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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?

#121

Post by kelnos »

sage76 wrote: post #107
beat wrote: post #92

Earlier quoted context omitted.

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 o…

> ... 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.

That's why you set up terms up front. If, when they decided on a 33/33/33 split, they also decided on a vesting schedule, they wouldn't have this problem. The OP would get some percentage value based on math, from contract terms they all agreed to when they started.

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

#122

Post by dchichkov »

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.

I'm curious, would it be against YC ethics ( https://www.ycombinator.com/ethics/ ) to do a dilution like this? And what are the consequences for founders in the YC program (or alumni), that did it? Nothing? Case-by-case?

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

#123

Post by derefr »

SkyMarshal wrote: post #95
empath75 wrote: post #89

Earlier quoted context omitted.

Or you might think that he got in over his head and decided to step aside and let the other guys manage the business.

That rarely happens. In that case the incentive is actually to stay on, let your co-founders drive the value, and pocket the equity/$ for it. Easy money. Takes a rare breed to self-sacrifice for the good of the company. It's more likely what annovikov said, the one leaving has serious doubts about the strategy but got out-voted.

What is the self-sacrifice in this case? You're trading "working to build a business to earn an equity-stake" for "free-riding on others' work to build said business to make your equity-stake more valuable."

Think of it as two separate companies: Startup A, which you co-founded, and which ended up dissolving, you seeing nothing for your efforts (other than whatever salary you managed to scrape out); and then, Startup B, which you bought a huge number of shares of for the amazing price of $0/share, and now get to smile as those shares appreciate, like any investor. It just so happens that Startup A and Startup B are the same company at different points in their life, but that shouldn't change your views toward the two situations.

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

#124

Post by derefr »

caseysoftware wrote: post #118
TuringNYC wrote: post #94

Earlier quoted context omitted.

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…

What about (very wealthy) friends-and-family round investors, who understand the people involved but nothing else?

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

#125

Post by kelnos »

greglindahl wrote: post #81
erikb wrote: post #14

It sounds like you own a contractually agreed upon amount of shares. Since it's not an employment contract but ownership you can just walk away and keep all your shares until you or the company dies. If they want you out they can buy your shares. But otherwise there is no problem with keeping the shares and walking away. Before I had to fight for my legal rights a few times I always considered agreement more importan…

No problem? If the company dies because 1/3 of the cap table is dead, that's a problem.

I think the parent's advice wasn't to screw over the company, but just to approach it from the legal standpoint first. It sounds like his co-founders don't believe he's entitled to his 1/3 share, even though he is. So start from a position of strength (which he already legally has), and then work down from there:

"Hey you two, the fact of the matter is that I own 1/3 of the company outright. We didn't start off with a vesting schedule or anything else that would change that. Dwelling on that isn't helpful. I may be leaving, but I do want this company to succeed; my owning 1/3 of something that fails doesn't help me or anybody. I get that 1/3 of the company belonging to a non-participating founder will look bad to investors. However, I've put in just as much work as you two have up to this point, so I'm not just going to walk away empty-handed."

At this point it's just about good faith negotiation:

"I'm willing to let you guys buy me out of all or part of my stake. What do you think is a fair offer?"

All that being said, it is a shame that there was no vesting schedule set up in the beginning, so it might make sense for the OP and co-founders to essentially retroactively make one up, and, if they can all agree to it, all be subject to it. The OP will be giving up some of his shares, and the other two cofounders will feel an incentive to stay and work hard to ensure they vest as well.

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

#126

Post by caseysoftware »

derefr wrote: post #124
caseysoftware wrote: post #118

Earlier quoted context omitted.

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…

What about (very wealthy) friends-and-family round investors, who understand the people involved but nothing else?

Then they shouldn't be anywhere near 25%.

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

#127

Post by valuearb »

mamon wrote: post #116
pc86 wrote: post #108

Earlier quoted context omitted.

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).

Sure you can. You issue the remaining founders options for 100k shares at an excercize price if $50 per share. You can probably even do it at $10 or $20 per share, since investors shares are likely preferred, and don't have vesting requirements, meaning you can discount common shares for illiquidity/fewer rights.

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

#128

Post by valuearb »

kelnos wrote: post #125
greglindahl wrote: post #81

Earlier quoted context omitted.

No problem? If the company dies because 1/3 of the cap table is dead, that's a problem.

I think the parent's advice wasn't to screw over the company, but just to approach it from the legal standpoint first. It sounds like his co-founders don't believe he's entitled to his 1/3 share, even though he is. So start from a position of strength (which he already legally has), and then work down from there: "Hey you two, the fact of the matter is that I own 1/3 of the company outright. We didn't start off with…

He's not entitled to his 1/3 because typically a startup is worthless without its key employees. If his other two partners also quit, the purchase likely disappears, poof. Essentially he would be asking his partners to work years more so he can get value for his shares while he does nothing.

The proper thing is to issue new options to remaining partners to dilute him heavily and keep them motivated to work at building business.

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

#129

Post by doctorwho »

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…

Shareholder oppression is criminal. Whether the actions they take constitute shareholder oppression or not is a matter that usually gets settled in court or arbitration.

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

#130

Post by kelnos »

traviswingo wrote: post #38

This is a tough decision, but you're absolutely not alone. I've dealt with this in founding a company with my closest friends. I didn't agree with many aspects of how the company was being run and simply picked up and left. I also owned a significant portion of the company in my departure. In my opinion, you keep the shares that have vested to you, not the shares you are entitled to. I left 2.5 years after signing my…

> Eventually what happened was the company issued more shares, effectively diluting my holdings to nothing.

And you're still friends with these people? It's certainly their prerogative and legal right to do so, but it sounds like a shitty thing to do to a friend.

Dilution is inevitable, and faster if you leave and return unvested stock, but it sounds like this was a deliberate action by the remaining founders?

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