Ask HN: Co-founder leaving a startup for free without equity?
169 comments
Before you start, create a plan to stop
My #1 rule for ventures, especially with friends, is to create an “ejection seat plan” at the beginning. The ejection seat is designed to save friendships and prevent teams from holding on to ideas too long.
Write down a list of milestones that must be achieved in 1, 2, 3, and then every 3 months up to 48 months. Agree that either partner can choose to eject without blame whenever the milestones aren’t met. Agree how much equity will be retained in the event of ejection. Follow the plan.
I credit five inspirations for the ejection seat plan. (1) Tim Ferris’ “dreamline” concept from 4HWW, (2) news stories about “golden parachutes”, (3) my friends who learned this with me the hard way because we didn’t do it, (4) the Stripe Atlas guide to founders equity, (5) my friend who helped me validate that it can work.
My #1 rule for ventures, especially with friends, is to create an “ejection seat plan” at the beginning. The ejection seat is designed to save friendships and prevent teams from holding on to ideas too long.
Write down a list of milestones that must be achieved in 1, 2, 3, and then every 3 months up to 48 months. Agree that either partner can choose to eject without blame whenever the milestones aren’t met. Agree how much equity will be retained in the event of ejection. Follow the plan.
I credit five inspirations for the ejection seat plan. (1) Tim Ferris’ “dreamline” concept from 4HWW, (2) news stories about “golden parachutes”, (3) my friends who learned this with me the hard way because we didn’t do it, (4) the Stripe Atlas guide to founders equity, (5) my friend who helped me validate that it can work.
In the OP situation, where this was not done up front, I encourage you both to read the Stripe Atlas guide to founders equity to ground yourselves in accepted practice and then to have a discussion about what to do.
Edit (to add this link): https://stripe.com/atlas/guides/equity
Edit (to add this link): https://stripe.com/atlas/guides/equity
I think the ejection plan is also really good in romantic relationships.
If we are committing to each other, what does it look like if one of us decides we don’t want commitment?
Do we agree to do couples therapy for a X number of months where X is an agreed upon ratio of time spent together?
If we are committing to each other, what does it look like if one of us decides we don’t want commitment?
Do we agree to do couples therapy for a X number of months where X is an agreed upon ratio of time spent together?
That's, kind of, a prenuptial agreement. However, these are frequently contested in court. The ejection plan probably will have the same issue. A contract is only as good as your ability to defend it in the court. And if it costs more to defend it than to pay the person off...
I meant more for the emotional side of things.
I really do think an ability to agree to a process you’d go through if you are wanting to leave could be useful.
I really do think an ability to agree to a process you’d go through if you are wanting to leave could be useful.
I’ve written similar things before here, but what I would say is there’s a very small chance that you will lose some huge fortune by just walking away with nothing.
On the other hand, the emotional distress, distraction, and destruction of personal relationship(s) that can happen from arguing over this sort of thing is tremendous.
Your cofounder probably feels emotions surrounding you leaving. You probably do too.
That emotional context colors the conversation, and you both currently value everything you contributed so far in that context.
I would strongly urge you to consider prioritizing an amicable parting of ways over other considerations.
When you look back years later you probably will realize you were negotiating over such minor things, while risking the truly important stuff, like your personal energy.
On the other hand, the emotional distress, distraction, and destruction of personal relationship(s) that can happen from arguing over this sort of thing is tremendous.
Your cofounder probably feels emotions surrounding you leaving. You probably do too.
That emotional context colors the conversation, and you both currently value everything you contributed so far in that context.
I would strongly urge you to consider prioritizing an amicable parting of ways over other considerations.
When you look back years later you probably will realize you were negotiating over such minor things, while risking the truly important stuff, like your personal energy.
Thank you. I've hoped to resolve this peacefully and I plan to continue along that way. I'm pretty short on money right now, so getting couple thousands for a buyout or as a share of the sale of the company/source code is pretty significant for me and missing on it would be a real blow for all that work.
I cashed out of my private company a few years back. Advice that me & my partner got was that I should leave with no equity, as any ownership stake I retained would feel like there was still a business relationship where I had a say. The deal my partner worked out for a sale was a fixed price of X. 25% of the sale price of immediately, and the rest was worked out as a deal where I'd be paid out over 18 months. It worked great. Lawyers and tax people helped with the legalese and taxes.
Thank you, the thing with scheduling payments over some sounds good to me, I'll try to propose it to Jim
A couple tips:
- After negotiating a ballpark sale price, I was advised to get an attorney, and that was excellent advice. The attorney cost 10K or 20K, and it was worth every penny. My partner trusted each other enough to share an attorney we had worked with previously. I trusted the attorney to work with both sides, even though the attorney was probably representing the business more than myself.
- Any exit plan that involves deferred compensation should be crystal clear, and I encourage you to focus on discreet payments that do not require you audit the company's finances, as it's a lot easier for both sides if the only thing you have to do is cash a check (e.g. you receive a fixed payment of X regardless of how well the company does, and avoid things like you get X% of sales over a certain period)
- just keep in mind that you and your partner will likely have wildly different ideas about the company valuation
- one option you can consider is staying with the company and offering to buy out your partner. My partner was the one who originally wanted to exit, but she ended up buying me out, and it worked well for both of us!
- be nice (or at least civil) throughout the process, as breaking up will be hard, and you need trust to be preserved to feel good that any deferred payments are likely to happen. Also, you might wanna work with each other again in the future.
- don't negotiate an exit payment so high that the business might not be able to pay it
- After negotiating a ballpark sale price, I was advised to get an attorney, and that was excellent advice. The attorney cost 10K or 20K, and it was worth every penny. My partner trusted each other enough to share an attorney we had worked with previously. I trusted the attorney to work with both sides, even though the attorney was probably representing the business more than myself.
- Any exit plan that involves deferred compensation should be crystal clear, and I encourage you to focus on discreet payments that do not require you audit the company's finances, as it's a lot easier for both sides if the only thing you have to do is cash a check (e.g. you receive a fixed payment of X regardless of how well the company does, and avoid things like you get X% of sales over a certain period)
- just keep in mind that you and your partner will likely have wildly different ideas about the company valuation
- one option you can consider is staying with the company and offering to buy out your partner. My partner was the one who originally wanted to exit, but she ended up buying me out, and it worked well for both of us!
- be nice (or at least civil) throughout the process, as breaking up will be hard, and you need trust to be preserved to feel good that any deferred payments are likely to happen. Also, you might wanna work with each other again in the future.
- don't negotiate an exit payment so high that the business might not be able to pay it
Thanks! I don't have money now to afford a lawyer, and even if I did, it's possible that I'd pay more for a lawyer than potentially get in cash or equity
Jim would never leave me the company and frankly, I have no interest to stay even without him
Jim would never leave me the company and frankly, I have no interest to stay even without him
I don't know what kind of money you're thinking of (you mentioned a couple thousand dollars), if the sum is relatively small - eg $3,000 or less - I would not schedule payments over time. Try to get the partner to pay you out immediately and walk. If it's a larger sum, it might make sense to schedule it into payments (particularly if it means a consequentially larger payout). The ideal is to have no outstanding agreements whatsoever between you and Jim. Next week or next month when the app fails (or xyz happens), he might decide he doesn't think you're owed the rest of the payout because of said failure ('but the thing no longer exists, I am not paying for something that failed!'). It's a lot of bullshit for $3,000 in regards to a contract and payments over time. If he decides to stop paying for any reason, now you have to consider suing him, which is a lot to go through for $1,000 or $2,000 or whatever is remaining (more likely the balance is lost at that point).
Right now Jim probably thinks there is serious value in the app. The odds are overwhelming that isn't true. While he believes that, your likelihood of getting paid are dramatically higher, so again go for the 100% immediate payout if you can.
Right now Jim probably thinks there is serious value in the app. The odds are overwhelming that isn't true. While he believes that, your likelihood of getting paid are dramatically higher, so again go for the 100% immediate payout if you can.
Thank you, good point. I'll try to get as much upfront as possible
For context, my payout was $200K USD. Small enough that the business could swallow the cost and pay out of savings and cash flow (50K upfront, and 150K deferred).
>I'm pretty short on money right now, so getting couple thousands for a buyout
For two years of fulltime work or are we misunderstanding?
You own 40% of this company without encumbrance and you have it in writing in an official corporate registration document filed with your government, correct. If this company is worth anything at all your 40% is worth vastly more than a couple thousand. You could sell your rights to a third party.
Also, everything the partner did, and which you did, as a registered legal partner, is owned by the company. Not by him, not by you. The company. He can not claim it is his and take it elsewhere. That would be illegal. You own 40% of the value of the software code, just as he owns 60% of the work you did.
All the endemic downvoters here should explain why for two years of full time work that brought this company to the point where it can be sold by a cofounder is only worth at most $2000 total and you yourselves (state your legal name) would be happy yourselves with the deal you are pushing to this guy.
For two years of fulltime work or are we misunderstanding?
You own 40% of this company without encumbrance and you have it in writing in an official corporate registration document filed with your government, correct. If this company is worth anything at all your 40% is worth vastly more than a couple thousand. You could sell your rights to a third party.
Also, everything the partner did, and which you did, as a registered legal partner, is owned by the company. Not by him, not by you. The company. He can not claim it is his and take it elsewhere. That would be illegal. You own 40% of the value of the software code, just as he owns 60% of the work you did.
All the endemic downvoters here should explain why for two years of full time work that brought this company to the point where it can be sold by a cofounder is only worth at most $2000 total and you yourselves (state your legal name) would be happy yourselves with the deal you are pushing to this guy.
Then maybe start there!
Something like (obviously don’t use these exact words) “Hey Jim, I know it’s a drag that I’m leaving the company like this. I’m sad I have to go too. I know it’s messy if I retain equity, but is there any way you could pay me a buyout to reflect some portion of the hours I’ve put in so far? I’m pretty broke and it would make a huge difference.”
Then if Jim honestly feels that is fair, and he (very big consideration) feels like he can actually afford it, he might just do that.
The number, in that case, will probably be lower than you imagine. Because everyone tends to value their time highly and other people’s time less so.
But it would sidestep any fighting, and Jim will feel less resentment because it was genuinely his choice.
Or he will say absolutely no. But again that’s what you’re likely to get no matter how much you fight, the only difference being the damage done by fighting.
And in either event, whatever Jim does, you can focus your mind on your next thing in life.
Edit: Because remember, starting a company always had the risk you would work a whole bunch and end up with nothing to show for it.
Something like (obviously don’t use these exact words) “Hey Jim, I know it’s a drag that I’m leaving the company like this. I’m sad I have to go too. I know it’s messy if I retain equity, but is there any way you could pay me a buyout to reflect some portion of the hours I’ve put in so far? I’m pretty broke and it would make a huge difference.”
