My (non-technical) co-founder spent $10k to create the initial website over a year ago with the idea. I joined about 11 months ago and since then the idea has changed a bit, we've built loads of products, grown from 2k users to 60k users and continuing to grow due to dominating SEO for our niche.
Recently my co-founder said they wanted to work on it themselves. I said I didn't want to leave. They suggested I go down to 3% equity and they continue. I said they would need to buy out my equity at a fair price.
My co-founder doesn't have the money, and the business only has around $40k cash in the bank right now. My co-founder also won't entertain the idea of raising external money to buy me out, or monetizing the site right now.
To me this seems ridiculous as I'm literally just giving away my equity after spending 11 months building the tech and growing the business. Right now if we stuck adsense on the site, we'd generate $5k/mo, and we have inbound sales leads looking to spend upwards of $40k with us. Basically, the business is primed to make money.
They will not entertain the idea of me buying them out for cash.
What are my options here? It's basically being presented to me as "Take the 3% otherwise you'll own 40% of nothing". I don't really want any equity in the company at this point if I'm not involved.
You said it yourself, you've grown hugely, you're dominating SEO since you joined, and built loads of products. This is your 'partner' getting greedy after you've done a lot of hard work. It wouldn't have happened without you. Don't undersell yourself.
Your 40% is worth $400k based on that initial funding valuation, right? Assuming it's as successful as you seem to be implying, it is almost certainly worth more now.
Everyone is telling you to roll over but seriously, fuck them. This other toxic guy is the one who should be getting pushed out, not you.
The other investor ultimately has power in this situation, not you or him, so whoever convinces them that they are the person to go with gets the seat and gets to continue with the project.
If he has a good relationship there you're probably fucked, but results matter... and if you can prove you've done great stuff since joining and and have great plans for the future, he can be replaced.
To be clear: this guy has decided to blow up the project so he can get a bigger share, if it all fails now he can only blame himself.
Go scorched earth - what do you have to lose? Know the other guy is hostile and don't trust them to do the right thing. Consider your options outside of that and talk it over with the other investor.
If you're the technical cofounder here you're probably in a stronger position to negotiate.
If you can get the other investor to see what's happening here (your cofounder pushing you out one month before the cliff after you've helped to build things up) you may be able to get them on your side.
As I see it without knowing details:
- Either your contributions are real and your cofounder is a miserable person trying to screw you out of it and risking the company in order to do that.
- Or you haven't done anything substantial and the cofounder wants you out. Even in this case it's still wrong of them to do this one month before vesting (and the way they're approaching it sounds dishonest, they should be direct).
If it's truly the former I think getting the third investor to understand this is key, if the non-technical cofounder is risking the entire business at this stage they're going to be bad going forward - you probably need to get rid of them.
If it's the latter (which seems unlikely since the other cofounder is non-technical) you'll still want to negotiate a reasonable exit, but it may be harder to do so (and you'll probably need a lawyer).
Instead, I would have an open, honest conversation, listen from a place of empathy and generosity and seek a compromise.
The truth is, unless your cofounder has the right to terminate your employment, then continue working and try to create as much harmony as possible.
Co-founder disputes are awful and usually result in the death of the company. But being aggressive will only speed up the Demise not prevent it, and if the company implodes that equity is worth nothing anyway.
If things roll your way, maybe you resurrect the business later buying its assets out of bankruptcy. Either way, think lazy; this looks like a scam for your time; the more you put into it at any price, the worse off you are.
One quibble. That is typically not how it works, since his shares are likely common stock and investors get preferred stock. In my experience, the range of value for common stock in private firms varies widely, but it is never one to one with preferred stock (the golden rule being, of course, "who has the money makes the rules").
I have seen values ranging from 10% to 30% of the preferred stock price. Now, of course, I only have a few data points, so ymmv, but founders shouldn't delude themselves that their sweat equity is valued the same as preferred stock.
Honestly, if non-technical thought he could fire this guy, he probably would have already. That's why TCF is being bullied into resigning.
What is non-technical going to tell the investors when he fires the guy who keeps everything running, built everything, and did all the SEO?
Think of it this way, take the deal and you get 3% of nothing because it'll get driven into the ground.
Don't take the deal and either you keep working on it, and get 40+% of something decent, or you get N% of nothing because other guy drives it into the ground but you got a better buyout.
There's very little downside for TCF in actually sticking to his guns, and it's not like he's going to look like the asshole here.
Note the “reverse vesting” bit, this caught me out too. This is not the standard employee “you have zero until your 1yr cliff” deal, it’s the opposite in some sense, the founders own their shares unless they leave, in which case they are clawed back, and the clawed back amount goes by the 4yr period.
