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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?

#101

Post by winut23 »

nealbozeman wrote: post #67
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 ov…

As an investor I'd see one of the founders leaving a red flag, no matter what, maybe not a big one, but I'd certainly ask about it and step away if I don't find the explanation satisfactory.

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

#102

Post by icedchai »

16 months isn't a very long time. Have you raised any money to date? Is there any product, customers, or revenue?

Odds are your share is worth somewhere between what you paid for it and how much you put in. In other words, somewhere between zero and close to nothing.

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

#103

Post by greglindahl »

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?

Are they disaffected? Do they understand the usual trajectory and terms for Silicon Valley-style startups?

If it's 25% and the angel doesn't appear to have angel experience, you can bet that future investors are going to want to interview the angel!

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

#104

Post by icedchai »

BillinghamJ wrote: post #5

If you own 33%, you own 33%. That can't just be changed arbitrarily.

It can. You simply increase the denominator (number of shares issued.) This happens all the time during normal financing.

Absent an agreement to the contrary, his other two partners can issue more shares to themselves, diluting him to near zero.

Or, a better solution, start a new company, agree to transfer the "assets" (if any) from the old to the new, removing him from the equation entirely.

Stuff like this happens all the time.

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

#105

Post by allannienhuis »

SkyMarshal wrote: post #99
sage76 wrote: post #70

Earlier quoted context omitted.

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,…

>I would say he should stick to 12%. It's derived from an industry standard. What exactly is this standard? Haven't heard it before. (serious question)

the 48 month vesting schedule described above (resulting in approx 12% figure) is a very typical vesting schedule. Industry standard might not be exactly the right term, but it's probably the most common default/boilerplate plan.

edit: from the parent:

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%

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

#106

Post by ares2012 »

nealbozeman wrote: post #67
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 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.

Investors will likely push for a recapitalization to reset the cap table and remove the outstanding equity all together.

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

#107

Post by sage76 »

beat wrote: post #92
sage76 wrote: post #70

Earlier quoted context omitted.

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,…

It doesn't matter whether or not they're greedy assholes (it's probably safe to assume they are). It only matters whether they're willing to invest. So a red flag is a red flag. There are plenty of places for handwaving and hope in startups already. The ownership status of a departed founder should not be one of them. That should be crystal clear.

Well, what you are essentially saying is that if you need money, VCs can and will make you dance to their tunes. That much has been confirmed by Parker Conrad himself, so I agree. It's not really a red flag since he could have a number of reasons for leaving that are not related to the business. But I guess a VC would use anything as an excuse to control and manipulate things.

This really puts a giant question mark on why anyone would bother with a non-CEO founding role. Startups are hard enough as it is, adding to it the potential of losing all your equity because you had a falling out with the CEO makes it almost not worth the trouble.

Engineers getting into partnerships with domineering business types should definitely watch out for this and evaluate their options. At least when you work for Microsoft and leave after 2 years, they cannot claw back what you earned over that period of time.

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

#108

Post by pc86 »

nealbozeman wrote: post #71
koliber wrote: post #69

Earlier quoted context omitted.

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 wonderin…

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% and OP owns ~4%. Shitty move? Yes. Morally and ethically terrible? Absolutely. Will OP sue them? I would hope so. Illegal? Not even a little bit.

The way you prevent this is by having a contract. But again, OP was just doing this with his buds so no need for a contract, right? This is why you sign a contract for anything you're doing that involves more than $100 in assets or a few weekends of time.

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

#109

Post by logicallee »

bsterne wrote: post #100
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…

There are financing options for people facing a shotgun clause. e.g. http://www.shotgunfund.com/

OMG, I'm not in that position or anything right now but thank you SO much for this link! So good to know.

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

#110

Post by inputcoffee »

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'.

This is a different question though.

This would be a red flag whether he accepted 33%, 10% or 5%.

The question is, is the flag "more red" if he has a higher percentage.

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