Then if Jim honestly feels that is fair, and he (very big consideration) feels like he can actually afford it, he might just do that.
The number, in that case, will probably be lower than you imagine. Because everyone tends to value their time highly and other people’s time less so.
But it would sidestep any fighting, and Jim will feel less resentment because it was genuinely his choice.
Or he will say absolutely no. But again that’s what you’re likely to get no matter how much you fight, the only difference being the damage done by fighting.
And in either event, whatever Jim does, you can focus your mind on your next thing in life.
Edit: Because remember, starting a company always had the risk you would work a whole bunch and end up with nothing to show for it.
Right, thanks!
Walking away enables you to drop the rock. I don’t mean to gloss over the value of your contribution. But it seems you have done the cost to benefit analysis and have decided to move on. You’re saying additional risk is not worth it. Or in your estimation the company is not worth your continued efforts, aka worth $0 to you.
Either find some consulting work and work something out with Jim to stay in the game, or cede all the risk and reward to him. Building a company isn’t for wimps. My apologies for my brutality, but I’m actually in your position and see it from my Jim’s perspective.
Either find some consulting work and work something out with Jim to stay in the game, or cede all the risk and reward to him. Building a company isn’t for wimps. My apologies for my brutality, but I’m actually in your position and see it from my Jim’s perspective.
First, Read "venture deals" by Brad Feld
Then understand that what both of you should have done is 4 years vesting with 12-month cliff.
With that come to an agreement that since you did two years, you should keep only half of your equity (20%), freeing up the remaining 20% so Jim can acquire better talent.
Long version (Excerpt from a post I wrote):
"These are the legal concepts you can use to protect founders from each other, the company from the founders and founders from a hostile board.
Let's run an Example assuming I'll be your co-founder and the company will grant me 48,000 shares for each of the legal concepts (The number 48,000 was chosen to simply math but does not reflect typical number of shares per founder):
1. Cliff
• If founder stays less than 12 months, no equity.
Example: In this case I receive 0 of my 48,000 shares.
• After 12 months 25% of stock is instantly vested.
Example: In this case I receive 12,000 shares of my 48,000 shares.
2.Vesting
• After the cliff, founder vests 1/36th of granted stock each month.
Example: In this case I receive 1,000 shares a month, on top of my previously earned 12,000 shares after the cliff for a total of 48,000 shares over a total of four years. If I leave in month 24 my total number of shares is 24,000.
3. Acceleration Triggers
• Single trigger: all stock is vested upon change of control or sale of the company.
Example: Let's say Google buys our company in my month 24 of vesting, in order to prevent google from firing me right after the acquisition in order to stop my remaining 24,000 shares from vesting, all my shares accelerate are granted immediately, thus accelerating the vesting
• Double trigger: some stock is vested upon termination without just cause.
Example: This provides a dis-incentive from investors, the board, or a co-founder from firing me if I am not done vesting, in order to free up equity to hire a lot more other people, if I am fired and it's not due to committing a crime like fraud then I will earn some stock, normally 12 months, without having to remain at the company for 12 months."
Even longer version: https://www.linkedin.com/pulse/startup-survival-guide-recrui...
Then understand that what both of you should have done is 4 years vesting with 12-month cliff.
With that come to an agreement that since you did two years, you should keep only half of your equity (20%), freeing up the remaining 20% so Jim can acquire better talent.
Long version (Excerpt from a post I wrote):
"These are the legal concepts you can use to protect founders from each other, the company from the founders and founders from a hostile board.
Let's run an Example assuming I'll be your co-founder and the company will grant me 48,000 shares for each of the legal concepts (The number 48,000 was chosen to simply math but does not reflect typical number of shares per founder):
1. Cliff
• If founder stays less than 12 months, no equity.
Example: In this case I receive 0 of my 48,000 shares.
• After 12 months 25% of stock is instantly vested.
Example: In this case I receive 12,000 shares of my 48,000 shares.
2.Vesting
• After the cliff, founder vests 1/36th of granted stock each month.
Example: In this case I receive 1,000 shares a month, on top of my previously earned 12,000 shares after the cliff for a total of 48,000 shares over a total of four years. If I leave in month 24 my total number of shares is 24,000.
3. Acceleration Triggers
• Single trigger: all stock is vested upon change of control or sale of the company.
Example: Let's say Google buys our company in my month 24 of vesting, in order to prevent google from firing me right after the acquisition in order to stop my remaining 24,000 shares from vesting, all my shares accelerate are granted immediately, thus accelerating the vesting
• Double trigger: some stock is vested upon termination without just cause.
Example: This provides a dis-incentive from investors, the board, or a co-founder from firing me if I am not done vesting, in order to free up equity to hire a lot more other people, if I am fired and it's not due to committing a crime like fraud then I will earn some stock, normally 12 months, without having to remain at the company for 12 months."
Even longer version: https://www.linkedin.com/pulse/startup-survival-guide-recrui...
Thanks a lot for both the examples & a book tip. It was really a mistake that we didn't think about this earlier & I'll definitely have this put in place the next time I'm involved in a startup or other type of arrangement that could result in the problem I have now
This is the bog standard arrangement, please ask Jim if he will abide by that standard. If he doesn't agree, he's really acting in bad faith. There's not much you can do with a bad faith co-founder and no pre-existing arrangement.
Not to mention that Jim could be in a precarious position. OP retains all of their shares that were initially agreed upon so offering to retroactively do vesting helps Jim a bit.
However, since OPs cofounder paid out of pocket for the app, I'm not sure what the StartupInc actually owns. But that also means the possibility of piercing the corporate veil - which is also bad.
I'm not a lawyer, but I did have a startup where my cofounder gutted the company after trying to stage a coup - then created a very similar company. He'd signed all the NDAs, non-competes (these ARE enforceable, even in CA, with co-founders/execs) etc.
I never went after him.
Instead, I waited to see: would he be able to steal my idea, connections, and clients to be successful on his own. If so, I planned on getting my share through legal proceedings.
Short version, a few years later one of his 3 co-founders quit, a year later the other did, and now the company is gone.
I'll avoid giving OP advice based on my one story, but another poster made a good point: there is very little to be gained.
Legally, though, I believe that - short of creating a new corporate entity or watering down the stock (both possible, though they come with risks RE getting sued by OP) - OP will retain all of their shares.
Of course, being not a lawyer, there are likely major gaps in my understanding and OP should at least have a chat with one.
However, since OPs cofounder paid out of pocket for the app, I'm not sure what the StartupInc actually owns. But that also means the possibility of piercing the corporate veil - which is also bad.
I'm not a lawyer, but I did have a startup where my cofounder gutted the company after trying to stage a coup - then created a very similar company. He'd signed all the NDAs, non-competes (these ARE enforceable, even in CA, with co-founders/execs) etc.
I never went after him.
Instead, I waited to see: would he be able to steal my idea, connections, and clients to be successful on his own. If so, I planned on getting my share through legal proceedings.
Short version, a few years later one of his 3 co-founders quit, a year later the other did, and now the company is gone.
I'll avoid giving OP advice based on my one story, but another poster made a good point: there is very little to be gained.
Legally, though, I believe that - short of creating a new corporate entity or watering down the stock (both possible, though they come with risks RE getting sued by OP) - OP will retain all of their shares.
Of course, being not a lawyer, there are likely major gaps in my understanding and OP should at least have a chat with one.
[deleted]
I'll try, thanks a lot! :)
Very interesting. A couple of potential issues spring to mind, in my ignorance:
Does this mean that if a founder leaves immediately after 12 months, he will own 50% of the shares issued and it will be a further three years before he is back down to 25% (and his remaining co-founder up to 75%).
Also, if all goes well, the shares received towards the end of the four years could be worth a considerable sum, resulting in a large tax bill each month as they are received.
Does this mean that if a founder leaves immediately after 12 months, he will own 50% of the shares issued and it will be a further three years before he is back down to 25% (and his remaining co-founder up to 75%).
Also, if all goes well, the shares received towards the end of the four years could be worth a considerable sum, resulting in a large tax bill each month as they are received.
If you leave after 12 months and one day, you keep a quarter of your initial stock grant.
Assume the stock grant was 48,000 if you have after the day after you completed 12 months, you get to keep 12,000 shares not 24,000.
In terms of taxes, you have to file an “83b election” with the IRS to prevent being liable for “paper wealth” that’s not really cash
Technically you are granted all 48,000 shares at a nominal value like .00001 and the company has the automatic right to buy back the shares you do not vest at that same nominal value
Assume the stock grant was 48,000 if you have after the day after you completed 12 months, you get to keep 12,000 shares not 24,000.
In terms of taxes, you have to file an “83b election” with the IRS to prevent being liable for “paper wealth” that’s not really cash
Technically you are granted all 48,000 shares at a nominal value like .00001 and the company has the automatic right to buy back the shares you do not vest at that same nominal value
> Assume the stock grant was 48,000 if you have after the day after you completed 12 months, you get to keep 12,000 shares not 24,000.
I meant that if the other shareholder also only has 12,000 at that point, that's 50%.
> In terms of taxes, you have to file an “83b election” with the IRS to prevent being liable for “paper wealth” that’s not really cash.
> Technically you are granted all 48,000 shares at a nominal value like .00001 and the company has the automatic right to buy back the shares you do not vest at that same nominal value.
I see, and I guess that explains the first issue too.
I meant that if the other shareholder also only has 12,000 at that point, that's 50%.
> In terms of taxes, you have to file an “83b election” with the IRS to prevent being liable for “paper wealth” that’s not really cash.
> Technically you are granted all 48,000 shares at a nominal value like .00001 and the company has the automatic right to buy back the shares you do not vest at that same nominal value.
I see, and I guess that explains the first issue too.
Stupid question, but if you straight-up own 40% with none of the usual options/vesting stuff, then can’t you just tell Jim to go stuff it until he comes up with an offer to buy that 40% back that sounds reasonable to you?
You came together a couple years ago with a plan to make something and own it 60/40. Now you have something and you own 40% of that thing. I’m not sure how your continued employment matters at this point. It’s like saying someone needs to be employed at Apple to own Apple stock. They don’t.
Maybe I’m missing something.
You came together a couple years ago with a plan to make something and own it 60/40. Now you have something and you own 40% of that thing. I’m not sure how your continued employment matters at this point. It’s like saying someone needs to be employed at Apple to own Apple stock. They don’t.
Maybe I’m missing something.
> Maybe I’m missing something.