In this case if the investor has voting rights, neither founder has a controlling share, and the investor is the tiebreaker. So OP can fire the other founder with the investor’s vote.
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I would request OP to assume good intent and ask the following question.
> What are you giving me in return of my 40% of the stock ? Why is that a fair price ?
I do not know, but it is perfectly possible that the other person might have a good answer. If you have already made up your plan you guys can agree on some kind of plan where you divest your stock over a period in one way to another.
I have a suspicion that the other co-founder probably does not want OP around for whatever reason. But OP can help him by simply taking a break while keeping the stock.
Don't fall for the 40% of nothing once you are close of making money. They just don't want to share the pie.
Value to a founder does not imply value to the market.
https://www.mwl-law.com/wp-content/uploads/2018/02/RECORDING...
- If OP keeps 40% and doesn't do work for the company, the company is highly unlikely to succeed. The company needs to be able to dish out equity to future employees and likely investors to succeed, and having 40% locked up in an entity that doesn't do anything for the company is not going to be attractive to those future participants.
- If OP keeps any equity, they should be doing it with the hope that the company succeeds, so that the equity will be worth something. Don't keep equity to spite your co-founder. It's not going to benefit you in any way if that causes the company to fail and your equity ends up being worth $0.
- If OP wants a fully cash deal, it's not realistic if the other co-founder doesn't have a ton of personal cash (most don't). Raising a round to buy out a co-founder at 40% of valuation isn't something ANY investor is going to want to do. That's almost half of an investment thrown in the trash, from their perspective, and they'd probably rather invest in a less complicated competitor.
- It sounds like the human relationship between OP and co-founder is broken and it is not worth pursuing working together, as that alone would likely lead to the failure of the company even if everything else works out.
That said, my thoughts would be:
(a) Stall for a month to get to the cliff so you have slightly more leverage.
(b) Work out a deal where you're not keeping that much equity, but you're keeping an amount such that the company is still bound for success, and that your smaller amount will actually be worth something. Owning 40% of $0 is still $0. Owning maybe 5% of $1 billion is something.
Most important here, I think, is to act in polite and professional manner. It is not uncommon in these situations for everyone to lose because things get personal. Just try to find some kind of deal where you are likely to get some value.
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Dilution of the sort you seem to be describing would expose the founder and investor to a minority oppression lawsuit from OP which could result in monetary damages, and/or the forced sale of all or part of the company at a price determined by the court.
You can't just dilute people without there being any consequences, unless the new shares are being sold at a justifiable price and at an arm's length. The attempts made so far by the founder to push out the OP would color any future dilution, making it harder to justify that dilution in court, even if on the surface it appears legitimate.
If the shares are not sold to a third-party arms-length investor, OP would have to be given the opportunity to participate in the share issuance on a proportional basis. If the founder and investor conspire to issue shares to themselves with the sole purpose of diluting OP, not only would that dilution possibly be reversed in court, but further sanctions could be imposed on the founder and investor as well.
In 1 month, you've vested 25% of your grant, or 10% of the company. So I would try to get to that mark to strengthen your negotiating position. Any references to 40% are red herrings at this point.
Unless there's a specific buyback clause in your stakeholder agreement, they're under no obligation to buy you out at any time. (They may have the right to do so. That's not uncommon.)
Of course, you're under no obligation to resign, either. So this is a negotiation.
So the way I see it, you have a few options:
1. You take your 10% and leave. You "don't want any equity", but better something you don't want than nothing.
2. You agree to a buyback, potentially at a discount to FMV. If you don't know what FMV is, it's hard to negotiate one way or another. It's v. likely not $1M. Sounds like this is a no-go.
2B. You agree to a non-cash buyback, e.g., in IP. You spent 11 months building the tech: what if you took that with you?
3. You flip the script and buy your co-founder out.
In any case, your relationship is over. You might walk away with nothing.
(a) You need a lawyer who deals with this kind of stuff regularly and has a realistic and well-informed view of what the outcomes are going to be. Most lawyers aren't like this.
(b) Legal gets expensive very fast, especially as it transitions from advice to negotiation and document review. At this scale of opportunity (the way the company is described), I'd stick to get getting advice!
(c) Past the "can I be fired" question, which I agree is urgent (and probably predictable), a lot of the negotiation here isn't going to be about the law so much as it's going to be about what both sides are willing to accept. If you have friends who have been in founder disputes like this, their input is going to be just as valuable as the lawyer's.
