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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?

#151

Post by siegel »

Jomi wrote: post #149
siegel wrote: post #137

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 meth…

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 work…

So, if my math is correct, if this were a standard 4-year vesting, 1-year cliff scenario, after 16 months you'd be at about 11%.

It would be very generous of you to offer to treat things as if you were on a 4-year vesting/1-year cliff vesting schedule.

If you are comfortable with that, then B% would be 22% (let the company repurchase now). That would leave 11%.

If you are going to offer further generosity, then I'd say this: for every percent you give up to go into category C, then I would transfer an equivalent percentage from B to C.

What I mean is this: Let's say you were going to agree to make A% = 8.25%, as you suggest above. Then that would mean you are giving up 2.75% off the 11%. So, then the breakdown would seem to be: A=8.25%; B=22%, C=2.75%. But then I would move 2.75% from B to C, making the breakdown: A=8.25%, B=19.25%; C=5.5%.

Does that make sense?

There's no right or wrong answer here. But I'm trying to propose something that is defendable on principle, makes some logical sense, gives the company the room it needs to move forward, but also gives you something for your generosity.

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

#152

Post by beagle3 »

logicallee wrote: post #147
beagle3 wrote: post #143

Earlier quoted context omitted.

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…

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 --------------------------------- 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 p…

I would recommend reading http://www.investopedia.com/ask/answers/114.asp for how valuations work.

Don't take this as a personal attack: To me it seems you are very confused about the difference between share purchase and investment (these are NOT the same thing). In the world of company founding and funding, these go hand in hand with other things like dilution, vesting, rights of first refusal, "double dipping", and many more (and you practically need to be familiar with them to understand why things work the way they do; other wise, things that are very logical and pragmatic like shotgun buyouts don't make much sense).

I don't have the time to give you an answer all of these cases, but when you read on it, keep in mind that EVERY DEAL has both a pre-money valuation and post-money valuation, and the difference between them is exactly the money invested (in a "standard" investment deal). It is important to qualify a valuation (whether pre- or post- money) when you discuss it.

I did NOT use one or other valuation; I gave both, to make the numbers clear.

Again, until you properly understand the difference between share sales and share issuance (which is what is done in an investment), nothing will make sense. Make sure you have a good grasp of these -- a reasonable test if you got it right is to see if my "ground truth" example makes sense.

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

#153

Post by JSeymourATL »

> They think it's way too much.

Take the emotion out of these discussions. First understand their perceptions, their standards.

Ask what do they think would be a fair? How would they prefer to structure the exit?

On this subject, Stuart Diamond is brilliant > https://www.youtube.com/watch?v=2QtZ-vObJrk

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

#154

Post by logicallee »

beagle3 wrote: post #152
logicallee wrote: post #147

Earlier quoted context omitted.

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 --------------------------------- 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 p…

I would recommend reading http://www.investopedia.com/ask/answers/114.asp for how valuations work. Don't take this as a personal attack: To me it seems you are very confused about the difference between share purchase and investment (these are NOT the same thing). In the world of company founding and funding, these go hand in hand with other things like dilution, vesting, rights of first refusal, "double dipping", an…

I read that.

Thank you for the rest of your comment as well (not taken as a personal attack): I think you have identified one source of my confusion. I closely relate the idea of valuation to share price.

I will read up to get a fuller understanding, but could I just ask one question before you go: do the terms "pre-money valuation" and "post-money valuation" or does the term "valuation", mean anything when you buy 100% of the company from me (without issuing any extra shares shares, and the company doesn't get any of your money) for a certain amount? If that amount is $500,000 then what is the pre-money and post-money valuation (if these terms apply).

This should clear up my confusion as in this case no extra stock is issued. I will read up on the rest. I want to know if these terms (pre-money valuation; post-money valuation; valuation) even apply in such a case!

Thank you for taking the time to understand some of my sources of confusion. Other than this one, I'll try to get a handle on the rest of my questions from other sources.

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

#155

Post by beagle3 »

logicallee wrote: post #154
beagle3 wrote: post #152

Earlier quoted context omitted.