That the entity was never capitalized and the 60% founder paid for the app development out of his own pocket and plans to just reincorporate another entity and sell the app that way
That the entity was never capitalized and the 60% founder paid for the app development out of his own pocket and plans to just reincorporate another entity and sell the app that way
But Jim only owns 60% of the app. OP owns the rest. It doesn't matter if Jim put in $10m if the agreement is that they own the app 60/40.
Anyway, to echo other people: This is why you use clear contracts and try to deviate from the norm on these things only when you have to. Because otherwise disagreements become complex and expensive to resolve.
Anyway, to echo other people: This is why you use clear contracts and try to deviate from the norm on these things only when you have to. Because otherwise disagreements become complex and expensive to resolve.
Thanks chasing, the problem may be what rolltiide mentioned - I'm not 100% sure whether Jim just can't establish a new company without me
In your position I would assume I have rights of ownership and act like it until I was told definitively otherwise. He put in money, but you put in time and expertise, which is also a high-value thing. He can start a new company but he can't sell something he doesn't own. And if he does, keep a tab on the new company. If they do well, you may be able to go after them for being built on software you partially own. Don't just flip over and shrug.
Yeah, after some comments from others I've realized that Jim doesn't really own all of the code/app. I guess that would be what I would do if he just starts a new company - wait and see what happens and if they get somewhere, I can go after them as you've mentioned. Thank you!
If Jim can close shop and start a new company without using any of the original company's assets/IP/trademarks/goodwill then there's nothing you can do about it. He has essentially declared bankruptcy and started a new company on his own. However, if he can't do that and you outright own 40%, then like GP said, "he can stuff it" (love the wording BTW).
If the original company has any value to Jim, then you two should come to some reasonable agreement to settle the matter in a way that's acceptable to both of you.
If the original company has any value to Jim, then you two should come to some reasonable agreement to settle the matter in a way that's acceptable to both of you.
[deleted]
The mistake you made was two years ago, by not putting in vesting in your initial contract. But since we can't fix the past...
You appear to own 40% of the company, which means you own 40% of the IP. Whether Jim paid for the development or not isn't super relevant, the relevant part is the contracts between Jim and freelancers. Who is assigned their IP? Who is listing as hiring them on the contract, the company or Jim?
Jim can try to play games by re-incorporating and moving the IP around, but you'd still be entitled to 40% of it. But you might have to sue to get it.
The good news is that you can just walk away now, and if it gets really big later, you can file your lawsuit if it might actually be worth something (see Facebook). In the meantime no need to stress about it.
Of course I'm not a lawyer etc etc, but from my experience this is how it would go down.
BTW if you wanted a fair deal, you'd get 20% of the stock now and forever. That's what you would have vested in with a standard four year vesting agreement.
You appear to own 40% of the company, which means you own 40% of the IP. Whether Jim paid for the development or not isn't super relevant, the relevant part is the contracts between Jim and freelancers. Who is assigned their IP? Who is listing as hiring them on the contract, the company or Jim?
Jim can try to play games by re-incorporating and moving the IP around, but you'd still be entitled to 40% of it. But you might have to sue to get it.
The good news is that you can just walk away now, and if it gets really big later, you can file your lawsuit if it might actually be worth something (see Facebook). In the meantime no need to stress about it.
Of course I'm not a lawyer etc etc, but from my experience this is how it would go down.
BTW if you wanted a fair deal, you'd get 20% of the stock now and forever. That's what you would have vested in with a standard four year vesting agreement.
> You appear to own 40% of the company, which means you own 40% of the IP.
Actually, I'm going to bet that he owns 100% of the IP he wrote because if they didn't have good documents around something like vesting, they probably don't have good IP documents either. That gives him the upper hand in negotiation.
To the OP: without a vesting schedule or agreement on what happens when you leave, your partner is stuck with you. If you've done most of the work up to this point, don't be bullied or browbeaten into giving up your shares. I wouldn't even give up that 10% you were going to right off the bat—that's giving away something for nothing,
Most attorneys will have a conversation with you and give you at least some background and let you know what general options are. I've been through a situation similar-ish to this one and if it wasn't for the fact that my partners were so completely sloppy with their paperwork I would have been completely screwed out of several years of my life—they certainly weren't looking out for me. As it was, they took more than half of the proceeds when we eventually sold the company even though pretty much everyone but me had ghosted a couple years earlier.
> Jim can try to play games by re-incorporating and moving the IP around, but you'd still be entitled to 40% of it. But you might have to sue to get it.
Remember, if you didn't sign IP assignment papers when you founded the company, you own 100% of what you produced. Copyright goes to the creator in the absence of any agreement to the contrary. That also means Jim can't transfer it to a different company (which he couldn't do anyway without inviting a shareholder lawsuit.)
> BTW if you wanted a fair deal, you'd get 20% of the stock now and forever. That's what you would have vested in with a standard four year vesting agreement.
Agree with this—if you really think the company has a good shot, I"d negotiate a generous buyout (generous to your partner that is) of half your equity and keep the other half.
Actually, I'm going to bet that he owns 100% of the IP he wrote because if they didn't have good documents around something like vesting, they probably don't have good IP documents either. That gives him the upper hand in negotiation.
To the OP: without a vesting schedule or agreement on what happens when you leave, your partner is stuck with you. If you've done most of the work up to this point, don't be bullied or browbeaten into giving up your shares. I wouldn't even give up that 10% you were going to right off the bat—that's giving away something for nothing,
Most attorneys will have a conversation with you and give you at least some background and let you know what general options are. I've been through a situation similar-ish to this one and if it wasn't for the fact that my partners were so completely sloppy with their paperwork I would have been completely screwed out of several years of my life—they certainly weren't looking out for me. As it was, they took more than half of the proceeds when we eventually sold the company even though pretty much everyone but me had ghosted a couple years earlier.
> Jim can try to play games by re-incorporating and moving the IP around, but you'd still be entitled to 40% of it. But you might have to sue to get it.
Remember, if you didn't sign IP assignment papers when you founded the company, you own 100% of what you produced. Copyright goes to the creator in the absence of any agreement to the contrary. That also means Jim can't transfer it to a different company (which he couldn't do anyway without inviting a shareholder lawsuit.)
> BTW if you wanted a fair deal, you'd get 20% of the stock now and forever. That's what you would have vested in with a standard four year vesting agreement.
Agree with this—if you really think the company has a good shot, I"d negotiate a generous buyout (generous to your partner that is) of half your equity and keep the other half.
Thanks a lot. I think regarding the IP it's very messy and questionable who owns how much, because he may have paid for the development, but it was based on by sketches & app flow, and I've contributed to the development with a lot of testing & design stuff. Even if he wanted to take his chances, Jim would be in a worse position than me since it would be pretty unclear what I'm entitled to & that could be toxic for investors or in case he wanted to sell it right away.
We have a meeting scheduled for tomorrow, I'd stand my ground as you've and others suggested and we'll see what happens. If it gets really messy maybe I'd think about bringing on a lawyer, but it would have to be certain that I'm not going to lose money because of that since lawyers... well, aren't cheap
We have a meeting scheduled for tomorrow, I'd stand my ground as you've and others suggested and we'll see what happens. If it gets really messy maybe I'd think about bringing on a lawyer, but it would have to be certain that I'm not going to lose money because of that since lawyers... well, aren't cheap
I think the parent was assuming you did most of the development yourself. Judging by what's been said, it's more likely that your contracted developers themselves own the IP, not either of you.
The contract with developers states that Jim will own the finished product. My role in the app development was to make the initial sketches & app flow (both in the beginning and during the development), some design stuff, and Android testing, so I guess it can be argued that Jim doesn't own 100% of the current app because I've contributed something to the development as well
Yeah that’s quite a bit dicier. I did assume you had done the actual development. Copyright on visual presentation is much more difficult to argue your case with.
Thanks a lot! To address one of your points:
> Who is listing as hiring them on the contract, the company or Jim?
Jim is the one. People around here suggested though that it doesn't really matter because for example I've contributed something to the app as well (sketches, app flow, design, etc.) and the app was clearly made for the purposes of the company
> Who is listing as hiring them on the contract, the company or Jim?
Jim is the one. People around here suggested though that it doesn't really matter because for example I've contributed something to the app as well (sketches, app flow, design, etc.) and the app was clearly made for the purposes of the company
I'd tell him that he has two options:
- Find an amicable agreement to buy you out in the short term
or
- You'll back up all of your documentation around incorporation and wait until the app gets larger, hire a lawyer and go after 40% of the significantly higher value. You have a solid claim, and this would be much more painful for him. He has a fiduciary duty to protect the value of your share, if he takes action to attempt to devalue your portion he could be personally liable to make you whole for more than 40%. Especially egregious action could rise to the level of criminality.
Either way, probably worth consulting with a lawyer now.
- Find an amicable agreement to buy you out in the short term
or
- You'll back up all of your documentation around incorporation and wait until the app gets larger, hire a lawyer and go after 40% of the significantly higher value. You have a solid claim, and this would be much more painful for him. He has a fiduciary duty to protect the value of your share, if he takes action to attempt to devalue your portion he could be personally liable to make you whole for more than 40%. Especially egregious action could rise to the level of criminality.
Either way, probably worth consulting with a lawyer now.
Great take, thanks!
Yeah you still clearly have a claim but it just makes it a bit harder. If the contract said Company Inc. on it, it would make things a lot clearer.
That's right, but I remember that Jim really wanted to have his name on that contract which I've accepted at that time since he was the one coming up with the money for development
This comment right here is potentially your kryptonite. Technically, if this is the case, then Jim owns the development IP personally and would then be “contributing” it to the company as a member/investor. The business org itself is valueless.
In my opinion, Jim is lazy, but not dumb. It doesn’t sound like you guys have been very good at formalizing things under the company and Jim knows that and has positioned himself quietly as the one with all the power.
Setting my analysis of Jim’s character aside, I think your best bet is to not demand a thing, just keep your already agreed to equity you have documentation on and walk away. The reason being you don’t want to give Jim the chance for a new document to muddy things up more in case of later litigation.
He may restructure or do some sneaky thing to make himself feel as though he’s bested you, but the likelihood whatever is made is going to make a huge amount of money is slim (especially with what I see as severely amateur behavior here coupled with a lacking in ethics). He’ll have a hell of a time raising any funding either way if investors do their due diligence.
If it does succeed sometime in the future, send the whole file to a decent attorney and let them do their jobs then.
In the meantime, just understand the tactics he’s employed and do think defensively, preserving what you do have now. Then store it in case you need it later. After that, move on with your life and forget about it.
I’d probably remove Jim from your life though. Every comment I’ve read from you about him has had the between the lines description that his behavior has never been in your best interest. He doesn’t care about you at all.
In my opinion, Jim is lazy, but not dumb. It doesn’t sound like you guys have been very good at formalizing things under the company and Jim knows that and has positioned himself quietly as the one with all the power.
