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Co-founder exiting after pivot – what's a fair exit package?

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Re: Co-founder exiting after pivot – what's a fair exit package?

#31

Post by peter422 »

moron4hire wrote: post #18

As someone who has never been in this situation, some of the replies in this thread are very disappointing. They basically seem to amount to, "eh, go pound sand, quitter." You've put in a ton of work during the hardest period for a startup. That's not worth nothing. In opposition to these other people, I'd say maybe a frank but congenial discussion with your co-founder is in order. Something along the lines of being…

The issue has nothing to do with whether he worked hard, it has to do with the fact that the work the company did ended up being not very valuable, so much so that the company is doing something completely different.

Ultimately he created very little value and therefore is entitled to very little value. The company can just go out of business and start fresh!

Raising money is not value.

2-5% could be appropriate. 10% is completely insane.

Re: Co-founder exiting after pivot – what's a fair exit package?

#32

Post by hluska »

I’ve been through this type of thing a few times and there aren’t many good solutions. The new business needs cash so taking some is a tough pitch to the new team’s executives. New investors are rarely keen to see funds going to an exit fund. You can make threats and indicate you won’t go quietly into the good night, but that makes things adversarial. At some point in the future, your equity could become a problem that will be worth taking care of. At this point, your best path to dollars is to become the problem, but if you do that, it’s a lot more difficult to see one of those future exits shape up.

Re: Co-founder exiting after pivot – what's a fair exit package?

#33

Post by throwpoaster »

tptacek wrote: post #29
umeshunni wrote: post #27

Earlier quoted context omitted.

What does that mean?

That theoretically future investors will be reluctant to invest because the founder 10% is crowding out equity that could otherwise be used to attract key performers down the line.

Nah, they can just issue more. He's already giving up 40% -- plenty of head room.

Re: Co-founder exiting after pivot – what's a fair exit package?

#34

Post by moron4hire »

peter422 wrote: post #31
moron4hire wrote: post #18

As someone who has never been in this situation, some of the replies in this thread are very disappointing. They basically seem to amount to, "eh, go pound sand, quitter." You've put in a ton of work during the hardest period for a startup. That's not worth nothing. In opposition to these other people, I'd say maybe a frank but congenial discussion with your co-founder is in order. Something along the lines of being…

The issue has nothing to do with whether he worked hard, it has to do with the fact that the work the company did ended up being not very valuable, so much so that the company is doing something completely different. Ultimately he created very little value and therefore is entitled to very little value. The company can just go out of business and start fresh! Raising money is not value. 2-5% could be appropriate. 10%…

Bullshit. He helped build a company that could even continue past a year. That's better than literally 80% of the startup market. Look up BLS statistics. Not only that, he helped build a company that could even bother to attract the attention of investors. Prima facia, someone thinks there's value there.

The world is full of jokers talking about starting a business and jokers who have "started" a business but are faking-it-to-make-it off of credit cards. You can't do that for a 18 months. OP has built something. It may not be the software he started out to make, but it's certainly a business that some investor thinks has a chance of being a going concern.

Re: Co-founder exiting after pivot – what's a fair exit package?

#35

Post by throwpoaster »

throwaway-xx wrote: post #7
agcat wrote: post #6

Went through a similar scenario a few years ago, similar valuation range and stage. The person was nice, so we amicably decided to settle at around 3% sweat equity.

interesting, i might end up doing something similar. if you don't mind me asking, how much did you sell the remainder of your shares for? was it close to your FMV? i feel like i'm already being negotiated hard by being forced to sell my equity to minimize dead equity and then instead of selling at the 409A valuation, being sold at the FMV seems like i'm losing another battle. thoughts?

If you need your initial investment back you could also take a note payable.

Re: Co-founder exiting after pivot – what's a fair exit package?

#36

Post by icedrop »

codingwagie wrote: post #5

I've commonly seen grants like this diluted to almost zero. I would think carefully and strategically about how you can get some sort of value for the equity you vested. Its probably harder than you think to get decent liquidity on it.

Is it legal to dilute this to zero? Can't you sue post-exit (e.g. Saverin and Facebook)?

Re: Co-founder exiting after pivot – what's a fair exit package?

#37

Post by peter422 »

moron4hire wrote: post #34
peter422 wrote: post #31

Earlier quoted context omitted.

The issue has nothing to do with whether he worked hard, it has to do with the fact that the work the company did ended up being not very valuable, so much so that the company is doing something completely different. Ultimately he created very little value and therefore is entitled to very little value. The company can just go out of business and start fresh! Raising money is not value. 2-5% could be appropriate. 10%…

Bullshit. He helped build a company that could even continue past a year. That's better than literally 80% of the startup market. Look up BLS statistics. Not only that, he helped build a company that could even bother to attract the attention of investors. Prima facia , someone thinks there's value there. The world is full of jokers talking about starting a business and jokers who have "started" a business but are fa…

The investors invested on a previous idea.

The fact that the other founders are deciding to pivot is just a luxury of the fact that the company has inertia, not value, which is why they are switching ideas.

Our OP doesn’t want to work on the new idea, the one that might have value, therefore he is entitled to very, very little.

You do not understand the economics of VC backed startups.

Re: Co-founder exiting after pivot – what's a fair exit package?

#38

Post by tptacek »

throwpoaster wrote: post #33
tptacek wrote: post #29

Earlier quoted context omitted.

That theoretically future investors will be reluctant to invest because the founder 10% is crowding out equity that could otherwise be used to attract key performers down the line.

Nah, they can just issue more. He's already giving up 40% -- plenty of head room.

I'm not saying I agree with the concern, I'm just articulating what it is. I think the answer here is super simple: walk away with the 10% vested. (Also: stop thinking in terms of %).

Re: Co-founder exiting after pivot – what's a fair exit package?

#39

Post by tptacek »

vessenes wrote: post #11

Some good advice here; couple qs: did you get shares for your personal capital contribution? Simplest thing to do if you think it will work and don't need money is just sit on your vested shares, perhaps ask for a little more as an exit package, be supportive, offer to join the board as an advisor, and move on. If you'd like a clean break and some cash, you could call your last round investors and offer them a discou…

I agree with Joel Spolsky that nobody should get shares for personal capital contributions (at least, not unless they're investing in a round). If you want to be fastidious, set up IOUs.

Re: Co-founder exiting after pivot – what's a fair exit package?

#40

Post by throwpoaster »

throwaway-xx wrote: post #7
agcat wrote: post #6

Went through a similar scenario a few years ago, similar valuation range and stage. The person was nice, so we amicably decided to settle at around 3% sweat equity.

interesting, i might end up doing something similar. if you don't mind me asking, how much did you sell the remainder of your shares for? was it close to your FMV? i feel like i'm already being negotiated hard by being forced to sell my equity to minimize dead equity and then instead of selling at the 409A valuation, being sold at the FMV seems like i'm losing another battle. thoughts?

Oh, also: if you feel like you're being forced to do anything, or negotiated hard against at all, or losing battles, just lawyer up. Depending on your jurisdiction you could start saying things like, "I dunno, sounds like oppression -- let's just do what's best for the company here".
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