5 ms·

Here's the questions we thought through when our 3-person consulting firm split up: https://ozar.me/2015/12/what-does-it-mean-to-buy-out-your-partners/ https:/

Here's the questions we thought through when our 3-person consulting firm split up: https://ozar.me/2015/12/what-does-it-mean-to-buy-out-your-partners/ https://ozar.me/2015/12/what-does-it-mean-to-buy-out-your-pa... The first thing to do is read the startup's legal agreements. In our case, when we started the company, we agreed that partners (owners) could not participate in a business that competed with our own. You could leave at any time and do something competitive - but if you did, you thereby let go of your ownership. (You may also have a vesting schedule.) If it's not obvious to you what your legal agreements mean, get a lawyer. Most lawyers will talk to you for 30 minutes for free to decide if it makes sense to hire them. Hiring a lawyer won't be cheap. You need the lawyer to tell you if you can simply walk away from the company and retain all of your ownership. If you can, then just ask the remaining partners, "What would you like to pay me to buy out my ownership?" It's simply a matter of what you're willing to accept. Don't get hung up on valuing what the company will be worth in the future. If you can't agree on strategy, you won't agree on a valuation, either. Just ask them what they're willing to pay, and see if it lines up with what you'd accept. If it doesn't, and you can retain your ownership, and you believe the company will be worth a lot in the future, then walk away and keep your ownership. But if you don't have that legal ability to keep your shares, then be prepared to accept a cup of coffee and a smile, and that's about it. (In our case, I bought out my cofounders because it was the right thing to do, but don't expect your partners to do the same. It's just a matter of character and your negotiation skills.)

Ntrails 9y ago
The most common method of valuation for splits I've heard is the shotgun clause into "offer what you're willing to accept" methodology. As in, offer a price to buy me out - but you have to be willing to accept the same price for your share (which is the incentive to make a fair offer). Ofc i've only seen it in 2 person partnerships but imagine can be generalised.
- logicallee 9y ago
  I don't understand the "shotgun clause" at all. Suppose we simplify and the offer must be accepted using only money in a (private) bank account designated in advance, and each person knows the other person's balance because they're honest with each other. Then if one person has $27,000 in their private bank account and the other person has $14,000 then the person with $27,000 can offer $14,001 and the person with $14,000 is forced to accept. If one of the parties happens to be overdrawn on that account and have net -$3.70 then the other party can ofer $5 and the overdrawn party would be forced to accept. Now granted in the real world people can raise buyout capital from their private network on short notice -- but doesn't this show great unfairness, if the parties aren't both independently much richer than the value of the business they're discussing? For most startup founders who own, say, 50% of a startup whose last valuation was $7 million, that is nearly all of their net worth. The vast majority probably could not so much as raise $50,000 on short notice. So, if one of the parties already has a hundred thousand, they can offer $55,000 and the more cash-strapped party would be forced to accept it. So what gives. I just don't get it at all. Like, I don't even get the theory of why this is supposed to be fair... it just seems "obviously" broken to me -- so I must be missing something.
  - beagle3 9y ago
    You are missing the "raising for buy out". If the shares are realistically worth $20K, and the $27K guy offers $14.1K, then the $14k guy would raise $0.1K (possibly even with a 50% APR) and counter; instant 5.9k profit.
    - logicallee 9y ago
      It was an illustrative, mathematical example, of what I'm talking about. If the shares are worth $3.5 million, how much do you think the guy leaving can raise on short notice? If you say anything over $100,000 you are delusional. Investors don't even see the value in companies that are provably worth $1 billion. Even in retrospect you say, "well yeah history showed it is worth $1 billion, and the founder made a good case for that, but actually that is like a founder making a good case that he will role 10 "6's" in a row on a die, and then proceed to do that. The chances that he was going to do that are actually just 1 in 60,466,176 so the correct value of that "$1 billion" share is actually $1 billion / 60,466,176 = $16. That seems a little low - I'll give you a $100 for it. That's my annual budget for lottery tickets." Investors don't value startups correctly and the idea that a guy can quickly raise money for a buyout of a stake in a company he's leaving borders on delusional. Plus, who would invest in a company with a negative signal that strong: that a guy who owns 1/3 of it wants to leave it. There is obviously absolutely no way for a cash-poor founder without prior exits to raise anywhere near $3.5 million for a 50% buyout of a company raising a round at $7 million. honestly - have you tried raising money around the seed stage? It's brutal, if everyone is on board and there are no negative signals of any kind. I wouldn't be surprised if no poorly networked, cash-poor founder has raised significant (>$1 million) for a shotgun buyout of a company he's leaving, on short notice, ever. I might be wrong though, and I'd love to know if so. In my model it's really, really hard to raise money.
      - beagle3 9y ago
        Yes, I have raised successfully at the seed stage several times. If the company is worth $3.5M and no vesting schedule, no investor will touch it (and the 3.5m valauation was reached either out of thin air, or on the back of a sucker). If you cannot raise (with e.g. 20% discount for the trouble), the valuation is wrong.
- 6nf 9y ago
  Roulette Clause

