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Ask HN: Co-founder leaving a startup for free without equity?

• the-dude 7y ago
  Would you please read the guidelines and make this a 'Ask HN' ?
  • mickeyM 7y ago
    I'm sorry, thanks for reminding me - done
    • the-dude 7y ago
      Thnx. No need to apologize. I am not a moderater.
• onion2k 7y ago
  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.
  • mickeyM 7y ago
    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
    • onion2k 7y ago
      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.
      • mickeyM 7y ago
• c89X 7y ago
  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.
  • mickeyM 7y ago
    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.
    • neumann 7y ago
      In that case (and this might be unpacking something else), can you just hang in for a few months?
      • mickeyM 7y ago
        Well, the main reason for selling the startup/source code would be my departure so I don't think that would work
    • smudgymcscmudge 7y ago
      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.
• seanrrwilkins 7y ago
  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.
  • mickeyM 7y ago
    That's right, lesson learned :) I would agree with such an equity stake & expiration, that sounds reasonable
• RocketSyntax 7y ago
  I reduced my equity from 55% to 12% when i left. it felt fair.
  • mickeyM 7y ago
    That would feel fair to me too :)
    • quaquaqua1 7y ago
      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.
      • mickeyM 7y ago
        True, thank you
        • quaquaqua1 7y ago
          Good luck!!! Sad that he is refusing to meet you in the middle. Stick to your rights.
          • mickeyM 7y ago
            Sure, thanks! :)
• RocketSyntax 7y ago
  what’s the actual vesting schedule??
  • mickeyM 7y ago
    There's none, that's the thing (lesson learned). It's just that Jim owns 60% and I own 40%, that's it
    • wheelerwj 7y ago
      > It's just that Jim owns 60% and I own 40%, that's it well that seems pretty cut and dry.
• andreshb 7y ago
  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-recruiting-co-founder-andres-barreto/ https://www.linkedin.com/pulse/startup-survival-guide-recrui...
  • mickeyM 7y ago
    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
• carimura 7y ago
  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.
  • mickeyM 7y ago
    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
• droithomme 7y ago
  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.
  • revel 7y ago
    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.
    • mickeyM 7y ago
      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.
      • droithomme 7y ago
        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.
• lostsoul8282 7y ago
  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.
  • mickeyM 7y ago
    Interesting. I guess that's Jim's main problem - that a non-employee would own equity. Thanks!
• phanindra_veera 7y ago
  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.
  • mickeyM 7y ago
    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
    • gamblor956 7y ago
      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
      • mickeyM 7y ago
        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
        • gamblor956 7y ago
          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.
          • mickeyM 7y ago
            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 $11.000, there is a value just in the source code
• smoyer 7y ago
  "I own 40%" If you own part of the company you don't just give that up without there being express wording in the charter (or whatever contract/paperwork you used to create the company). The problem you have is that right now, you own 40% of nothing so you're going to pay the lawyer you talk to (rather than have them work on contingency). I should also note that this seems like a weird time to leave a startup ... did you really think you could cash out in just two years? Perhaps you haven't been "invested" in some time?
  • mickeyM 7y ago
    Yeah, there's no way I'm hiring a lawyer for this ($). 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
    • pickle-wizard 7y ago
      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.
      • mickeyM 7y ago
        True, I hope to it done as soon as possible
• whiddershins 7y ago
  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.
  • mickeyM 7y ago
    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.
    • PopeDotNinja 7y ago
      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.
      • mickeyM 7y ago
        Thank you, the thing with scheduling payments over some sounds good to me, I'll try to propose it to Jim
        • 7y ago
• mooreds 7y ago
  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.
  • mickeyM 7y ago
    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
    • mooreds 7y ago
      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.
      • mickeyM 7y ago
        Yeah, after some comments and thinking I think the walk away money would be more reasonable to go for than the equity. Thank you!
• deleted 7y ago
  [deleted]
• pickle-wizard 7y ago
  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.
  • mickeyM 7y ago
    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
    • pickle-wizard 7y ago
      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.
      • mickeyM 7y ago
        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)
• chasing 7y ago
  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.
  • rolltiide 7y ago
    > 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
    • deleted 7y ago
      [deleted]
    • mickeyM 7y ago
      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
      • chasing 7y ago
        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.
        • mickeyM 7y ago
          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!
• stevewilhelm 7y ago
  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?
  • mickeyM 7y ago
    Nope, Jim can only sell his equity (60%) - in other words, he has no right to sell my equity without my agreement
• raiyu 7y ago
  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?
  • mickeyM 7y ago
    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!
• drelihan 7y ago
  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.
  • mickeyM 7y ago
    Yeah, Jim buying me out would be a preferable option now
• toxik 7y ago
  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.
  • mickeyM 7y ago
    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!
    • mch82 7y ago
      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.
      • mickeyM 7y ago
        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
• pulse7 7y ago
  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 https://en.wikipedia.org/wiki/Paul_Allen#Microsoft
  • mickeyM 7y ago
    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!
• mch82 7y ago
  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.
  • mch82 7y ago
    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 https://stripe.com/atlas/guides/equity
  • ada1981 7y ago
    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?
    • maerF0x0 7y ago
      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...
      • ada1981 7y ago
• chasing 7y ago
  You've said your age, but out of curiosity: How old is Jim?
  • mickeyM 7y ago
    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
    • jmalicki 7y ago
      > 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?
• logfromblammo 7y ago
  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?
  • mickeyM 7y ago
    Thanks a lot, great tips :) That's very reasonable, I'd gladly agree to that.
• partingshots 7y ago
  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.
  • frenchman99 7y ago
    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).
    • mickeyM 7y ago
      Right, thanks!
  • mickeyM 7y ago
    Yeah, that's also one of the reasons for walking away, better to get it over with now
• jedberg 7y ago
  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.
  • eloisant 7y ago
    Yes, just be careful what you sign when walking away now.
    • mickeyM 7y ago
      Yeah, at this point I'll be careful about everything I sign & do, not only with this startup but with any I'd potentially join in the future
  • mickeyM 7y ago
    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
    • jedberg 7y ago
      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.
• abannin 7y ago
  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.
  • mickeyM 7y ago
    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.
• lmeyerov 7y ago
  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%?
• deleted 7y ago
  [deleted]
• jiveturkey 7y ago
  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.
  • smileysteve 7y ago
    > 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.
    • jiveturkey 7y ago
      It's extortion to use such leverage to reduce your stake from 40% to 3.85%? Worst extortionist ever!
• easel 7y ago
  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.
• kerkeslager 7y ago
  It sounds like you should get a lawyer and stop talking about this online, as anything you say here can be used against you.
• tiffanyh 7y ago
  See Seth Godin “Shotgun Clause” (#6) https://seths.blog/2006/11/dont_make_a_bad/ https://seths.blog/2006/11/dont_make_a_bad/
  • mickeyM 7y ago
    :) Thanks, sounds good!
• johnwheeler 7y ago
  This is silly. If you own the equity you don’t have to give him any of it, unless there was an agreement beforehand
  • mickeyM 7y ago
    Yeah, there was no such agreement
• ReD_CoDE 7y ago
  I think this is one the best resources for founders: https://www.businessinsider.com/how-to-allocate-ownership-fairly-when-forming-a-new-software-startup-2011-4 https://www.businessinsider.com/how-to-allocate-ownership-fa...
• adonese 7y ago
  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
  • mickeyM 7y ago
    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?
• Aeolun 7y ago
  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.
• not_a_cop75 7y ago
  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.