Another way to look at it: their sweat equity is more like $1 million e.g. $100k “time” invested with a risk of success of 1 in 10 means you need to get $1 million out to be “even” (ignoring Kelly Criterion).
Obviously there is some Bayesian that goes on now that there is more information, but it seems like it has a better chance of success than when it started, which makes numbers more difficult to calculate than complete failure ($0).
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Walk away. It's not fair, but starting a company isn't like getting a job. It's a relationship and a risk that doesn't always work out. Sometimes you find more money and success than you could ever dream of, and other times you waste 11 months.
Here's my thought process. You and your cofounder aren't going to be able to work together after this. The company has no money and no value, so you're trying to get your portion of something that doesn't exist. Them raising money to pay you just kills their chance at ever being successful... plus, who would give a company money just to pay someone out? Same goes for accelerating vesting on the 40%... there's no way they can build a company when someone not involved owns a huge stake.
You could spend time and money trying to right this injustice. And yeah, it is an injustice. But the worst thing you can do is tie your identity to this. There's not much upside to fighting it; all you'll do is spend more time, money and energy you could be using to start something new.
I've had this happen to me before, so I completely understand what it's like. You feel helpless and shitty and like you wasted a ton of time. Rather, do your best to put it behind you, and focus on what benefits you got out of it.
Did you learn about a new space that will make you extra valuable to another company? Even just having a founder mentality will raise your value to a startup. Did you learn things you would do differently? You can start another company, and do it better this time.
I know it sucks. But I'm 99% confident you won't get anything out of this, so it's best to just walk away. It's cheesy, but "success is the best revenge." Your relationship with this company failed, but you haven't. Don't tie your personal journey to this one company.
Good luck, and my emails in my profile if you want to talk!
(Also, a few years ago I wrote about going through it: https://medium.com/@gkoberger/five-years-time-6a6ae1157a66)
No cash upfront, equity is somewhat preserved and the rest becomes a source of potentially passive income.
Note. He has to leave. The situation is now untenable.
Meanwhile, at most the company can generate $5K a month in revenues. That’s not a business, that’s a part time job with a partner you cannot trust.
Also, seen from the other side: They made a contract offering 40% in four years (conditionally) - most importantly only relevant when the company/idea survive that long and are thus profitable/worth something. Why should they suddenly pay this (or a meaningful fraction?) out after one year? Or give an "outsider" 40%, which will most certainly be difficult to explain to future investors?
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The obvious answers are
- they are a jerk to work with and they won't admit it - you are a jerk to work with and they won't tell you - something else
If it's something else and there is real money at stake both of you should be able to work something out.
Otherwise it's one of the first two - which is much harder to deal with
Also, I don't know for sure, but I imagine they know the reason (even if they don't agree with it).
Wasting 3 years is not worth the time. The Op should eject and focus on building something else or the same thing with a new co-founder.
And I think that is also the best option. Just mentally evaluate the ROI of this project to zero, and try to focus on something else now. With startups you got to get used to the fact that failures and misinvestments happen.
>Same goes for giving you the 40%... there's no way they can build a company when someone not involved owns a huge stake.
This actually happened to one of my professors, which represents the opposite end of the absurdity. He started the company with a friend. The company pivoted to a completely different direction and the friend left because it was outside his expertise. My professor wanted to "do the right thing" and preserve their friendship, so he let the friend keep all the equity. In the end, the friend ended up getting millions of dollars despite producing 0 value to the company.
There has to be some middle ground here, like offering options to the company to buy back OP's shares at the current valuation plus interest. If company still can't afford a buyback a few years later, then they didn't grow the company enough to deserve to own those shares anyways.
So what the industry has mostly converged on is a pretty basic, simple-to-understand solution that has a small enough number of dials that people can work it. It covers the main outcomes reasonably well if people are not too terrible. And if people are terrible, well, no mechanism is really enough.
In the early phase of a startup it quite often happens that equity is given on very relaxed way on good terms. For example someone can work only short time in the company and still get nice piece of equity, just because other founders are lazy or careless.
A lot related to startups is "play stupid games, win stupid prizes". Sometimes you can get lot of equity & money if you just happen to be in the right place at the right time. Other times you end up working a lot and get nothing.
Maybe his cofounders threat that it’s 3% or nothing is bluffing. It doesn’t really make sense for his cofounder, because that guy maybe is in the same situation if OPs contract is favorable. Maybe It’s 40% or nothing for him.