Ntrails 9y ago

The most common method of valuation for splits I've heard is the shotgun clause into "offer what you're willing to accept" methodology. As in, offer a price to buy me out - but you have to be willing to accept the same price for your share (which is the incentive to make a fair offer). Ofc i've only seen it in 2 person partnerships but imagine can be generalised.

logicallee 9y ago
I don't understand the "shotgun clause" at all. Suppose we simplify and the offer must be accepted using only money in a (private) bank account designated in advance, and each person knows the other person's balance because they're honest with each other. Then if one person has $27,000 in their private bank account and the other person has $14,000 then the person with $27,000 can offer $14,001 and the person with $14,000 is forced to accept. If one of the parties happens to be overdrawn on that account and have net -$3.70 then the other party can ofer $5 and the overdrawn party would be forced to accept. Now granted in the real world people can raise buyout capital from their private network on short notice -- but doesn't this show great unfairness, if the parties aren't both independently much richer than the value of the business they're discussing? For most startup founders who own, say, 50% of a startup whose last valuation was $7 million, that is nearly all of their net worth. The vast majority probably could not so much as raise $50,000 on short notice. So, if one of the parties already has a hundred thousand, they can offer $55,000 and the more cash-strapped party would be forced to accept it. So what gives. I just don't get it at all. Like, I don't even get the theory of why this is supposed to be fair... it just seems "obviously" broken to me -- so I must be missing something.
- beagle3 9y ago
  You are missing the "raising for buy out". If the shares are realistically worth $20K, and the $27K guy offers $14.1K, then the $14k guy would raise $0.1K (possibly even with a 50% APR) and counter; instant 5.9k profit.
  - logicallee 9y ago
    It was an illustrative, mathematical example, of what I'm talking about. If the shares are worth $3.5 million, how much do you think the guy leaving can raise on short notice? If you say anything over $100,000 you are delusional. Investors don't even see the value in companies that are provably worth $1 billion. Even in retrospect you say, "well yeah history showed it is worth $1 billion, and the founder made a good case for that, but actually that is like a founder making a good case that he will role 10 "6's" in a row on a die, and then proceed to do that. The chances that he was going to do that are actually just 1 in 60,466,176 so the correct value of that "$1 billion" share is actually $1 billion / 60,466,176 = $16. That seems a little low - I'll give you a $100 for it. That's my annual budget for lottery tickets." Investors don't value startups correctly and the idea that a guy can quickly raise money for a buyout of a stake in a company he's leaving borders on delusional. Plus, who would invest in a company with a negative signal that strong: that a guy who owns 1/3 of it wants to leave it. There is obviously absolutely no way for a cash-poor founder without prior exits to raise anywhere near $3.5 million for a 50% buyout of a company raising a round at $7 million. honestly - have you tried raising money around the seed stage? It's brutal, if everyone is on board and there are no negative signals of any kind. I wouldn't be surprised if no poorly networked, cash-poor founder has raised significant (>$1 million) for a shotgun buyout of a company he's leaving, on short notice, ever. I might be wrong though, and I'd love to know if so. In my model it's really, really hard to raise money.
    - beagle3 9y ago
      Yes, I have raised successfully at the seed stage several times. If the company is worth $3.5M and no vesting schedule, no investor will touch it (and the 3.5m valauation was reached either out of thin air, or on the back of a sucker). If you cannot raise (with e.g. 20% discount for the trouble), the valuation is wrong.
6nf 9y ago
Roulette Clause