5 ms·

Having a shootout agreement in place I think is the best option: At any moment, a founder may wish to buy someone else's equity, or may wish to sell his own. At

Having a shootout agreement in place I think is the best option: At any moment, a founder may wish to buy someone else's equity, or may wish to sell his own. At that moment, he proposes a transaction value. The counter-party has the choice to take either side of the transaction. Example: Alice wants out. She proposes that Bob buys her shares for 50k. Bob may either accept the purchase, if he thinks the price is correct, or he must sell his own shares to Alice if he thinks the proposal is over-valued. There are more details to this, like a horizon allowing for funds to be sought, the possibility of financing by the company or dealing with more than two partners, but this is the gist of it.

unethical_ban 5y ago
>Alice wants out. She proposes that Bob buys her shares for 50k. Bob may either accept the purchase, if he thinks the price is correct, or he must sell his own shares to Alice if he thinks the proposal is over-valued. "I want out now, at $1,000,000 a share. What? You think my stake is only worth $50,000? Well then, sell me the company!"
- nicwolff 5y ago
  "OK! Per our agreement, you owe me $1,000,000 per share." > he must sell his own shares to Alice at the price she proposed! > The counter-party has the choice to take either side of the transaction.
- addingnumbers 5y ago
  "Ha ha, I tricked you into selling for only 2000% of your asking price!"
pitaj 5y ago
Huh, that's pretty ingenious.
mkoryak 5y ago
So lets say that bob thinks that the proposal is over valued and sells his shares to Alice. Now Alice wants out, but is 50k poorer, and owns the entire company. How does it help the company to now be run by someone who no longer wants to work there, but has to because of debt?
- etchalon 5y ago
  That situation would imply Alice over-valued the company, and Bob was 100% right to sell his portion and walk away.
  - mkoryak 5y ago
    I get that Bob is happy with this outcome, but what about the company?
    - horsawlarway 5y ago
      At the end of the day - most of what makes a company valuable (or even functional) is the people who are working there. Sometimes novel IP has value, and sometimes the company has assets that are worth something, but this is relatively rare for software companies. If you are relatively popular with your current users, your brand may also have some worth, and quite a few companies are happy to scoop up a brand, hollow it out, and retire it a few years later once it's no longer associated with anything worth while. Otherwise... The company dies, because it was not profitable enough, and this is both normal and expected.
    - sergiosgc 5y ago
      The company avoided a shareholder fight for shares. This is actually a defense mechanism for the company, not the founders.
- sergiosgc 5y ago
  It solves the basic problem of stabilizing the shareholder group. No more infighting. Important to your point, this method makes it difficult to stray from the real valuation. If Alice really wants out, she does not value the shares as much as Bob. Her just valuation will be viewed as a good deal by Bob. The scenario you define probably will not happen. If it does happen, then by definition Alice actually valued staying with company.
tqi 5y ago
I think this only works if both parties have similar financial situations? ie if the shares are "truly" worth 50K but one party can only come up with 10K, then an offer of 11K would allow the other to buy up the shares at a massive discount?
- thih9 5y ago
  Perhaps an external investor could help? This way the amount wouldn’t reach 50k but I guess it wouldn’t drop to 11k either.
- sergiosgc 5y ago
  It's a very risky move. These agreements usually have a generous period for participants to seek funding (six months is typical). If the deal is economically advantageous (11k for a 50k share), and the problem is liquidity, the buying party can find an external investor willing to get in on the deal.

unethical_ban 5y ago

>Alice wants out. She proposes that Bob buys her shares for 50k. Bob may either accept the purchase, if he thinks the price is correct, or he must sell his own shares to Alice if he thinks the proposal is over-valued. "I want out now, at $1,000,000 a share. What? You think my stake is only worth $50,000? Well then, sell me the company!"

nicwolff 5y ago
"OK! Per our agreement, you owe me $1,000,000 per share." > he must sell his own shares to Alice at the price she proposed! > The counter-party has the choice to take either side of the transaction.
addingnumbers 5y ago
"Ha ha, I tricked you into selling for only 2000% of your asking price!"

pitaj 5y ago

Huh, that's pretty ingenious.

mkoryak 5y ago

So lets say that bob thinks that the proposal is over valued and sells his shares to Alice. Now Alice wants out, but is 50k poorer, and owns the entire company. How does it help the company to now be run by someone who no longer wants to work there, but has to because of debt?

etchalon 5y ago
That situation would imply Alice over-valued the company, and Bob was 100% right to sell his portion and walk away.
- mkoryak 5y ago
  I get that Bob is happy with this outcome, but what about the company?
  - horsawlarway 5y ago
    At the end of the day - most of what makes a company valuable (or even functional) is the people who are working there. Sometimes novel IP has value, and sometimes the company has assets that are worth something, but this is relatively rare for software companies. If you are relatively popular with your current users, your brand may also have some worth, and quite a few companies are happy to scoop up a brand, hollow it out, and retire it a few years later once it's no longer associated with anything worth while. Otherwise... The company dies, because it was not profitable enough, and this is both normal and expected.
  - sergiosgc 5y ago
    The company avoided a shareholder fight for shares. This is actually a defense mechanism for the company, not the founders.
sergiosgc 5y ago
It solves the basic problem of stabilizing the shareholder group. No more infighting. Important to your point, this method makes it difficult to stray from the real valuation. If Alice really wants out, she does not value the shares as much as Bob. Her just valuation will be viewed as a good deal by Bob. The scenario you define probably will not happen. If it does happen, then by definition Alice actually valued staying with company.

tqi 5y ago

I think this only works if both parties have similar financial situations? ie if the shares are "truly" worth 50K but one party can only come up with 10K, then an offer of 11K would allow the other to buy up the shares at a massive discount?

thih9 5y ago
Perhaps an external investor could help? This way the amount wouldn’t reach 50k but I guess it wouldn’t drop to 11k either.
sergiosgc 5y ago
It's a very risky move. These agreements usually have a generous period for participants to seek funding (six months is typical). If the deal is economically advantageous (11k for a 50k share), and the problem is liquidity, the buying party can find an external investor willing to get in on the deal.