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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?

#71

Post by tptacek »

vessenes wrote: post #69
tptacek wrote: post #39

Earlier quoted context omitted.

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.

I'm 100% the opposite. It's wrong for one group to expect preferred stock for their capital contributions, while they ask the usually less experienced CEO to make a tacit capital contribution (lower than market salary) and then on top to ask them to put cash in that won't be given the same terms -- nah. Now, if the founder capital went in pre-round, and a round was raised, I'm with you -- that's fine - and between th…

We're talking about arrangements between founders, not arrangements between operators and investors. Investors don't ask you to put up cash; that is literally the opposite of what they do.

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

#72

Post by agcat »

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?

Yes, so i had another cofounder join in, with the previous cofounder exit, so first we sold the shares to the new cofounder at FMV and the company returned the sweat equity to him at FMV. Honestly, the best thing is to get a lawyer who has done these transactions before and once you have amicably communicated let the lawyer take this up, it will drain your energy otherwise.

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

#73

Post by takklz »

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?

Isn’t the 409a valuation FMV? I thought that the whole point of the 409a valuation was to find FMV? Do you mean par value?

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

#75

Post by throwpoaster »

tptacek wrote: post #70
throwpoaster wrote: post #68

Earlier quoted context omitted.

> 'Selling your board seat' really means engineering a complex deal that requires a bunch of other people to sign off. The company is at (pre-)seed, so the next round is this exactly: they're probably rewriting the shareholder agreement, for example. I wouldn't call it more "complex" any other round.

A startup that has a board is a company you can't sell a board seat at. This is past silly. Despite what you wrote earlier, "holding on to and selling" board seats is not a thing.

You're simply wrong, I have done deals like this. You are clearly quite upset about something, and are not providing a clear argument -- relying instead on personal attacks and "no true Scotsman" goal post shifting.

Good luck to you, all the best!

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

#76

Post by throwaway-xx »

zanone wrote: post #74

Have been in that situation. If you leave, you're done. It's up to the other co-founders if they want to throw you a bone to keep a relationship in place. The leaver is dead to the board and the investors. It's your business now, move on.

is it tho? like i agree if i just took the equity. but if i own a ton of equity and the board wants to clean up the cap table, don't they still need to deal with me by offering me a fair number instead of "just moving own"?

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

#77

Post by tptacek »

throwpoaster wrote: post #75
tptacek wrote: post #70

Earlier quoted context omitted.

A startup that has a board is a company you can't sell a board seat at. This is past silly. Despite what you wrote earlier, "holding on to and selling" board seats is not a thing.

You're simply wrong, I have done deals like this. You are clearly quite upset about something, and are not providing a clear argument -- relying instead on personal attacks and "no true Scotsman" goal post shifting. Good luck to you, all the best!

I have no idea who you are and there's nothing personal about any of this, but I am concerned that people are going to read this and come away with the idea that departing founders with board seats generally sell them, and when they try that, everybody is going to look at them like they're both naive and irrational --- exactly what the original poster said they were trying to avoid.

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

#78

Post by zanone »

throwaway-xx wrote: post #76
zanone wrote: post #74

Have been in that situation. If you leave, you're done. It's up to the other co-founders if they want to throw you a bone to keep a relationship in place. The leaver is dead to the board and the investors. It's your business now, move on.

is it tho? like i agree if i just took the equity. but if i own a ton of equity and the board wants to clean up the cap table, don't they still need to deal with me by offering me a fair number instead of "just moving own"?

Not sure they need to do anything. Maybe in the interest of smooth sailing, and closing things off, then the board might be motivated to reach a mutually acceptable conclusion. Whether this be a little buyout, an advisor tie-in, etc, completely depends. Situations like this is why founders create equity agreements.

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

#79

Post by vessenes »

tptacek wrote: post #71
vessenes wrote: post #69

Earlier quoted context omitted.

I'm 100% the opposite. It's wrong for one group to expect preferred stock for their capital contributions, while they ask the usually less experienced CEO to make a tacit capital contribution (lower than market salary) and then on top to ask them to put cash in that won't be given the same terms -- nah. Now, if the founder capital went in pre-round, and a round was raised, I'm with you -- that's fine - and between th…

We're talking about arrangements between founders, not arrangements between operators and investors. Investors don't ask you to put up cash; that is literally the opposite of what they do.

Actually they do it all the time - asking to ‘top up’ employee stock option pools before a round is closed, keeping exec salaries low, or cutting them when the company is running low on money - these are all forms of founder capital contribution that are not compensated. I’m not saying they’re not market, or even that they’re a bad idea. But, consider an exec who could make $300k base plus ISOs at a public company going from $170k to $100k for lean times — what would raising that 70k cost the company in stock? A fully level capital stock playing field would see the 70k investment from the founder independently priced in a fair round and deliver preferred stock. I’m unaware of this ever happening in my last 25 years of startup and venture experience.

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

#80

Post by jrlee »

As someone who had a co-founder exit 3 years into our 8-year journey, here's my take: keeping your full 10% might actually hurt everyone involved, including you.

Think about it from the new investors' perspective. They see a former founder holding 10% who left because they didn't believe in the new direction. That's a red flag. They'll either demand you reduce it significantly or they might just pass on the deal entirely. I've seen this kill funding rounds.

More importantly, it can destroy motivation for the team staying behind. They're busting their ass on the pivot while someone who checked out still owns 10%? That breeds resentment fast.

My suggestion: voluntarily reduce your equity to something like 2-3%. Shows good faith, removes the investor concern, and keeps the team motivated. In exchange, ask for a reasonable cash package - especially if you've been working unpaid or below market for months. That's just settling up what's owed, not "taking money from the company."

When my co-founder left, he went from 26% to 3%. Seemed harsh at the time, but it let us move forward clean. We raised our next round 3 months later partly because investors saw we handled the transition professionally.

The cash part really depends on your financial sacrifice. If you've been unpaid for 6 months while getting the company to this point, then yeah, getting compensated for that makes sense. It's not about "exit package" - it's about getting paid for work already done.

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