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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?

#131

Post by angus-prune »

austenallred wrote: post #114
anovikov wrote: post #74

Earlier quoted context omitted.

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 opti…

You've done this, and I haven't. But I thought you just diluted every round - so that 28% would end up as 21% if you sold a further 25% of the company.

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

#132

Post by austenallred »

angus-prune wrote: post #131
austenallred wrote: post #114

Earlier quoted context omitted.

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 opti…

You've done this, and I haven't. But I thought you just diluted every round - so that 28% would end up as 21% if you sold a further 25% of the company.

Yes there's dilution, but ~50% of the company being gone after a couple million dollars raised is not a good thing

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

#133

Post by nslindtner »

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…

Speaking from experience. You guys Need to find an agreement now. Do not keep any part of the company. It will not work in the long term. Things will get messy, and they will slowly build up a truth about you not giving (and never did) anything to the company.

You have to settle on some kind of amount. And then you can be flexible about the payment of the amount - it could be over 36 month or someting.

My experience was it took 3 years with layers, lost friendships - and in the end we enden exactly the same place - same amount and everything. I sold 50% of my stake right away, and should have keep the rest. Big mistake.

My recommendation would be to find an amount - yep - it's hard. But it will only get worse from now.

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

#134

Post by siegel »

marcus_holmes wrote: post #80
dustingetz wrote: post #22

i have a vesting agreement with my co-founder, 50/50 split vest 25% per year, if he left at 16 months he would keep 12.5%, is this agreement naive given that at some point in the future we will be raising vc?

not really. As other people have said, you have lots of options. If they leave before the VC gets on board, you can just issue more shares to dilute them down to nothing. You can declare a new class of shares with better voting rights, or better preferences, and issue yourself those. The actual numerical value of the shares may be within agreements, but they'll give you more control/entitlement. You can form a new co…

I hate to be a downer here, but a lot of options you disclose above are breaches of fiduciary duty that would end up getting the remaining founder sued. I'd really be careful about creative workarounds like that.

Your point about knowing the co-founder is intending to leave resulting in trouble is a very good one. Virtual guarantee that as part of a VC round, you will be making representations that you have no reason to believe any key employee intends to leave the company. you don't want to breach such a rep.

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

#135

Post by siegel »

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.

The directors and officers have a fiduciary duty to all shareholders, including non-employee shareholders. The level of difficulty in legally challenging a merger on fiduciary duty grounds depends on other factors, most prominently whether there were non-interested directors approving the transactions. Basically, if the board was all made up of people who got special deals, it becomes much easier to sue.

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

#136

Post by siegel »

greglindahl wrote: post #90
bitL wrote: post #86

Earlier quoted context omitted.

While this might be pertaining to cofounders as well, it's not a rule, whereas it is a rule for first hires. Cofounders can have completely different means to resolve conflicts/departures etc. specified in operating agreements, such as arbitrations etc.

All of the investors I've ever talked to preferred founder vesting over anything else. Maybe we run in different investor circles.

Most investors do, yes. But the investors aren't there to tell founders what to do at the initial incorporation phase, when vesting decisions initially get made. Of course those decisions can be modified when investors come on board, but until that time the founders are typically working with the original vesting structure chosen by the founders.

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

#137

Post by siegel »

People are right that you would end up being seen as dead weight on the cap table. Not automatically disqualifying to a VC. But not a good thing.

One option we've used in these types of situations: You can enter into an agreement with the company whereby the company is given the option to repurchase your shares (or some portion thereof) in connection with a VC funding round. You can mutually agree on a valuation method (specified fraction of funding round price, 409A price, have a valuation done by an independent accountant). This allows the company to minimize the dead weight on the cap table, while allowing you to obtain some compensation for giving up your shares.

I would not recommend just offering to give up vested shares. What was the point of the vesting schedule you had agreed upon? I assume you've been working without a salary for 16 months, right? What compensation do they think you should get for that?

Happy to provide further advice off this thread, if you have further questions.

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

#138

Post by greglindahl »

siegel wrote: post #136
greglindahl wrote: post #90

Earlier quoted context omitted.

All of the investors I've ever talked to preferred founder vesting over anything else. Maybe we run in different investor circles.

Most investors do, yes. But the investors aren't there to tell founders what to do at the initial incorporation phase, when vesting decisions initially get made. Of course those decisions can be modified when investors come on board, but until that time the founders are typically working with the original vesting structure chosen by the founders.

I'm sure there are some founders who make that mistake, this discussion being one example, but I didn't make that mistake, and the startups I've advised (all first-time founders) didn't make that mistake, you basically won't find any "guide to founding your first startup" on the Internet advocating that mistake. I have a hard time believing that it's common.

I see from your profile that you're a startup attorney, so you probably have seen a LOT more deals than I have, but to a certain extent you probably remember the messed up ones more than the ones that used boilerplate documents.

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

#139

Post by mchannon »

Apple had a version of this problem (45/45/10).

After much less time than 18 months, Cofounder Ron Wayne cashed out his 10% of Apple for $800. Are you at peace following Ron's path?

One other point is the notion that you're in the process of raising $500k. I, like many of us, have been in the process of raising hundreds of thousands of dollars for many years, decades even. Most years, there was definitely process but the only result was a donut between the $ and the k.

We don't know your finer details, but there's a good chance the entirety of the firm is valued at zero and so is your sunk cost of time. So it's not worth stressing over what percent of zero you manage to walk away with. Keep in the loop, slack off if you must, and pick a better moment (better than immediately before your hard work pays off) to walk away.

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

#140

Post by siegel »

greglindahl wrote: post #138
siegel wrote: post #136

Earlier quoted context omitted.

Most investors do, yes. But the investors aren't there to tell founders what to do at the initial incorporation phase, when vesting decisions initially get made. Of course those decisions can be modified when investors come on board, but until that time the founders are typically working with the original vesting structure chosen by the founders.

I'm sure there are some founders who make that mistake, this discussion being one example, but I didn't make that mistake, and the startups I've advised (all first-time founders) didn't make that mistake, you basically won't find any "guide to founding your first startup" on the Internet advocating that mistake. I have a hard time believing that it's common. I see from your profile that you're a startup attorney, so…

I've seen a lot of deals...and a lot of messed up deals.

Multi-founder teams with no vesting does happen. I think that's a mistake and advise against it. Things go wrong way more often than people think.

I differ from many folks in that I don't necessarily advocate standard investor-friendly structures (though structures that are easily made investor friendly, yes). But founder vesting is one place where I agree with the standard line - it's really necessary.

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