I would recommend reading http://www.investopedia.com/ask/answers/114.asp for how valuations work. Don't take this as a personal attack: To me it seems you are very confused about the difference between share purchase and investment (these are NOT the same thing). In the world of company founding and funding, these go hand in hand with other things like dilution, vesting, rights of first refusal, "double dipping", an…

I read that. Thank you for the rest of your comment as well (not taken as a personal attack): I think you have identified one source of my confusion. I closely relate the idea of valuation to share price. I will read up to get a fuller understanding, but could I just ask one question before you go: do the terms "pre-money valuation" and "post-money valuation" or does the term "valuation", mean anything when you buy 1…

"pre" and "post" valuations are not relevant terms for a buyout; only for an invsetment; an invsetment goes into the company bank account and increases the value (hence, pre/post) of the company by that amount. in a buyout, an existing owner is paid, and no money goes into (or out of) the company bank account.

For a buyout, you usually talk about price (although some people talk about "valuation" in this context too -- nomenclature is not completely standard here).

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

#156

Post by logicallee »

beagle3 wrote: post #155
logicallee wrote: post #154

Earlier quoted context omitted.

I read that. Thank you for the rest of your comment as well (not taken as a personal attack): I think you have identified one source of my confusion. I closely relate the idea of valuation to share price. I will read up to get a fuller understanding, but could I just ask one question before you go: do the terms "pre-money valuation" and "post-money valuation" or does the term "valuation", mean anything when you buy 1…

"pre" and "post" valuations are not relevant terms for a buyout; only for an invsetment; an invsetment goes into the company bank account and increases the value (hence, pre/post) of the company by that amount. in a buyout, an existing owner is paid, and no money goes into (or out of) the company bank account. For a buyout, you usually talk about price (although some people talk about "valuation" in this context too…

Thank you!

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

#157

Post by valuearb »

kelnos wrote: post #142
valuearb wrote: post #128

Earlier quoted context omitted.

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 buildin…

Absent an agreement that stipulates a vesting schedule or dilution/share return on leaving before some point, he absolutely is (legally) entitled to his 1/3. Whether or not it's best for the company that he keep it (I agree it's not) is an entirely different matter.

He's entitled to 1/3 of the founders shares. He's not entitled to any new shares and they have the ability to issue as many new shares as they want. Their only restriction is that the shares have to be fairly valued, so they might have to issue them as options with high purchase prices.

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

#158

Post by valuearb »

erikb wrote: post #150
valuearb wrote: post #128

Earlier quoted context omitted.

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 buildin…

but you cannot just dilute shares. Otherwise everybody would do that all the time. You buy 30% shares of a startup for 2 billion, then they just dilute you down to 0.3%. That's not how it works. What they can do is either put him or themselves on a vesting schedule that represents share % with future work.

Oh but they can.

If you start a company with two other founders and agree to a 1/3 split each, or 33,000 shares. After a month you get bored and decide to let them make it a success, quit the company and tell them to wire you your third when they finally succeed.

In that case they can issue 1 million new shares immediately to themselves, and with very little tax consequence. It's a one month old startup, worth close to nothing so they can make them options costing a few pennies a share to make it fair and legal with no tax consequences .

In the case where you leave with a sale or investment pending, it gets much trickier. The shares have to be priced at fair value. If the company is about to sell shares at $15 per share, new options for the remaining founders can likely to be priced somewhere around $1-$5 per share since they will be common shares, not preferred shares like the ones being sold. They can be fairly valued much cheaper because won't have the special rights of preferred shares, and should be less liquid.

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

#159

Post by erikb »

valuearb wrote: post #158
erikb wrote: post #150

Earlier quoted context omitted.

but you cannot just dilute shares. Otherwise everybody would do that all the time. You buy 30% shares of a startup for 2 billion, then they just dilute you down to 0.3%. That's not how it works. What they can do is either put him or themselves on a vesting schedule that represents share % with future work.

Oh but they can. If you start a company with two other founders and agree to a 1/3 split each, or 33,000 shares. After a month you get bored and decide to let them make it a success, quit the company and tell them to wire you your third when they finally succeed. In that case they can issue 1 million new shares immediately to themselves, and with very little tax consequence. It's a one month old startup, worth close…

True. In that regard it's also fair.

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

#160

Post by beat »

kelnos wrote: post #121
sage76 wrote: post #107

Earlier quoted context omitted.

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.

Exactly. They should have had this worked out from the start, just in case. "Irreconcilable differences" isn't the only thing that can go awry, and a vesting schedule protects everyone.

If you're losing all your equity after over a year of work just because you had a falling-out with co-founders (or investors), you didn't do your homework.

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