Setting my analysis of Jim’s character aside, I think your best bet is to not demand a thing, just keep your already agreed to equity you have documentation on and walk away. The reason being you don’t want to give Jim the chance for a new document to muddy things up more in case of later litigation.
He may restructure or do some sneaky thing to make himself feel as though he’s bested you, but the likelihood whatever is made is going to make a huge amount of money is slim (especially with what I see as severely amateur behavior here coupled with a lacking in ethics). He’ll have a hell of a time raising any funding either way if investors do their due diligence.
If it does succeed sometime in the future, send the whole file to a decent attorney and let them do their jobs then.
In the meantime, just understand the tactics he’s employed and do think defensively, preserving what you do have now. Then store it in case you need it later. After that, move on with your life and forget about it.
I’d probably remove Jim from your life though. Every comment I’ve read from you about him has had the between the lines description that his behavior has never been in your best interest. He doesn’t care about you at all.
I recommend reducing the equity stake to something like 5% now, with an expiration of 5 years.
This should be small enough that it won't effect him or the bottom line for the business, but provide value to you in the long term if the business does sell or raise significant money.
If you want to retain a working relationship with Jim, and keep some interest in this company moving forward, it sounds like the responsibility is on you, based on the way Jim countered.
Otherwise, it might just be that you walk away and take a hit, but you gain a valuable lesson for next time. Always have a written operating agreement to define how you will both act in situations like this. Codify the ins and outs from the beginning, get it on paper and take the emotion out of the process should you need to separate later.
This should be small enough that it won't effect him or the bottom line for the business, but provide value to you in the long term if the business does sell or raise significant money.
If you want to retain a working relationship with Jim, and keep some interest in this company moving forward, it sounds like the responsibility is on you, based on the way Jim countered.
Otherwise, it might just be that you walk away and take a hit, but you gain a valuable lesson for next time. Always have a written operating agreement to define how you will both act in situations like this. Codify the ins and outs from the beginning, get it on paper and take the emotion out of the process should you need to separate later.
That's right, lesson learned :)
I would agree with such an equity stake & expiration, that sounds reasonable
I would agree with such an equity stake & expiration, that sounds reasonable
"I own 40%"
If you own part of the company you don't just give that up without there being express wording in the charter (or whatever contract/paperwork you used to create the company). The problem you have is that right now, you own 40% of nothing so you're going to pay the lawyer you talk to (rather than have them work on contingency).
I should also note that this seems like a weird time to leave a startup ... did you really think you could cash out in just two years? Perhaps you haven't been "invested" in some time?
If you own part of the company you don't just give that up without there being express wording in the charter (or whatever contract/paperwork you used to create the company). The problem you have is that right now, you own 40% of nothing so you're going to pay the lawyer you talk to (rather than have them work on contingency).
I should also note that this seems like a weird time to leave a startup ... did you really think you could cash out in just two years? Perhaps you haven't been "invested" in some time?
Yeah, there's no way I'm hiring a lawyer for this ($).
When we were starting the thing I was 19, kind of naive and inexperienced. Now that I'm 20 I've experienced a couple of other things along the road and it made me realize that I'm probably wasting my time here. Also, problems that seemed unlikely in the start arose so I believe this is the best decision right now
When we were starting the thing I was 19, kind of naive and inexperienced. Now that I'm 20 I've experienced a couple of other things along the road and it made me realize that I'm probably wasting my time here. Also, problems that seemed unlikely in the start arose so I believe this is the best decision right now
If you feel that you are wasting your time here, then there are two terms I submit for your consideration, opportunity cost, and sunk cost.
By pursuing this startup, what is the value of other opportunities you have to pass up. If you think the value of the startup is higher than those, then stick with the startup. However it sounds like you don't feel that way. If the other opportunities are a higher value, you should pursue those instead.
So far it sounds like you are mostly out time as you can get your cash back. If the business is not profitable and you don't have a good outlook on it. Then your time value so far is is lost, or sunk. Sunk costs, are sunk. You can't get them back, and people have lost a lot more trying to get them back.
As others have mentioned about, try to negotiate are prorated amount of your shares. If you can't get thank, don't keep wasting time here. Cut your losses and learn a lesson from it, then move on.
By pursuing this startup, what is the value of other opportunities you have to pass up. If you think the value of the startup is higher than those, then stick with the startup. However it sounds like you don't feel that way. If the other opportunities are a higher value, you should pursue those instead.
So far it sounds like you are mostly out time as you can get your cash back. If the business is not profitable and you don't have a good outlook on it. Then your time value so far is is lost, or sunk. Sunk costs, are sunk. You can't get them back, and people have lost a lot more trying to get them back.
As others have mentioned about, try to negotiate are prorated amount of your shares. If you can't get thank, don't keep wasting time here. Cut your losses and learn a lesson from it, then move on.
True, I hope to it done as soon as possible
> "I'm probably wasting my time here"
Realistically, you've likely answered your question regarding if it's worth it to fight it out.
Then again, if you've signed docs that say you own X shares, then Jim can't just take those away (as the parent poster mentioned).
Jim could issue a bunch of new stock (watering you down), or (if it's an LLC/s-corp with pass-through income) generate a bunch of phantom income to drown you in taxes, or create a new corp and sell the IP from oldCorp to newCorp for a pittance (bit of a quagmire there as you'd have good grounds to sue).
All of these present challenges, though.
Your best bet may be to determine a transition period where, at the end, he pays you for your shares and you walk away. Your chances of staying as an equity owner given the capitalization of the biz (~$1000, if I understand correctly, as his $12k was spent outside of the biz).
Of course, this should be in writing, signed, etc.
Realistically, you've likely answered your question regarding if it's worth it to fight it out.
Then again, if you've signed docs that say you own X shares, then Jim can't just take those away (as the parent poster mentioned).
Jim could issue a bunch of new stock (watering you down), or (if it's an LLC/s-corp with pass-through income) generate a bunch of phantom income to drown you in taxes, or create a new corp and sell the IP from oldCorp to newCorp for a pittance (bit of a quagmire there as you'd have good grounds to sue).
All of these present challenges, though.
Your best bet may be to determine a transition period where, at the end, he pays you for your shares and you walk away. Your chances of staying as an equity owner given the capitalization of the biz (~$1000, if I understand correctly, as his $12k was spent outside of the biz).
Of course, this should be in writing, signed, etc.
Thanks a lot - that list looks kind of scary :) I'll definitely keep that stuff on mind. Yeah, now I see that it'd be really best to try to negotiate a walk away fee
I like to look at similar losses from this perspective: To learn what I did, would I pay about the same amount for a college course?
In the scope of your life, $1000 probably isn’t that much and it’s about the same as a college course. You’ve learned a lot. Those lessons are valuable. This hasn’t been a failure.
In the scope of your life, $1000 probably isn’t that much and it’s about the same as a college course. You’ve learned a lot. Those lessons are valuable. This hasn’t been a failure.
That's true, I've definitely learned a lot, I guess during my time with the company I was able to cover a lot of curriculum on various topics :)
It would just feel bad to me to walk away for free from something I was working on that can be tomorrow sold for couple (tens of)thousands (the value doesn't really matter in this case) for free
It would just feel bad to me to walk away for free from something I was working on that can be tomorrow sold for couple (tens of)thousands (the value doesn't really matter in this case) for free
I don’t know. At 19 I was at the university doing my first year and already earning £18K/year freelancing as a software engineer.
So frankly there are many people who can start their own companies, but there’s a lot to learn in terms of actually working with people and choosing the right ones to build a company with, too.
The fact that their party can’t be fair regarding their share is already a huge-huge red flag. Many supposedly greedy people I know wouldn’t do that simply because they have respect for the capitalism (or in other words - they know perfectly well that their words are no longer enforceable).
So frankly there are many people who can start their own companies, but there’s a lot to learn in terms of actually working with people and choosing the right ones to build a company with, too.
The fact that their party can’t be fair regarding their share is already a huge-huge red flag. Many supposedly greedy people I know wouldn’t do that simply because they have respect for the capitalism (or in other words - they know perfectly well that their words are no longer enforceable).
The fact is you've only just launched, you've not proved the market for the app actually exists yet, there are still technical problems to overcome, and the hard part of running a startup, eg getting customers and scaling up, hasn't actually started yet (feedback means very little; it's all about actual sales for real money).
You could just walk away and keep the shares, but as you're a minority shareholder your stake will be diluted to approximately nothing fairly soon.
You're in a really bad position here. If Jim wants to be a %^&% about this then you're going to get screwed.
You could just walk away and keep the shares, but as you're a minority shareholder your stake will be diluted to approximately nothing fairly soon.
You're in a really bad position here. If Jim wants to be a %^&% about this then you're going to get screwed.
I'm not sure how it would work in this case in the US, but we're from Europe - my 40% will stay 40% forever. I want to part our ways on a good terms though and don't want to leave the startup in a situation like this. On the other hand, the work I've done is pretty significant and I wouldn't like to see myself empty-handed if the company is sold in the near future
my 40% will stay 40% forever
I don't think it will.
Jim can issue new shares so long as the majority of shareholders agree (which is Jim agreeing with himself) and just not give you any. Consequently the percentage of the available stock you own is diluted, and you end up with less and less of the company. This is how it works in the UK (where I am).
Normally share dilution happens when new investors come on board and put some money in which increases the value of the company so the value of the shares doesn't really change. If there are 100 shares in the company and the company is worth £1000 each share is worth £10. If you own 40% that's 40 shares worth £400. If 100 new shares are issued and sold to an investor for another £1000 then the company is worth £2000 and there are now 200 shares still worth £10 each. Your percentage has dropped to 20% but the value of your investment is still worth £400 (ignoring the value of dividends, voting rights, etc). The same mechanism can be used to screw people though if more shares are issues without a commensurate increase in value.
I don't think it will.
Jim can issue new shares so long as the majority of shareholders agree (which is Jim agreeing with himself) and just not give you any. Consequently the percentage of the available stock you own is diluted, and you end up with less and less of the company. This is how it works in the UK (where I am).
Normally share dilution happens when new investors come on board and put some money in which increases the value of the company so the value of the shares doesn't really change. If there are 100 shares in the company and the company is worth £1000 each share is worth £10. If you own 40% that's 40 shares worth £400. If 100 new shares are issued and sold to an investor for another £1000 then the company is worth £2000 and there are now 200 shares still worth £10 each. Your percentage has dropped to 20% but the value of your investment is still worth £400 (ignoring the value of dividends, voting rights, etc). The same mechanism can be used to screw people though if more shares are issues without a commensurate increase in value.
