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The risk was not having these things sorted out at the start. It’s pretty standard to have vesting schedules, even for founders. For exactly this kind of situat

The risk was not having these things sorted out at the start. It’s pretty standard to have vesting schedules, even for founders. For exactly this kind of situation. Most Series A investors will stipulate such a requirement, and if there was already a vesting schedule it all resets as part of the investment. Similarly it’s less common, but still not uncommon, to have provisions for leavers. Either some kind of prenegotiated basis to determine how you calculate fair value and buy back the share. Or I have seen something that was more like a reverse vesting in that the ownership expires X years after you leave. The benefit of sorting all this stuff upfront isn’t just to avoid negotiating at the worst time when emotions are high. The game theory aspect of it requires you to balance not getting screwed with what seems fair if you’re the one that leaves.

sergiomattei 5y ago
Elementary isn’t new, I wouldn’t be surprised if the vesting schedule ran its course.
l33tman 5y ago
Yes reverse vesting (which is common) means that you start by owning your, say, 33% share from the start and each month you stay your quitting penalty reduces by 1%. So if you quit 1 month in you need to sell back 32% at basically no cost. Since you own all the stock up front the founder participates fully in shareholder voting and you don't get taxed for receiving valuable stock later (although there might be issues with the actual reverse vesting agreement from a tax law standpoint as it is a form that ties your employment with benefits).
- berdario 5y ago
  That's interesting, I never heard of reverse vesting. I thought you'd be liable for capital gains tax (since you're making a "gift to the company/cofounder", you'd have to use the real market value of the gift to compute CGT), but it seems that the tax rules have a special case defined exactly for this circumstance: https://www.gov.uk/gift-holdover-relief https://www.gov.uk/gift-holdover-relief (of course, this depends on jurisdiction)
  - glenngillen 5y ago
    At the risk of making sweeping generalisations about tax law interpretations in multiple jurisdictions… I’ve lived in numerous countries and they’ve all applied either one or both of the following to such a situation: * the shares are deemed “at risk” because of the exit clause, and so are not yet taxable. In Australia _I think_ you need to explicitly declare that treatment in the first tax return that the event happens, and you’d be losing some of the benefit of the long term capital gains tax discount as a result. I’d need to double check with my accountant on the specifics, but I know he suggested such a thing at one point. * the nominal value at the time is tiny fractions of a cent per share because the company has no assets or income. So you just take the tax hit, which ends up being something like $1.
hvidgaard 5y ago
I've seen a few pair of founders with great success have an agreement that one could at any point for any reason, decide to buy out the other party. Catch is that if you invoke that the other party can switch it around and demand that you accept that pay for your share. It's crystal clear what and how, and you're not going to try and low ball it because you can be forced to sell for that yourself. I don't think it's perfect, but it is simple, self correcting and crystal clear.
- dwohnitmok 5y ago
  > Catch is that if you invoke that the other party can switch it around and demand that you accept that pay for your share. I'm kinda curious how the low-level details of that work out. Do you have some sort of 3rd-party service which temporarily holds one founder's offer and gives the other founder N days to make a decision? Or is there some other mechanism to prevent the founder initiating a buy out from backing out ("no you see, I wasn't actually serious about buying you out!").
  - KarlKemp 5y ago
    The mechanism is triggered by one founder making a clear statement, usually in writing, that they want to trigger it. From that moment on, they are bound to it.
  - hvidgaard 5y ago
    Apart from invoking it in writing, I think such manoeuvres go through a lawyer, which a court will usually accept them as stating the truth about when an offer was send and received. I'm also sure the clause have some text about how long the other founder has to answer and how long they have to come up with the money if they decide to switch it around.
- y7 5y ago
  This only works well if the parties have equal access to that kind of cash. Otherwise you might get into a situation where the richer founder can just decide to buy the other founder out at a price which is unfair but still beyond their cash means.

sergiomattei 5y ago

Elementary isn’t new, I wouldn’t be surprised if the vesting schedule ran its course.

l33tman 5y ago

Yes reverse vesting (which is common) means that you start by owning your, say, 33% share from the start and each month you stay your quitting penalty reduces by 1%. So if you quit 1 month in you need to sell back 32% at basically no cost. Since you own all the stock up front the founder participates fully in shareholder voting and you don't get taxed for receiving valuable stock later (although there might be issues with the actual reverse vesting agreement from a tax law standpoint as it is a form that ties your employment with benefits).

berdario 5y ago
That's interesting, I never heard of reverse vesting. I thought you'd be liable for capital gains tax (since you're making a "gift to the company/cofounder", you'd have to use the real market value of the gift to compute CGT), but it seems that the tax rules have a special case defined exactly for this circumstance: https://www.gov.uk/gift-holdover-relief https://www.gov.uk/gift-holdover-relief (of course, this depends on jurisdiction)
- glenngillen 5y ago
  At the risk of making sweeping generalisations about tax law interpretations in multiple jurisdictions… I’ve lived in numerous countries and they’ve all applied either one or both of the following to such a situation: * the shares are deemed “at risk” because of the exit clause, and so are not yet taxable. In Australia _I think_ you need to explicitly declare that treatment in the first tax return that the event happens, and you’d be losing some of the benefit of the long term capital gains tax discount as a result. I’d need to double check with my accountant on the specifics, but I know he suggested such a thing at one point. * the nominal value at the time is tiny fractions of a cent per share because the company has no assets or income. So you just take the tax hit, which ends up being something like $1.

hvidgaard 5y ago

I've seen a few pair of founders with great success have an agreement that one could at any point for any reason, decide to buy out the other party. Catch is that if you invoke that the other party can switch it around and demand that you accept that pay for your share. It's crystal clear what and how, and you're not going to try and low ball it because you can be forced to sell for that yourself. I don't think it's perfect, but it is simple, self correcting and crystal clear.

dwohnitmok 5y ago
> Catch is that if you invoke that the other party can switch it around and demand that you accept that pay for your share. I'm kinda curious how the low-level details of that work out. Do you have some sort of 3rd-party service which temporarily holds one founder's offer and gives the other founder N days to make a decision? Or is there some other mechanism to prevent the founder initiating a buy out from backing out ("no you see, I wasn't actually serious about buying you out!").
- KarlKemp 5y ago
  The mechanism is triggered by one founder making a clear statement, usually in writing, that they want to trigger it. From that moment on, they are bound to it.
- hvidgaard 5y ago
  Apart from invoking it in writing, I think such manoeuvres go through a lawyer, which a court will usually accept them as stating the truth about when an offer was send and received. I'm also sure the clause have some text about how long the other founder has to answer and how long they have to come up with the money if they decide to switch it around.
y7 5y ago
This only works well if the parties have equal access to that kind of cash. Otherwise you might get into a situation where the richer founder can just decide to buy the other founder out at a price which is unfair but still beyond their cash means.