation of shares that will have a vesting schedule, and will dilute you down fairly over time. There's nothing to stop the other founders from doing the exact same thing you are doing - leave and retain the company. Give them a compelling reason to stay.
> raise 500K for 25% This puts the company at a valuation of 2M After that you would have 1/3 of 75% of 2M, that is, 495k You can base your "how much" answers on the above calculation (and previous money raised) If you really don't want to be a part of it anymore, propose them to pay you in installments (depends on the company cash flow)
Divide your result by a factor of 5 or 10.
Industry standard is 4 years vesting with a 1 year cliff. You are vesting, right? You should own 8.25% at a year and then 0.6875% for each month after that. Sometimes there are differences because different founders contributed different amounts. For example, this schedule wouldn't be fair if one of you had a side job. Ultimately, it won't really matter. If they think you have too much ownership, they can issue thems…
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…
Earlier quoted context omitted.
I don't understand the "shotgun clause" at all. Suppose we simplify and the offer must be accepted using only money in a (private) bank account designated in advance, and each person knows the other person's balance because they're honest with each other. Then if one person has $27,000 in their private bank account and the other person has $14,000 then the person with $27,000 can offer $14,001 and the person with $14…
You are missing the "raising for buy out". If the shares are realistically worth $20K, and the $27K guy offers $14.1K, then the $14k guy would raise $0.1K (possibly even with a 50% APR) and counter; instant 5.9k profit.
If the shares are worth $3.5 million, how much do you think the guy leaving can raise on short notice? If you say anything over $100,000 you are delusional.
Investors don't even see the value in companies that are provably worth $1 billion. Even in retrospect you say, "well yeah history showed it is worth $1 billion, and the founder made a good case for that, but actually that is like a founder making a good case that he will role 10 "6's" in a row on a die, and then proceed to do that. The chances that he was going to do that are actually just 1 in 60,466,176 so the correct value of that "$1 billion" share is actually $1 billion / 60,466,176 = $16. That seems a little low - I'll give you a $100 for it. That's my annual budget for lottery tickets."
Investors don't value startups correctly and the idea that a guy can quickly raise money for a buyout of a stake in a company he's leaving borders on delusional. Plus, who would invest in a company with a negative signal that strong: that a guy who owns 1/3 of it wants to leave it.
There is obviously absolutely no way for a cash-poor founder without prior exits to raise anywhere near $3.5 million for a 50% buyout of a company raising a round at $7 million.
honestly - have you tried raising money around the seed stage? It's brutal, if everyone is on board and there are no negative signals of any kind.
I wouldn't be surprised if no poorly networked, cash-poor founder has raised significant (>$1 million) for a shotgun buyout of a company he's leaving, on short notice, ever. I might be wrong though, and I'd love to know if so. In my model it's really, really hard to raise money.
Earlier quoted context omitted.
The most common method of valuation for splits I've heard is the shotgun clause into "offer what you're willing to accept" methodology. As in, offer a price to buy me out - but you have to be willing to accept the same price for your share (which is the incentive to make a fair offer). Ofc i've only seen it in 2 person partnerships but imagine can be generalised.
I don't understand the "shotgun clause" at all. Suppose we simplify and the offer must be accepted using only money in a (private) bank account designated in advance, and each person knows the other person's balance because they're honest with each other. Then if one person has $27,000 in their private bank account and the other person has $14,000 then the person with $27,000 can offer $14,001 and the person with $14…
Not necessarily - for example, in my own company's case, the company itself paid out the other partners. The company can take on debt to buy out a partner's shares (or a portion thereof) if the existing partners are willing.
I couldn't have afforded to buy out my partners personally, but with the business's assets, I could.
Earlier quoted context omitted.
You are missing the "raising for buy out". If the shares are realistically worth $20K, and the $27K guy offers $14.1K, then the $14k guy would raise $0.1K (possibly even with a 50% APR) and counter; instant 5.9k profit.
It was an illustrative, mathematical example, of what I'm talking about. If the shares are worth $3.5 million, how much do you think the guy leaving can raise on short notice? If you say anything over $100,000 you are delusional. Investors don't even see the value in companies that are provably worth $1 billion. Even in retrospect you say, "well yeah history showed it is worth $1 billion, and the founder made a good…
If you cannot raise (with e.g. 20% discount for the trouble), the valuation is wrong.
Can you confirm the company is an LLC based in the USA? (most replies are assuming this!)