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The typical defense against this is a pro rata investment right - if the company tries to conduct a financing at an artificially low valuation, you are allowed

The typical defense against this is a pro rata investment right - if the company tries to conduct a financing at an artificially low valuation, you are allowed to invest alongside the investors to protect your percentage position. If you had this right, and felt 150k was too much money to support your position, you could have gone out and borrowed the money from another investor. To be honest, if at a 1M post money valuation you couldn't justify defending your position, the company was probably, in fact, approximately worthless.

nostrademons 3y ago
It sounded like he had a pro rata, but he couldn't afford to exercise his pro rata. Borrowing money to invest in a startup that you've left and that the board values at approximately worthless is a pretty tough sell, both to yourself and to a potential lender.
- propter_hoc 3y ago
  Yup. Sounds like he isn't missing out on too much. If anything, he might actually consider himself fortunate here that the company successfully conducted its recapitalization and raised fresh equity. Maybe his otherwise-worthless shareholding will ultimately end up in the money, due to the other investors rescuing the company.
ravingpanda 3y ago
That assumes the valuation is honest. The fact we're seeing this post suggests otherwise.
- propter_hoc 3y ago
  It doesn't assume that at all. If the valuation on the deal is below your estimation of the true enterprise value, then this mechanism allows you to participate alongside the others and also buy cheap shares.
  - Scarblac 3y ago
    If you are rich enough to do that. But OK, if you don't then you now have a smaller share of a bigger pie.
    - robertlagrant 3y ago
      If not then you find the money somehow. Rich people don't have piles of money lying around. They just know how to convince others to lend them money at a certain rate, and hope that the profit pays all that off and leaves them a chunk. It's not magic; it's just being relatively trustworthy with risk.
j45 3y ago
That might be true in this case, but one partner using their knowledge as an advantage over the other to let them disproprtionately be squeezed out is just dirty business. Nothing else. Partners are supposed to leverage the opportunity together, not each other. It’s why attempts to simplify this and advocate for the actual innovators/creators who are just as much technical people are incredibly important. Tech people need to retain way more of the equity, period. They create tangible value in building something. The “sales” oriented partners should earn their equity from the pool with delivering distribution or move on.
- deleted 3y ago
  [deleted]
- robocat 3y ago
  There are lots of negative risks from taking VC money. Even freshly minted from university there are enough true horror stories like this on the internet to learn from. But working in an incubator you see it all and have little excuse to be surprised (I was a founder and we were in an incubator for a while - saw some of the action!). Avoiding outcomes like these would be a reason I would go through YC if I wanted to chase VC money rather than bootstrap. Having a strong minority investor beside you; one where the VCs do repeat business, and one the VCs care about their reputation, would be very helpful. > Tech people need to retain way more of the equity That's just fantasy. Common shares really suck: VC rights trump and VC model has a lot of dilution built into the success case. The median return of a any business is zero. VC money gears the risks higher for a Tech/investor. Good luck!
  - j45 3y ago
    >That's just fantasy. YCombinator started partially to change the fantasy. Not fantasy at all. Below recent video from YC for technical founders on balance that's not occurring. The lack of healthy balance between founders leads to risking investments more than they are. If the VC model is imablanced and it incentivizes non-tech founders to do the same, both will need to understand the cheaper it gets to build and scale larger and larger. Leveraging young founders or tech talent who might not know any better won't last long, it seems founders are learning from the experiences of others now that there have been so many more funded startups. YC clearly talks about avoiding co-founders and situations that rip off the technical founder when they are creating so much equal value to anyone else in the start. "How not to get screwed as a software engineer". What they see in applications from a mile away from people being exploited in applications. https://www.youtube.com/watch?v=fcfVjd_oV1I https://www.youtube.com/watch?v=fcfVjd_oV1I
s1artibartfast 3y ago
There are are legal remedies to challenge false valuation. There is a near endless list of ways to be defrauded if founders engage in illegal behavior and nobody is willing to legally challeng it. These range from simply tearing up you stock grant to transferring the IP to a parallel entity.

nostrademons 3y ago

It sounded like he had a pro rata, but he couldn't afford to exercise his pro rata. Borrowing money to invest in a startup that you've left and that the board values at approximately worthless is a pretty tough sell, both to yourself and to a potential lender.

propter_hoc 3y ago
Yup. Sounds like he isn't missing out on too much. If anything, he might actually consider himself fortunate here that the company successfully conducted its recapitalization and raised fresh equity. Maybe his otherwise-worthless shareholding will ultimately end up in the money, due to the other investors rescuing the company.

ravingpanda 3y ago

That assumes the valuation is honest. The fact we're seeing this post suggests otherwise.

propter_hoc 3y ago
It doesn't assume that at all. If the valuation on the deal is below your estimation of the true enterprise value, then this mechanism allows you to participate alongside the others and also buy cheap shares.
- Scarblac 3y ago
  If you are rich enough to do that. But OK, if you don't then you now have a smaller share of a bigger pie.
  - robertlagrant 3y ago
    If not then you find the money somehow. Rich people don't have piles of money lying around. They just know how to convince others to lend them money at a certain rate, and hope that the profit pays all that off and leaves them a chunk. It's not magic; it's just being relatively trustworthy with risk.

j45 3y ago

That might be true in this case, but one partner using their knowledge as an advantage over the other to let them disproprtionately be squeezed out is just dirty business. Nothing else. Partners are supposed to leverage the opportunity together, not each other. It’s why attempts to simplify this and advocate for the actual innovators/creators who are just as much technical people are incredibly important. Tech people need to retain way more of the equity, period. They create tangible value in building something. The “sales” oriented partners should earn their equity from the pool with delivering distribution or move on.

deleted 3y ago
[deleted]
robocat 3y ago
There are lots of negative risks from taking VC money. Even freshly minted from university there are enough true horror stories like this on the internet to learn from. But working in an incubator you see it all and have little excuse to be surprised (I was a founder and we were in an incubator for a while - saw some of the action!). Avoiding outcomes like these would be a reason I would go through YC if I wanted to chase VC money rather than bootstrap. Having a strong minority investor beside you; one where the VCs do repeat business, and one the VCs care about their reputation, would be very helpful. > Tech people need to retain way more of the equity That's just fantasy. Common shares really suck: VC rights trump and VC model has a lot of dilution built into the success case. The median return of a any business is zero. VC money gears the risks higher for a Tech/investor. Good luck!
- j45 3y ago
  >That's just fantasy. YCombinator started partially to change the fantasy. Not fantasy at all. Below recent video from YC for technical founders on balance that's not occurring. The lack of healthy balance between founders leads to risking investments more than they are. If the VC model is imablanced and it incentivizes non-tech founders to do the same, both will need to understand the cheaper it gets to build and scale larger and larger. Leveraging young founders or tech talent who might not know any better won't last long, it seems founders are learning from the experiences of others now that there have been so many more funded startups. YC clearly talks about avoiding co-founders and situations that rip off the technical founder when they are creating so much equal value to anyone else in the start. "How not to get screwed as a software engineer". What they see in applications from a mile away from people being exploited in applications. https://www.youtube.com/watch?v=fcfVjd_oV1I https://www.youtube.com/watch?v=fcfVjd_oV1I

s1artibartfast 3y ago

There are are legal remedies to challenge false valuation. There is a near endless list of ways to be defrauded if founders engage in illegal behavior and nobody is willing to legally challeng it. These range from simply tearing up you stock grant to transferring the IP to a parallel entity.