Yeah, that's right, but in our country, there are no shares in our type of company, so the ownership is derived from the initial investment (this is most of the times fictional, in our case it's 60:40 as mentioned before), so even if Jim owns the majority stake, he can't do anything about mine
Really? One trick I've seen that comes to mind is that the controlling shareholder sells the company to himself (really another operating entity) at a low-ball price. You'll get a little bit of cash but your 40% would be gone.
Ah. Cool. That's quite fortunate then. :)
Yeah, I would have been in a much worse situation if we had the company structure you've mentioned :)
If it's all as you say then since Jim is saying he wants everything and you should get nothing despite the fact hat you legally own 40% of the company without condition, I'd now be a hard ass, assert I own 40% of the company, and that I intend to defend that ownership. Put Jim on the defense. By saying you owe nothing he just told you he intends to steal two years of your full time work, which I'd estimate has a street value of at least $250,000. Someone who just told me they plan to steal a quarter million dollars of something I own is my enemy and a serious threat that requires professional legal assistance to defend against. Your ownership might be worth nothing that you can ever get back, but the labor and expertise you contributed still has a value that you yourself invested in the company and morally validates your ownership of 40% in addition to the already established legal fact.
Right, thanks a lot. We are friends and I've told him that I'm flexible & willing to find a reasonable solution that would be fair to both of us, but the fact that he doesn't want to talk about it at all really puts me in the position you've described. The thing I'm not sure about though is the ownership of the app - if he said to me that he'll simply form another company, I guess I'll wait if they make something of it and then I'll come back asking for a fair share
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What country and type of company is this?
I wouldn't like to disclose my country & the company type since I don't want to get into trouble over the possible NDA that I may have to sign, but it's not a US C-Corp-like where you can issue shares and stuff like that. the ownership is derived from the initial investment (this is most of the times fictional, just to establish the ratio - in our case it's 60:40 as mentioned before)
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You can't actually do that in the UK, there are stringent protections for minority shareholders to stop these exact shenanigans.
If Jim issued himself more shares for a nominal fee, he would have to offer the OP the same deal.
Yes, share dilution might happen with genuine investors, but no he can't just dilute out the OP on his own to 'screw' him.
If Jim issued himself more shares for a nominal fee, he would have to offer the OP the same deal.
Yes, share dilution might happen with genuine investors, but no he can't just dilute out the OP on his own to 'screw' him.
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I think you need to be realistic about the valuation of the company, and take it from there. I may have spent 10,000 hours perfecting my basket weaving technique and business, but if I can only sell my business for $1, that's what it's worth.
You may feel the value is yet to be realized, but then you should probably stick with the company. Jim's planning to do that, I assume because he thinks his future efforts in addition to what's already been done will make it valuable.
One other thing I'll throw out there. In general, maintaining a complex cap table for an early-stage company is very bad. Jim will have a devil of a time getting investment or funding when he has a 40% share holder who is no longer involved. The optics are bad and will spoil the deal. Given that, I'd consider being willing to part ways for future cash, perhaps cash payable upon closing the first $X in deals or something. Basically converting your equity to debt.
You may feel the value is yet to be realized, but then you should probably stick with the company. Jim's planning to do that, I assume because he thinks his future efforts in addition to what's already been done will make it valuable.
One other thing I'll throw out there. In general, maintaining a complex cap table for an early-stage company is very bad. Jim will have a devil of a time getting investment or funding when he has a 40% share holder who is no longer involved. The optics are bad and will spoil the deal. Given that, I'd consider being willing to part ways for future cash, perhaps cash payable upon closing the first $X in deals or something. Basically converting your equity to debt.
In my opinion, retaining equity, this early in the process, does seem unfair. By far most of the value of the company is yet to be created and if you choose to not be a part of that, it's hard to see why you would have a stake in it at all.
Leaving you 'empty handed', or only paying you the share of the incorporation fee also sounds unreasonable - you did invest time and effort and that largely remains unvalued in that case.
In the past I have dealt with similar situations by agreeing on the amount of hours and effort spend, and attach a market value to that. The leaving party then is paid that amount (either in whole, or stretched out over a period) and no equity is retained.
Leaving you 'empty handed', or only paying you the share of the incorporation fee also sounds unreasonable - you did invest time and effort and that largely remains unvalued in that case.
In the past I have dealt with similar situations by agreeing on the amount of hours and effort spend, and attach a market value to that. The leaving party then is paid that amount (either in whole, or stretched out over a period) and no equity is retained.
Hi, thanks a lot. The thing is that if I were to put a price on my work for on $10/hour, my compensation could reach $10.000, maybe even more and the co-founder would never pay me anything close to that. I actually don't see him paying me even $1000.
The thing is that I think it's pretty possible that he will sell the startup in the coming months - the startup itself may not be worth much right now, but since our programmers took far less than they should have, the source code has some value.
The thing is that I think it's pretty possible that he will sell the startup in the coming months - the startup itself may not be worth much right now, but since our programmers took far less than they should have, the source code has some value.
Are you more interested in eventually getting compensated for your time or having a piece of a potential larger valuation? Which do you think Jim is more interested in?
If you are primary looking to for the former, you could propose a deal where you get 40% up to whatever you both agree would be a market wage for the effort you put into the startup ($10/hr seems low, but I know nothing of your local economy). That may be more acceptable to Jim, and it keeps you from feeling like you got a raw deal if he has a great exit in a few months.
If you are primary looking to for the former, you could propose a deal where you get 40% up to whatever you both agree would be a market wage for the effort you put into the startup ($10/hr seems low, but I know nothing of your local economy). That may be more acceptable to Jim, and it keeps you from feeling like you got a raw deal if he has a great exit in a few months.
I don't think he has the money to pay me the real value (maybe he has, but in that case he'd never agree to pay me that. even the sum like $2000 would be a problem) so I'd prefer to split it - I'll retain a small equity stake along with some money. That's the thing I've told Jim I'm flexible in & willing to accommodate, but Jim simply doesn't think so
> if I were to put a price on my work for on $10/hour
That's an absurd valuation and what he is willing to pay is irrelevant. Your time for this level and value of investment as a cofounder is worth more like $250/hr. Plus the fact you've been going without salary or compensation for 2 years gives this a risk multiplier. People routinely pay business consultants, legal experts, and other such professional help $300-$500 an hour outright. When the expert accepts equity in lieu of pay, the expected payout to account for risk is much higher. That's why angel investors might spend $10,000 on something and invest 100 hours, and end up with a $100 million return. So their time was worth $1 million per hour.
That's an absurd valuation and what he is willing to pay is irrelevant. Your time for this level and value of investment as a cofounder is worth more like $250/hr. Plus the fact you've been going without salary or compensation for 2 years gives this a risk multiplier. People routinely pay business consultants, legal experts, and other such professional help $300-$500 an hour outright. When the expert accepts equity in lieu of pay, the expected payout to account for risk is much higher. That's why angel investors might spend $10,000 on something and invest 100 hours, and end up with a $100 million return. So their time was worth $1 million per hour.
When you found a startup the value of your work is the value of what you create. Pinning some prevailing market value for high priced consultants or FAANG engineers in a sellers market is also absurd.
At this point it’s hard to argue for any cash value, but he definitely earned some equity.
At this point it’s hard to argue for any cash value, but he definitely earned some equity.
Right, thanks!
Thank you. I'm not sure that work is worth as much as you've suggested as dasil mentioned, but I understand your point - I was going with a lower value because I'm not sure whether Jim has the money/would be willing to pay me the real value
The startup is in Europe, which could be anywhere from Switzerland to Moldova.
$10/hr is reasonable for a normal full time developer job somewhere in between.
$10/hr is reasonable for a normal full time developer job somewhere in between.
> "$10/hr is reasonable for a normal full time developer job" — Symbiote
No.
That is false.
That is false and also a bald faced lie by a bald faced liar.
No full time developer jobs anywhere in the world pay that. Not even China.
In the West, McDonalds pays more, as does WalMart ($142,107 per year average for a Software Engineer).
Most people acknowledge WalMart is a shitty company with shitty pay and sensible people can do better than the miserable $71/hr they offer for software engineers.
No.
That is false.
That is false and also a bald faced lie by a bald faced liar.
No full time developer jobs anywhere in the world pay that. Not even China.
In the West, McDonalds pays more, as does WalMart ($142,107 per year average for a Software Engineer).
Most people acknowledge WalMart is a shitty company with shitty pay and sensible people can do better than the miserable $71/hr they offer for software engineers.
"A mid-career Software Developer with 5-9 years of experience earns an average total compensation of RUB 1,440,000 based on 49 salaries." (Russia)
Assuming a 40 hour week, that's less than $11/hr. Belarus and Moldova are poorer countries, a figure for Moldova gives $7.
There are junior developer positions advertised in the UK paying £24,000 a year. Expect a 35 or 37 hour week and 6 weeks holiday, but it's not that much higher...
Assuming a 40 hour week, that's less than $11/hr. Belarus and Moldova are poorer countries, a figure for Moldova gives $7.
There are junior developer positions advertised in the UK paying £24,000 a year. Expect a 35 or 37 hour week and 6 weeks holiday, but it's not that much higher...
> In my opinion, retaining equity, this early in the process, does seem unfair.
True -- except that's what they agreed to, as far as I can tell...
True -- except that's what they agreed to, as far as I can tell...
It sounds like the country you are in has very strong protections for your equity, and very likely if you do nothing then you would continue to own 40%.
You have already offered a generous offer to the cofounder to reduce your equity stake over time and without knowing their side of the story, that seems like a great deal to take. You did put in two years of work, at a reduced, or $0 salary, and as a result there should be some equity that you retain.
You could simply just ignore everything and move on, and if the company sells get your 40%. You have already made an offer that he could have accepted, but chose not to for whatever reason.
So why stress more about it?
Agreements should be set in place beforehand as others have mentioned, specifically around vesting schedules and also control structures and so forth, but this is a good learning lesson for both of you.
So if you make a generous offer and instead of accepting it that person comes back and says you should have 0%, why are you continuing to put that person's needs first?
You have already offered a generous offer to the cofounder to reduce your equity stake over time and without knowing their side of the story, that seems like a great deal to take. You did put in two years of work, at a reduced, or $0 salary, and as a result there should be some equity that you retain.
You could simply just ignore everything and move on, and if the company sells get your 40%. You have already made an offer that he could have accepted, but chose not to for whatever reason.
So why stress more about it?
Agreements should be set in place beforehand as others have mentioned, specifically around vesting schedules and also control structures and so forth, but this is a good learning lesson for both of you.
So if you make a generous offer and instead of accepting it that person comes back and says you should have 0%, why are you continuing to put that person's needs first?
