Ask HN: How to leave a startup when you own a third of it? • Hacker News Board

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

#61

Post by JonFish85 » Wed, May 17, 2017, 3:41 PM UTC

obstinate wrote: post #23

ghshephard wrote: post #21

I'd be curious as to what the difference is between the theory of equity ownership and the reality. The theory, is that you have a certain percentage of the company (whether that is 10% of whatever), that is somehow "yours". But this is a private company, and you are a minority shareholder who presumably hasn't put much in the way of cash equity. What's to prevent the shareholders, after you leave, simply from dealin…

Can you really deal certain shareholders out because you don't like them? I was under the impression that there is still a fiduciary duty to non-employee shareholders.

"a fiduciary duty to non-employee shareholders"

I believe this is fairly difficult to prove in court. It happens pretty commonly; it's not super hard to dilute someone out if the company wants to. In fact, it's probably seen as a good move by the board and all current employees.

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

#62

Post by emeraldd » Wed, May 17, 2017, 3:45 PM UTC

Step one: Talk to a lawyer and an accountant and have them document what you're entitled to based on the books and existing agreements. (You don't have to use this, but you want to have it on hand if things get nasty.)

Step Two: Decide what you're willing to live with based on what you learned in step one and have the lawyer draw up or validate an agreement based on those.

Step Three: Have a talk with the other principles with the "What you're willing to agree to" document and the "What you're entitled to" document ready on hand. Decide which way is the one you want to offer them and be ready to pull the other if things go badly. Negotiate it out and keep everything in writing.

Past that, pretty much everything is relationship/internal political issues that need to be resolved.

But, make sure you talk to an accountant and/or a lawyer before putting anything on paper or signing anything.

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

#63

Post by ghshephard » Wed, May 17, 2017, 3:46 PM UTC

obstinate wrote: post #23

ghshephard wrote: post #21

I'd be curious as to what the difference is between the theory of equity ownership and the reality. The theory, is that you have a certain percentage of the company (whether that is 10% of whatever), that is somehow "yours". But this is a private company, and you are a minority shareholder who presumably hasn't put much in the way of cash equity. What's to prevent the shareholders, after you leave, simply from dealin…

Can you really deal certain shareholders out because you don't like them? I was under the impression that there is still a fiduciary duty to non-employee shareholders.

So, the catch here, is if you can get a significant portion of the common shareholders together, you might have grounds for a lawsuit, which may not be successful, but it will slow things down. What typically happens is that the big ones (in this case, the founders) get a "Consulting Bonus." - leaving the other common shareholders out in the cold as they no longer have enough shares to mount a law suit.

I've seen it happen at least once at a company that I worked for that was sold to Oracle for about $100mm - everyone who stuck around for the liquidation event got retention bonus, plus one of the cofounders who had left (but still had a big chunk of equity) got a "Consulting" bonus - and, of course, the CEO (who had been around for about 18 months) got a monster payoff. Preferred shareholders (who actually had put down $$$) got paid off with a liquidation preference.

100% of the common shareholders, including some early employees who had a reasonable chunk of the company - were totally wiped out. Got nothing for their equity.

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

#64

Post by logicallee » Wed, May 17, 2017, 3:46 PM UTC

beagle3 wrote: post #59

logicallee wrote: post #57

Earlier quoted context omitted.

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…

Yes, I have raised successfully at the seed stage several times. If the company is worth $3.5M and no vesting schedule, no investor will touch it (and the 3.5m valauation was reached either out of thin air, or on the back of a sucker). If you cannot raise (with e.g. 20% discount for the trouble), the valuation is wrong.

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 fair offer. Which is why I don't get how shotgun clauses are supposed to be fair. This is pretty "obvious" to me. So I might still be missing something.

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

#65

Post by logicallee » Wed, May 17, 2017, 3:48 PM UTC

BrentOzar wrote: post #58

logicallee wrote: post #43

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…

> 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 $14,000 is forced to accept. 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 c…

Hey, this is very useful information. I would like to ask some more details, but not here. Could you throw up a contact on your profile or mail me at mine, if you'd have a couple of minutes for my questions around that? Thanks.

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

#66

Post by ABCLAW » Wed, May 17, 2017, 3:49 PM UTC

There is a lot of 'one size fits all' advice in this thread which ignores important factors. Part of this is because you provide far too little information to make a good strategic choice.

Is this startup a moonshot? Do you have recurring revenue? Are you cashflow positive and using the raise to expand operations? Do you expect it to grow exponentially in the next few years? Was your contribution tangible? Are your continuing contributions required for the project to be successful or can you hand off your responsibilities without a hiccup? Do you know the tendancies and desires of your incoming investors? Do you expect the company to raise capital through equity in the next few years. etc. Did you draw a salary from the company? Are there any shareholder loans? What's the board structure of the organization?

Many of these comments assume that they know the answers to the above statements. They don't. Go speak with a reputable lawyer who deals with these types of transactions and ask him what the tax implications of your decisions are as well as a framework for negotiating a positive exit.

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

#67

Post by nealbozeman » Wed, May 17, 2017, 3:54 PM UTC

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…

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 over a new specified vesting period.

If you want to show future investors good will, ask to maintain a seat on the board.

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

#68

Post by fictioncircle » Wed, May 17, 2017, 3:55 PM UTC

> I'm leaving a startup I founded due to disagreements over team/strategy. I worked on it for about 16 months.

> Is it reasonable for me to keep 10% of it. - They think it's way too much.

33% over a 48 month vesting schedule is:

16/48*.33 is 11%.

Option A) Ask for 11% of the money raised, 11% of the company, or some combination thereof. (i.e. Keep 5% and sell them 6% for ~$30k)

Option B) Dilute you over time as the company grows.

A is about as low as its reasonable for them to offer you. If they aren't willing to meet that bar, just hold on to the full amount you are entitled until they agree.

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

#69

Post by koliber » Wed, May 17, 2017, 4:08 PM UTC

nealbozeman wrote: post #7

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.

Let's say OP decides to play unfriendly hard ball and hold on to his 33% of shares. Could the remaining two partners force through a new allocation of shares, vesting over time but only to active members, which would dilute OP to near zero?

I am asking about who gets to decide what is considered fair dilution. Assuming good will on all sides, I like the idea of your suggestion. Assuming non-cooperation, I am wondering what the worst case could be for OP.

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

#70

Post by sage76 » Wed, May 17, 2017, 4:12 PM UTC

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…

What's the point of a vesting schedule and having an orderly way to exit if it would still not be acceptable? I think it's odd that people would have a problem with him owning a stake. Should he not be compensated for the work he has put in? He was awarded shares for his work presumably.

I would say he should stick to 12%. It's derived from an industry standard. VCs who have a problem with this are, pardon my french, greedy assholes.