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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 a

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
- eloff 7y ago
  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.
  - mickeyM 7y ago
    I'll try, thanks a lot! :)
  - MrDunham 7y ago
    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.
  - deleted 7y ago
    [deleted]
hanoz 7y ago
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.
- andreshb 7y ago
  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
  - hanoz 7y ago
    > 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.

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

eloff 7y ago
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.
- mickeyM 7y ago
  I'll try, thanks a lot! :)
- MrDunham 7y ago
  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.
- deleted 7y ago
  [deleted]

hanoz 7y ago

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.

andreshb 7y ago
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
- hanoz 7y ago
  > 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.