Well, the type of company we have isn't suited for startups or companies with a similar structure, so there's nothing he can do about the equity without my agreement.
Thanks!
Thanks!
As long as you have it legally recognized, there’s absolutely no reason why you should let go of your share.
If your co-founder can’t understand this, then maybe it wasn’t meant to be in the first place.
If your co-founder can’t understand this, then maybe it wasn’t meant to be in the first place.
I think the same. I would never walk away with nothing. Your co-founder has to find a way to convince you, whatever that is (buying your shares at a reasonable price, or giving you some other reason that makes you happy).
Right, thanks!
Yeah, that's also one of the reasons for walking away, better to get it over with now
You own 40% of the company right now and Jim owns 60% ( assuming all common stock ). If you sold the company right now, that should be the ratio to use to divvy up the proceeds due to the common shareholders.
Assuming no vesting / clawback agreement was in place:
Simple option: have Jim buy your shares at fair value, which may be very close to 0.00. If Jim is unwilling / unable to pay with cash, have the company write you a note for the shares. In both cases, Jim ends up with 100% equity, which is what you say he wants, while you are compensated for value created to date.
Assuming no vesting / clawback agreement was in place:
Simple option: have Jim buy your shares at fair value, which may be very close to 0.00. If Jim is unwilling / unable to pay with cash, have the company write you a note for the shares. In both cases, Jim ends up with 100% equity, which is what you say he wants, while you are compensated for value created to date.
Yeah, Jim buying me out would be a preferable option now
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1) Talk to a lawyer. Details are going to vary wide depending on where you are and the documentation that exists.
2) Your work has value, quite possibly more value than the capital put in by Jim.
3) If you own 40%, Jim has to buy your 40%. You position as a shareholder is not related to your position as an employee. Ownership doesn't disappear. I don't quite understand how/why you would reduce to 5% from 40% (without dilution events).
4) Don't sign anything until you talk to a lawyer.
2) Your work has value, quite possibly more value than the capital put in by Jim.
3) If you own 40%, Jim has to buy your 40%. You position as a shareholder is not related to your position as an employee. Ownership doesn't disappear. I don't quite understand how/why you would reduce to 5% from 40% (without dilution events).
4) Don't sign anything until you talk to a lawyer.
Thank you. We're not from the "better" European countries, so I'm not sure whether my work would have that much value. Maybe it would, but Jim would NEVER pay that kind of money. In that case I would most likely end up with some equity and nice bill from a lawyer, which isn't something I can afford right now.
A similar situation is happening to me currently and it’s quite killing, I thought I’d share it with you.
We are 4 partners, we have created a startup a year ago. We work in electronic payment systems, I have done our whole infrastructure including the payment gateway integration and PCI certifications, etc and my best friend and college had done the Android part.
We are in a very critical situation now as he’s leaving to pursue a masters degree (studying abroad). It has been since then the worst time of my life. I have never talked to him about it and I frankly so mad at him that I just want him to leave.
I own 20% of the shares, it’s quite unfair but I really couldn’t care less. All i wanted is to make our startup work.
It might be irrelevant but I just thought I’d write it here
I own 20% of the shares, it’s quite unfair but I really couldn’t care less. All i wanted is to make our startup work.
It might be irrelevant but I just thought I’d write it here
Thanks for sharing your experience - that sounds pretty bad, I hope you work it out somehow. I think the vesting schedules should be talked about more especially among starting entrepreneurs so they can prevent situations like ours.
If you are comfortable sharing it - what is the reason the guy leaving the company doesn't want to negotiate something with you? Does he want to retain his full equity?
If you are comfortable sharing it - what is the reason the guy leaving the company doesn't want to negotiate something with you? Does he want to retain his full equity?
Many comments here say this already but from the way you describe it, most of the work by far is ahead of you. Most startups put vesting schedules in place for this very reason, and two years in you'd typically end up with half of your equity. Even IF that were the case here, Jim should be pretty bummed to let someone walk away with 20% of his company at this early of a stage. If I were him, I'd fight anything more than say 3-5%, or maybe paying out the fair market value of your work.
I'm not a lawyer, but if there's an invention assignment agreement in place the IP would be owned by the company, not Jim, despite his $ in, and thus it would be hard (not impossible) to dissolve and re-form.
Fail fast and move on to something new. Good luck.
I'm not a lawyer, but if there's an invention assignment agreement in place the IP would be owned by the company, not Jim, despite his $ in, and thus it would be hard (not impossible) to dissolve and re-form.
Fail fast and move on to something new. Good luck.
Thanks - both 3-5% or paying me the market value for my work sounds good to me.
The contract to develop an app is between Jim and programmers, so I'm not really sure how this would play out.
Right, I'm happy that I'm moving on now. If nothing else, I will have a very valuable experience
The contract to develop an app is between Jim and programmers, so I'm not really sure how this would play out.
Right, I'm happy that I'm moving on now. If nothing else, I will have a very valuable experience
Stop working immediately on anything relating to the company.
If you walk away right now, you own 40% of the company. There are some business-world dirty tricks Jim can do to cut you out without paying, but they can take some time to pull off, and some are grounds for a civil lawsuit (in the US).
That 85:15 ratio in your favor should have accumulated some sweat equity. The initial cash infusion works out to 7.7% you, 92.3% Jim. In order for that to work out to 40% you, 60% Jim now, the company valuation with minimum-viable product should now be $22333.33, and the value of the work you added via labor should be $7933.33, and the value Jim added by labor should be $1400.
If that seems reasonable, so too should the 40/60 split.
The value produced by the programmer-contractors doesn't count toward equity. They converted cash into company assets as a consequence of the business structure you set up. The only reasonable ways for Jim to ethically increase ownership share after you leave is by putting in more sweat equity, or by infusing more cash directly. But legally, the ownership share was established with the expectation that Jim put in more cash, and you put in more work, and anything happening after would require renegotiating the agreement.
With respect to Jim contracting the developers directly, that would not matter in the US (with a decent lawyer). Clearly, he was doing that as an owner/officer of the company, so the work product belongs to the company. In business shorthand, he loaned the cash to the company he owns, and then immediately paid it out as majority owner to a contractor. The work product goes on the books as belonging to the company, along with a zero-interest debt to Jim. Or perhaps the initial capitalization was in the form of IOUs from Jim to the company, and in paying the contractors, he simultaneously redeems those IOUs. We can't say for certain without seeing the incorporation documents.
You are actually being too reasonable. Demand an independent valuation of the company. Take 40% of that as cash buyout. If the company valuation grows over time, take 40% of that, whenever Jim feels like buying you out. Jim is trying to lowball the current value of the company, in order to screw you out of the value you put in after the initial investment.
Remember that whatever deal Jim may propose to you, you could use the same valuation strategy to buy him out. If you could be bought out by paying your share of the incorporation fee, would it be fair if you paid him his share to buy him out?
If you walk away right now, you own 40% of the company. There are some business-world dirty tricks Jim can do to cut you out without paying, but they can take some time to pull off, and some are grounds for a civil lawsuit (in the US).
That 85:15 ratio in your favor should have accumulated some sweat equity. The initial cash infusion works out to 7.7% you, 92.3% Jim. In order for that to work out to 40% you, 60% Jim now, the company valuation with minimum-viable product should now be $22333.33, and the value of the work you added via labor should be $7933.33, and the value Jim added by labor should be $1400.
If that seems reasonable, so too should the 40/60 split.
The value produced by the programmer-contractors doesn't count toward equity. They converted cash into company assets as a consequence of the business structure you set up. The only reasonable ways for Jim to ethically increase ownership share after you leave is by putting in more sweat equity, or by infusing more cash directly. But legally, the ownership share was established with the expectation that Jim put in more cash, and you put in more work, and anything happening after would require renegotiating the agreement.
With respect to Jim contracting the developers directly, that would not matter in the US (with a decent lawyer). Clearly, he was doing that as an owner/officer of the company, so the work product belongs to the company. In business shorthand, he loaned the cash to the company he owns, and then immediately paid it out as majority owner to a contractor. The work product goes on the books as belonging to the company, along with a zero-interest debt to Jim. Or perhaps the initial capitalization was in the form of IOUs from Jim to the company, and in paying the contractors, he simultaneously redeems those IOUs. We can't say for certain without seeing the incorporation documents.
You are actually being too reasonable. Demand an independent valuation of the company. Take 40% of that as cash buyout. If the company valuation grows over time, take 40% of that, whenever Jim feels like buying you out. Jim is trying to lowball the current value of the company, in order to screw you out of the value you put in after the initial investment.
Remember that whatever deal Jim may propose to you, you could use the same valuation strategy to buy him out. If you could be bought out by paying your share of the incorporation fee, would it be fair if you paid him his share to buy him out?
Thanks a lot, great tips :) That's very reasonable, I'd gladly agree to that.
Depending on your country, him paying out of pocket for business expenses does not necessarily mean he privately owns the product of those expenses. I would guess that in most countries, if he made it clear that this was for the company, and let you work on that code, i.e. "donated" the product of the expenses, then he is simply owed the amount by the company. He borrowed money to his company, in short. A court would easily see through that argument.
Now, that is but a tiny legal detail -- I think the other comments on interpersonal relationships are much more important. He can screw you if he really wants to, and so can you.
Now, that is but a tiny legal detail -- I think the other comments on interpersonal relationships are much more important. He can screw you if he really wants to, and so can you.
Wow, thanks a lot! I'm not sure how our country's law would look at this argument, I think it will be unclear and depend on the judge's decision, but it's definitely something that could bring Jim to senses - after all, he's got more to lose than I do. Thanks again!
Keep in mind that while 40% equity means you get 40% of dividends, it also means you’re on the hook for 40% of losses (or of the minimum annual tax bill if your company has no profit).
So retaining your equity may not be free.
So retaining your equity may not be free.
Good point. It's definitely something I'll consider. I guess in case I retain some equity, it would be sort of an agreement that I'll receive XY % in case the company is sold, so technically I wouldn't have a stake in the company & be responsible for the tax stuff
mickeyM: Please read and learn from the story how Paul Allen departed from Microsoft. From Wikipedia [1]: "In 1983, Gates tried to buy Allen out at $5 per share but Allen refused and left the company with his shares intact." So you can leave and retain your shares. If Jim continues developing existing app under a new company, he effectively steals the code you co-own... Remember that you also invested your work into this app (sketches & app flow)...
[1] https://en.wikipedia.org/wiki/Paul_Allen#Microsoft
[1] https://en.wikipedia.org/wiki/Paul_Allen#Microsoft
Wow, I didn't know such thing happened to Microsoft too :) Always it's only Gates who gets the spotlight.
Yeah, toxik also pointed to the fact I co-own the code (app), although from a different perspective. Thanks a lot!