The only acceptable advice here is to go talk to a lawyer. That’s it. Internet advice about things like this is always bad even when it is meant well
What's the best case scenario they could get out of it? Maybe 6% equity, or maybe a $10k severance. But going after a company with no revenue and only $40k in the bank doesn't really seem like the best use of anyone's time, energy or money.
There's minimal available short-term value, and litigation/fighting will sharply blunt any potential long-term value.
Even if it's telling you to get a lawyer?
The difference this time is they is more knowledge, clearer path and knowledge of what a competitor is doing. Consider it draft 2..if that's a direction you want to go.
> there's no way they can build a company when someone not involved owns a huge stake.
So what? That sounds like their problem, not his.
> But I'm 99% confident you won't get anything out of this, so it's best to just walk away.
Possibly. But is that is the case, why not just keep the 40%? He's got nothing to loose. So in that case, there is no need to give in to someone else being unreasonable.
He's on a vesting schedule, and currently has 0% (his cofounder also has 0% currently, assuming they started at the sam time). They both entered this agreement to only get ~40% if they work there for 4 years (and at that point, they'll likely have to revest).
Vesting schedules were created for this exact situation.
But knowing what we know, what's the best case scenario for the OP? Even if he's 100% right and the cofounder is the worst human being on the planet, what's ultimately the best outcome they'll get out of a startup with $0 revenue, maybe a potential $60k ARR with ads (but maybe not), and has $40k in the bank?
I get the impression this is all happening because things are going badly, not because things are really about to take off.
My point is that it may really really suck, but I just don't see a path, even if everything goes perfectly, where the net gain is worth it.
having said that, you can walk away. and still piss on their cake.
but this a toxic partner. you cannot work with them. that's for certain. you will have to walk away.
This is very unsound and simp like advice. He has built it. If anyone walks away it is the other guy and not him
You literally have nothing to lose by just waiting for the equity to vest and keeping your 40%. Fuck the co-founder. Fuck 3%.
Worst case you end up with 40% of nothing. Walking away you end up with 0% of nothing. If you don't stand up for your equity no one will. And if you let him get away with this, down the line he'll do the same shit to someone else. Stop this guy now in his tracks, don't let him swindle you and everyone else.
Don't be an idiot.
It could happen! They might reasonably spend $400-$500 figuring that out.
It's honestly a terrible situation
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I can't imagine (but would be very impressed with tech co-founder) if a year old system could run without any maintenance for a month. Seems also unlikely that tech co-founder could be replaced fast enough to continue reliable service seamlessly. I don't think non-tech co-founder realizes that if tech disappears, it will kill the baby.
Because this is the professional equivalent of shitting in your hand and throwing it at the wall?
The fact that an adult would suggest abdicating any professionalism and just letting a site with 60k users and investment backing start to break to prove a point is astounding.
These responses, my word.
To others in this thread, if you're looking to join a startup as a technical co-founder like this, 'We have very standard shareholder agreements for 4yr reverse vesting with 1yr cliff.' is not standard in the same way it is for other early employees. In this situation, your equity should be in real shares from the get-go, not options that vest over time. You should also have a partnership agreement or similar document that outlines how board-level decisions are made, and for a business with a few mostly-equal owners, such decisions should typically require consensus of the owners, even if one person controlls 51+% of the equity. This is the most reliable way to protect your interest in the business, and this is what true co-founder status looks like. If the O.P. had asked for this before signing on, my guess is that the co-founder would have balked, and the O.P. would have known from the get-go what the dynamics would be, and could have walked or insisted on a higher salary to reflect the fact that he's being treated like an employee not a business partner.
I also agree that the 1-year cliff is absolutely not standard for founders. Last time I did it, I had a 4-year reverse vest with no cliff at all.
The OP said reverse vesting. Doesn't that mean he does own all his shares now? The company just has the right to buy them back if he leaves (and the cliff is when the percentage they can buy back starts decreasing from 100%).
disagree. If the OP didn't already have this standard type of cofounder arrangement, the other guy wouldn't be asking him to leave. He'd be telling him.
yes but -- have spoken to founders raising large rounds pre-revenue who do have this deal. Their stock is the same as employee stock.
Reading between the lines, I suspect fourtydegrees is young and doesn't have the kind of money to do this.
(I also suspect that lawyers may be out of fourtydegrees' budget.)
The investor so far has also been very neutral and I think will remain so.
You have very little to lose by digging in and waiting for your co-founder to fold. If your co-founder has done this at this point of the business where the stakes are so low, they will absolutely try to screw you out of the 3% through other nefarious means.
It sucks that a single founder can tank a promising startup, but that's how it goes (unless you've already got a shotgun clause or equivalent in your shareholder agreements).