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

Why is 1/3 dead? Usually if you own 1/3 of the company you paid for it with adding time, money, intellectual property, etc. You bought these and the corresponding value should still be there. Same as with the car. If you buy a car, you pay for it, thereby giving back and assumed equal value. If you then never drive the car you don't stop other people from driving cars. They can buy their own cars.

Maybe it's a confusion of how shares work? If you earn 1/3 of a company you earn 1/3 of what is considered the core value of the company (not sure how to call that in English). If a new investor comes he'll give you money to participate in your company. He gives you $1mio, then your core value grows by that amount and he gets a share of the company which equals $1mio/. Nothing is lost.

The only way to lose in these deals if you sell a share of your company for much less than what it's worth. That can happen, e.g., if you give someone 1/3 of the company because you expect him to deliver something in the future (e.g., code the software you want to sell). But in that case you should put that in the contract. "You work here for 3 years, and for each you get 1/9th of the current size of the company." or "When the software with feature x,y,z is finished, you get 1/3rd of the company as compensation".

Make clear, legally enforcable contracts that state exactly what you want, and there's no problem.

Ground truth assumed:

- founders "Rich" and "Poor" have 50%/50% split, with zero investment so far.

- they raise $3M at a $4M pre-money valuation. This is highly unusual for a "seed"/"pre-seed" stage, but not unusual if they already managed to bootstrap, have paying customers, etc.

- cap table is now: 3/7=~42% investor, 2/7=~28% Rich. 2/7=~28% Poor. (This is your first mistake: poor's stake in the company is worth $3.5M but rather $2M, on paper), and his 28% actually controls ~$850K of cash (assuming perfect democratic voting rights).

1. I am not saying that. I am saying that if the rich founder makes a $500K offer (5 times what the poor founder can afford), the poor founder will easily raise those $500K, because they control about three times as much in voting power. Any offer significantly below $3M * (4/7 * 50%) =~ $850K, e.g. $500K, means that one can raise $500K, and "buy 850K" with it. So the offer, even by rich dude, is guaranteed to not be below $850K. If the company has tangible measurable business, and the real worth is indeed $2M, then the same would be true for any offer significantly less than $2M.

2. Not, they would not. They might buy the founder out themselves, perhaps through the company, but they would not give a carte blanche for that.

3. It is possible to raise money for that, but it would usually be in the form of bonds or loans (essentially different mechanics for the same principle), not in the form of equity.

An alternative is to convert the equity to a debt that must be paid over the next 2 years or something.

Investors won't like this as debt has a higher priority in getting paid than they will.

A settlement agreement whereby the employee (you) gets a severance payment, which may (depending on your tax jurisdiction) be paid in installments over a period of time (years even).

Separate to the settlement agreement you sign over all(most?) your shares, and make it "clear" that the shares being handed over have nothing to do with the settlement agreement (of course they ARE related, but legally they must not be, talk to a lawyer about this).

A severance payment spread over years is much more attractive to investors as it means they take higher priority in the event of liquidation of the company.

Thank you for all of your answers! I've gotten nearly everything from you, you've been very helpful. But I do have a couple of remaining questions. (This comment is not as llong as it seems.)

  Discussion of pre-money valuation
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First of all I have a fundamental followup question that cuts across literally everything around equity raises.

I don't understand why you continually use the pre-money valuation for how much a stake is worth! Usually post-money is used, isn't it?

This is how I think about it - tell me if I'm wrong: let us see if pre-money or post-money is the more appropriate metric, by looking at the extremes. You create a machine that poops bars of gold and show me. I want to buy 99.9% of your company for a billion dollars. You say okay, because you want to go invent something else using a billion dollars, and anyway you're pretty sure I can grow it to a seven hundred billion commodities company, which will make your remaining stake - which might come with anti-dilusion or ratchet clauses, so you always have 0.1% of the company - worth a further $700M. And the rich guy takes all the risk regarding whether he can actually grow it to $700M or fucks it up. You have your $1 billion today, either way, and obviously anyone who can invent a machine that poops bars of gold has good R&D ideas for how to use $1 billion. So you agree.

Ground condition: you had owned 100% of the company. A $1b investment for 99.9% of the company implies a post-money valuation of (1/99.9%) * 1 billion = $1,001,001,001. It implies a pre-money valuation of $1,001,001,001 - $1B = $1,001,001.

So how is the $1M relevant in anyway?

If the pre-money valuation is $1M then would the founder who just accepted $1B for 99.9% of the company, also accept a 50% buyout of the company for $2 million? After all, it's TWICE the pre-money valuation offer he just received!

Of course faced with two options - a 99.9% buyout of the company for $1 billion or a 50% buyout of the company for $2 million, he would accept the first one and not the second one, which to any reasonable person values the company at a much lower value.

As an even more extreme example, if the $2 million were for 100% of the company, then any reasonable person would understand that that offer values the company at $2 million. But the pre-money valuation is $0.

Which also OBVIOUSLY doesn't make any sense whatsoever. How does a 100% buyout offer of $2 million value a company at zero? Obviously it doesn't.

Would a guy looking at a 99.9% buyout for $1 billion and a 50% buyout for $2 million consider the second one to have a higher valuation? Of course not. But the pre-money valuation of the first one is just $1 million and the second one is $2 million - twice as high.

So we have three examples of absurd results from using pre-money valuation.

1. A hundred billion dollar investment for 99.9999999% of the company values the company at $100 pre-money ((1/99.9999999%) * (100,000,000,000) - 100,000,000,000 = $100). This is absurd.

2. A 100% buy of any company at any price values the company at $0. This is absurd.

3. A $4 million valuation (50% for $2m) can value the company higher than a $1 billion valuation - as long as the pre-money of the latter is lower. Again, absurd.

All of these absurd results make it totally unrealistic to use pre-money valuations so I really don't understand why you're doing it! Please explain in detail, as I've been used to using post-money valuations to talk about the value of a company. I thought this was standard.

Maybe I've grossly misunderstood something, so it would be very useful if you told me what!

  Your other answers
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Thank you for the other answers.

Your answer number 2 essentially means these kinds of clauses are only possible where there is not a VC on board, (because if there were, they wouldn't allow it and have protections against it in their standard docs), right?

You gave a partial answer to number 3 ("yes, but it would usually be in the form of bonds or loans") but as a practical matter would banks loan money to a company (say, against its assets as collateral) that was explaining to its loan officer at the bank that it was borrowing money to buy out one partner through another? At a practical level I didn't get whether this is something the company would probably be successful doing or probably fail doing. I have no experience with this. So I am asking whether banks would agree to that.

Thank you for all of your answers by the way! I am particularly interested in your list of reasons for using pre-money. It doesn't seem useful for me, or match people's intuitive definitions of valuation.

Thanks for your reply, I guess my post was confusing because of my poor english.

What I want to do is : I have 33% now and I want that 33% = A% + B% + C%

A% I keep it B% repurchased now C% repurchased later (after funding round for more valuation)

We all 3 agreed on this scenario and I wanted to have the good amount for A, B and C.

We are friends working together so we didn't agreed on a vesting schedule, and we worked without salary, and we each invest 10K to launch it.

I know that A% will be a dead weight, I got other advises saying 10% is too much, I should keep 1/4 of my 33% = 8.25%