Yeah, toxik also pointed to the fact I co-own the code (app), although from a different perspective. Thanks a lot!
From my personal experience.
I was a co-founder in a startup. It was split 50/50. I did all the development work and my partner did the business development work.
I had to drop out due to health reasons. I retained 1%, which I felt was fair. The main thing is they needed to bring in new people to replace me and needed equity to offer them. We did formalize it, and I have the legal documentation showing my shares in the company.
They have gotten investment so I'm sure my share is diluted quite a bit by now.
That was about 5 years ago that I left. At this point I'm ok if I don't get anything out of it.
I was a co-founder in a startup. It was split 50/50. I did all the development work and my partner did the business development work.
I had to drop out due to health reasons. I retained 1%, which I felt was fair. The main thing is they needed to bring in new people to replace me and needed equity to offer them. We did formalize it, and I have the legal documentation showing my shares in the company.
They have gotten investment so I'm sure my share is diluted quite a bit by now.
That was about 5 years ago that I left. At this point I'm ok if I don't get anything out of it.
Thanks a lot for sharing your experience. From what others have suggested here, I guess it was your generosity that you've only retained 1% & got no cash. I understand that there have to be equity left for others, I just wanted to protect myself in case Jim sold the company a month after I left (without him doing any extra work that would "devalue" my contribution) when I suggested the initial 30% stake that would then go down sharply
In my case I felt the 1% was fair. We had brought on a couple of people to help and we had offered them 1%. So I ended up getting what they got. I should have mentioned that my post, but its been so long I forgot about that. I might should have fought for more, but I was having some pretty severe health problems I needed to focus on.
I think it is important to honestly look at it. Not with what if, but how likely something is to happen. How likely is it that it can be sold as is in a month? How likely is it is that it is going to be profitable? How likely is it that more development work needs to be done? My gut tells that the answer to the first two questions is pretty low, as if there was a really good chance of making a profit or selling, you wouldn't be wanting to leave. Instead you'd be looking forward to the incoming money.
Do you have any sort of a written agreement, or was it a handshake deal.
I think it is important to honestly look at it. Not with what if, but how likely something is to happen. How likely is it that it can be sold as is in a month? How likely is it is that it is going to be profitable? How likely is it that more development work needs to be done? My gut tells that the answer to the first two questions is pretty low, as if there was a really good chance of making a profit or selling, you wouldn't be wanting to leave. Instead you'd be looking forward to the incoming money.
Do you have any sort of a written agreement, or was it a handshake deal.
I understand. I hope your health issues are resolved now.
The funny thing is that the only way it would make sense for Jim to sell the company in a month is when I leave. Otherwise it doesn't in such time frame.
Yeah, we have a company together that operates the app, but as I've mentioned before it's unclear whether Jim couldn't simply establish a new company and operate the app under it (since the app development itself was paid for by Jim + has a contract about it stating that he's the one requesting the development)
The funny thing is that the only way it would make sense for Jim to sell the company in a month is when I leave. Otherwise it doesn't in such time frame.
Yeah, we have a company together that operates the app, but as I've mentioned before it's unclear whether Jim couldn't simply establish a new company and operate the app under it (since the app development itself was paid for by Jim + has a contract about it stating that he's the one requesting the development)
Your 40% share isn’t going anywhere unless there is something of the kind specified somewhere in your contract/articles of incorporation/bylaws, even if you walk away now and never look back.
Your offer is generous, but I can see why Jim would rather own the entire company. He would have to buy you out though, and I can see how just the cost of your incorporation fee is hardly enticing.
If he starts running the app by himself with a different company though, I think that’s a case for lawyers. A fairly clear cut one too.
Your offer is generous, but I can see why Jim would rather own the entire company. He would have to buy you out though, and I can see how just the cost of your incorporation fee is hardly enticing.
If he starts running the app by himself with a different company though, I think that’s a case for lawyers. A fairly clear cut one too.
Did you have a vesting agreement? Sounds like not. Always prepare the divorce papers before you get married (when you are founding a company). It's awkward and hard, but that's the best time to do it, because if you agree you're all done and if you can't agree, you shouldn't be running a business together.
I think you should absolutely be paid for your time and effort, preferably in equity. Given the structure of your corporation (and how the app was paid for), you may have few options.
Contact a lawyer.
I think you should absolutely be paid for your time and effort, preferably in equity. Given the structure of your corporation (and how the app was paid for), you may have few options.
Contact a lawyer.
Thank you. Yes, not having the vesting agreement is a mistake. A lawyer is currently too expensive for me, so I'll try to get it done myself. Even if they found some way to get me out without my consent/go around me, the fact that I've done most work about the app apart from programming means that Jim & whoever he hires would have a hard time understand & navigating it wihout my help & advice
I think that maybe a trusted advisor that you both know might help. You don't want to tear down the company and neither does Jim. How can you both get what you want?
What do you want? I thought it was equity when I first read this, but some of your comments read like you'd be ok with some money. I would think carefully about this before moving any further.
Someone made the point that the equity isn't likely to be worth much. I agree, but for me I'd be digging my heels in because of fairness. At the same time, maybe that doesn't matter as much to you right now.
What do you want? I thought it was equity when I first read this, but some of your comments read like you'd be ok with some money. I would think carefully about this before moving any further.
Someone made the point that the equity isn't likely to be worth much. I agree, but for me I'd be digging my heels in because of fairness. At the same time, maybe that doesn't matter as much to you right now.
Yeah, after some comments and thinking I think the walk away money would be more reasonable to go for than the equity. Thank you!
If you guys have no paper agreement regarding equity, then you can forget about it. If you do have one then I think your proposition is good. Again that depends on the type of the deal.
Well, we both own the company (Jim 60% and I 40%) that operates the app, so there's no way Jim can get me out of the company.
The question remains whether he can simply take the app & create a new company since technically he paid for the app and the contract with programmers is only between Jim and programmers
The question remains whether he can simply take the app & create a new company since technically he paid for the app and the contract with programmers is only between Jim and programmers
When you enter into a partnership with someone, you usually have a non-compete and/or intellectual property clauses. If none of these exist it probably comes down to negotiation, but IANAL.
Yes, he could do that now quite easily since right now it sounds like the app isn't worth much under generally accepted valuation methodologies
Right, so that may be something they can use against me. Although since I've done the most work, I know all the ins and outs and not having me available for occasional consulting would be pretty bad for them
TBH, if the app doesn't currently have any traction, it's current value is essentially nil. If that's the case, knowing the ins and outs doesn't provide much value, especially if they have to rework the app as it would generally be cheaper to just start from scratch.
Thank you. They won't rework the app until they make some money off it first, so for the time being they would pretty much leave it as is. Since the freelance programmers (unknowingly) took very little money, the real value of the source code could potentially be a few tens of thousands. Even if it was just the $11.000, there is a value just in the source code
There’s only value to the source if someone wants to buy it, regardless of how much money was put in to make it.
It sounds like you should get a lawyer and stop talking about this online, as anything you say here can be used against you.
This is a very interesting question, no less from a 19^W20 year old. Honestly, most Ask HN are dull.
Normally, (90%ile) investors get paid back and founders do not (founders own common stock). In this case, Jim owns 92.3% of the preferred stock. Additionally, he paid for a developer out of pocket, not with corporate funds.
Without insulting you, trust me, whatever your idea was it's not going to unicorn status. You are going to fall into the 90%ile. You must already know that -- you're leaving of your own accord.
I would suggest that you propose reducing your equity stake immediately to 3.85%, based on your preferred stock ownership minus 50% to reflect Jim's personal payment for iOS work. Hours spent != effort and effort != stake. If that were true, founders would make kagillions and investors would make pennies. Get over the idea that your efforts justify reward ... it's a lottery not a skills test.
Given Jim's so-far absolutist position, I would further explain how you can make his life hell by making him and the company look bad on social media, directly to investors, etc. (Pls ignore the fact whether you would or not -- you are negotiating here.)
3.85% is perfectly reasonable on both sides so this should be a good offer.
Normally, (90%ile) investors get paid back and founders do not (founders own common stock). In this case, Jim owns 92.3% of the preferred stock. Additionally, he paid for a developer out of pocket, not with corporate funds.
Without insulting you, trust me, whatever your idea was it's not going to unicorn status. You are going to fall into the 90%ile. You must already know that -- you're leaving of your own accord.
I would suggest that you propose reducing your equity stake immediately to 3.85%, based on your preferred stock ownership minus 50% to reflect Jim's personal payment for iOS work. Hours spent != effort and effort != stake. If that were true, founders would make kagillions and investors would make pennies. Get over the idea that your efforts justify reward ... it's a lottery not a skills test.
Given Jim's so-far absolutist position, I would further explain how you can make his life hell by making him and the company look bad on social media, directly to investors, etc. (Pls ignore the fact whether you would or not -- you are negotiating here.)
3.85% is perfectly reasonable on both sides so this should be a good offer.
> I would further explain how you can make his life hell by making him and the company look bad on social media, directly to investors, etc.
For U.S. law this could be considered extortion, slander, or at best bad faith.
Also consider that op wants a job in the future, maybe even to talk to investors in the future.
For U.S. law this could be considered extortion, slander, or at best bad faith.
Also consider that op wants a job in the future, maybe even to talk to investors in the future.
It's extortion to use such leverage to reduce your stake from 40% to 3.85%? Worst extortionist ever!
Our firm has policy that equity is not to be held by non employees. I've seen this in certain investment partnerships. When someone leaves, we have a formula to buy them out, usually some multiple of EBIDA. We can discuss the timing is there is cashflows issues but overall I've seen that work.
Interesting. I guess that's Jim's main problem - that a non-employee would own equity. Thanks!
I think this is one the best resources for founders:
https://www.businessinsider.com/how-to-allocate-ownership-fa...
https://www.businessinsider.com/how-to-allocate-ownership-fa...
What keeps Jim from creating a new corporation, have that new entity tender an offer to buy the assets of the "current startup" for $100? Could Jim, owning the majority of equity accept the offer and pay our OP his $40?
Nope, Jim can only sell his equity (60%) - in other words, he has no right to sell my equity without my agreement
See Seth Godin “Shotgun Clause” (#6)
https://seths.blog/2006/11/dont_make_a_bad/
https://seths.blog/2006/11/dont_make_a_bad/
:) Thanks, sounds good!
This is silly. If you own the equity you don’t have to give him any of it, unless there was an agreement beforehand
Yeah, there was no such agreement
This will be controversial as it balances heroic efforts of founders vs the less risk-taking yet sizeable community who are 99.99% necessary to follow them. Overall theme is, what you did as a founder is great and you should be rewarded, but even 10% is pretty unfair and suffocating dead weight to the people who likely need to come after. You want ownership in something that succeeds.
1. This is why 4 year vests are critical. For co-founders, IMO, 4 year really should be 6 year. So 40% should really be 10-20%.
2. Focus on good/bad cases. Frankly, the value of OP's contrib is high wrt current company, and low wrt the necessary work to be done and effort/risk compensation for the people to do it:
a. Failure -- who cares. This is the 95% case.
b. Small exit -- so let's say they get releaseable (tech), enough micro-pivots to solve early product/market fit (product), get early traction (marketing), some sales, some hiring & management, and given current state, more investment by co-founder. WOW that's a lot of time/$/work still to be done, say another 2 years and maybe now it's Jim and a few contractors or ever 5-20 people, to get to a small M&A. Those folks will be taking low pay, hard hours, & a ton of risk, and they can't all get 10%. If a $5-10M exit through that many other people and investors, how much is OP really responsible for, $1M? $500K? IMO most of the hard work is still to be done: initial app launch is pre-product-market fit and pre-traction. This is the 4% case.
c. Big exit -- First they need to do above product/market fit iterations, could be a couple years. Then they need to build the actual business. So they bring in investment and build an operational & growing business. Let's say 1-3 rounds @ 20% dilution each. Takes another 5-9 years over ^^^: figure out sales/marketing, turn that crank, hiring, a pivot mid-way through, etc.. And exit at 50-200 employees for say $100M. So much more work to be done. A lot of people's work to pay out on: if everyone got 1%, wouldn't be enough. Arguably your 2yrs is worth than a senior infrastructure engineer spending nights and weekends for 2yrs replacing your code so it could scale to 10M people, but is it worth 10X more? 100X more? Riding the labor of others to the tune of $1-2M is just 1-2%, so starting with 5% now is still great.
3. Future investors and acquirers may look at the cap table and see OP's dead weight on it. It's very solvable.
"5%? That'd be equity for 10-50 employees, who is this person? Let's agree to a smaller acquisition with small/zero payout, and invest in that new company."
Or "5%? As an acquirer, we want to pay the people we're trying to sign on to our team, not some dude on a beach who wrote some stupid app that isn't even what the company does today, let's shift proceeds to sign-on bonuses." So weirdly, in your favor not to be big dead weight. Even 10% is dead weight.
4. For remaining founder, so much heavy lift & investment & risk is still to go -- esp if a 5-9 year journey from here -- that 20-30% is demoralizing. Let's say they want to hire another CTO and give them say 20-40% (VESTING!!!). So your remaining cofounder has to do a huge years long lift for... 20%?
1. This is why 4 year vests are critical. For co-founders, IMO, 4 year really should be 6 year. So 40% should really be 10-20%.
2. Focus on good/bad cases. Frankly, the value of OP's contrib is high wrt current company, and low wrt the necessary work to be done and effort/risk compensation for the people to do it:
a. Failure -- who cares. This is the 95% case.
b. Small exit -- so let's say they get releaseable (tech), enough micro-pivots to solve early product/market fit (product), get early traction (marketing), some sales, some hiring & management, and given current state, more investment by co-founder. WOW that's a lot of time/$/work still to be done, say another 2 years and maybe now it's Jim and a few contractors or ever 5-20 people, to get to a small M&A. Those folks will be taking low pay, hard hours, & a ton of risk, and they can't all get 10%. If a $5-10M exit through that many other people and investors, how much is OP really responsible for, $1M? $500K? IMO most of the hard work is still to be done: initial app launch is pre-product-market fit and pre-traction. This is the 4% case.
c. Big exit -- First they need to do above product/market fit iterations, could be a couple years. Then they need to build the actual business. So they bring in investment and build an operational & growing business. Let's say 1-3 rounds @ 20% dilution each. Takes another 5-9 years over ^^^: figure out sales/marketing, turn that crank, hiring, a pivot mid-way through, etc.. And exit at 50-200 employees for say $100M. So much more work to be done. A lot of people's work to pay out on: if everyone got 1%, wouldn't be enough. Arguably your 2yrs is worth than a senior infrastructure engineer spending nights and weekends for 2yrs replacing your code so it could scale to 10M people, but is it worth 10X more? 100X more? Riding the labor of others to the tune of $1-2M is just 1-2%, so starting with 5% now is still great.
3. Future investors and acquirers may look at the cap table and see OP's dead weight on it. It's very solvable.
"5%? That'd be equity for 10-50 employees, who is this person? Let's agree to a smaller acquisition with small/zero payout, and invest in that new company."
Or "5%? As an acquirer, we want to pay the people we're trying to sign on to our team, not some dude on a beach who wrote some stupid app that isn't even what the company does today, let's shift proceeds to sign-on bonuses." So weirdly, in your favor not to be big dead weight. Even 10% is dead weight.
4. For remaining founder, so much heavy lift & investment & risk is still to go -- esp if a 5-9 year journey from here -- that 20-30% is demoralizing. Let's say they want to hire another CTO and give them say 20-40% (VESTING!!!). So your remaining cofounder has to do a huge years long lift for... 20%?
You've said your age, but out of curiosity: How old is Jim?
Yeah, I'm currently 20 and Jim is over 30. That is one of the reasons I've decided to leave - I don't want this to sound cocky or something - but it was apparent that I'm more capable than Jim, or to put it other way Jim doesn't really have an idea what he's doing. I was able to discourage him from some crazy things he wanted to do along the way, but after some time I realized that it's leading nowhere.
I guess the turning point was when we were talking to a journalist and he asked us what are our KPIs (key performance indicators). Jim had no idea what that is, so he just told him some nonsense - I had to step in to make it clear. I just don't want to imagine the embarassment if we were sitting with investors instead
I guess the turning point was when we were talking to a journalist and he asked us what are our KPIs (key performance indicators). Jim had no idea what that is, so he just told him some nonsense - I had to step in to make it clear. I just don't want to imagine the embarassment if we were sitting with investors instead
> it was apparent that I'm more capable than Jim, or to put it other way Jim doesn't really have an idea what he's doing
In other words, you're leaving because you believe the value of your shares are approximately $0.
Why are you spending your valuable time, energy, and creativity fighting to retain your 40% of $0, rather than moving on to doing something more useful?
In other words, you're leaving because you believe the value of your shares are approximately $0.
Why are you spending your valuable time, energy, and creativity fighting to retain your 40% of $0, rather than moving on to doing something more useful?
I reduced my equity from 55% to 12% when i left. it felt fair.
That would feel fair to me too :)
I'm confused, how much is 12% worth when acquired?
If we aren't talking about $3x,xxx or more USD, then the acquisition isn't really very financially significant.
As such I would tell the cofounder that litigiation is a waste of time for both parties and that he really should just give you 12% or etc before you are forced to ruin a relationship and pursue legal action, which would be a net loss for everyone except the lawyers.
If we aren't talking about $3x,xxx or more USD, then the acquisition isn't really very financially significant.
As such I would tell the cofounder that litigiation is a waste of time for both parties and that he really should just give you 12% or etc before you are forced to ruin a relationship and pursue legal action, which would be a net loss for everyone except the lawyers.
True, thank you
Good luck!!! Sad that he is refusing to meet you in the middle. Stick to your rights.
Sure, thanks! :)
what’s the actual vesting schedule??
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It's ridiculous to expect anyone to stay forever, but you should both agree as to what is a good period of time to be vested. Probably you should have agreed on that in advance, but now you have to give and take and agree to compromise on something that works for both of you. Also, this guideline would be good to help others to be vested in the future. You have to consider what works in the industry.
Obviously you need to see the best lawyer you can find immediately. You should not be asking people on the internet to resolve this for you.
Strongly disagree. At this point the app has made almost no money and legal fees will quickly eclipse the rest of the money that you've spent on the app.
Speaking of lawyers, I'm not sure who did your incorporation work but it's honestly pretty disappointing to see that they didn't even suggest a vesting schedule. This is startups 101 stuff; any competent lawyer would have told you this.
Speaking of lawyers, I'm not sure who did your incorporation work but it's honestly pretty disappointing to see that they didn't even suggest a vesting schedule. This is startups 101 stuff; any competent lawyer would have told you this.
Right, hiring a lawyer for me isn't realistic right now and as you've mentioned I could lose more money than make with such action.
I guess another lesson for me other than having a vesting schedule is having a responsible lawyer.
I guess another lesson for me other than having a vesting schedule is having a responsible lawyer.
You side with those against you meaning your main problems are internal and psychological.
Your situation where your contract gives you 40% ownership of the business without a vesting schedule is massively preferable from your standpoint legally and vastly superior than one where you have restrictions on equity. You are in as they say, in the cat-bird seat.
Why do you continue to side against yourself and with those who seek to harm you? I don't need an answer nor can I answer that for you. It's something you need to resolve for yourself.
Your situation where your contract gives you 40% ownership of the business without a vesting schedule is massively preferable from your standpoint legally and vastly superior than one where you have restrictions on equity. You are in as they say, in the cat-bird seat.
Why do you continue to side against yourself and with those who seek to harm you? I don't need an answer nor can I answer that for you. It's something you need to resolve for yourself.
We are 2 co-founders - I own 40% and (let’s call him) Jim owns 60%. Jim invested $12.000 (funded the development), I’ve invested about $1.000. Most of the work except of programming (we hired freelancers to develop a sharing economy app) was done by me - I’ve done the initial sketches & app flow based on Jim’s idea, created us a website, got us a payment gateway, communicated with accountants, handled app submissions, marketing & social media, whole design & branding stuff, handled Android programmer, etc. Jim mainly handled the iOS programmer and a lawyer. The overall hours spent (and work done) are maybe in 85:15 ratio.
The app was released a few months ago, got some first users and great feedback from the startup community, but some huge bugs occurred so it’s currently in the stage of fixing them (it’d be done in like 2 weeks)
Now I’ve decided to leave after almost 2 years. I’ve proposed to Jim that my share from the potential sale of the startup will be reduced to 30% immediately and will be gradually reduced ever further over a period of 4 years to 5%.
Jim said that it’s absolutely unacceptable for me to retain ANY equity after I leave. He wants to pay me my share of the incorporation fee that I’ve paid and that’s it. He argues that once I leave the company I’m not entitled to any money he gets from the potential acquisition.
Do you think this is fair? I’ve tried to explain to Jim that what I want is a norm in the startup world and that the equity that I would retain is a compensation for the work that I’ve done to this point, but without any success.
If we don’t agree on my exit (taking my share of the incorporation fee) I think he will create a new company and operate the app like that - the thing is that he paid for the app development with his own money (not the corporate ones) so he argues that he owns the app.
I’d be really glad to hear your opinions & I will share them with Jim too
Thanks :)