8 ms·

Getting shares back from my co-founders

100 points by talsraviv 14y ago

mcherm 14y ago
Really a class act on the parts of Ariel and Anton. I hope that if I found myself in their position that I would be as gracious.
- cera 14y ago
  Agreed, and I believe they did the right thing in this situation. Hats off.
- aneth3 14y ago
  Could you guys expound on why this is the "right thing?" I see this very differently. Personally, I would never have agreed to this based on my understanding of the situation. It's clear from the article that Ecquire evolved from Dropcard, even if it is an entirely different product now: "Ecquire was getting further and further conceptually (and technologically) from Dropcard" Almost every tech company evolves dramatically, and rarely resembles its former self after four years. If one contributes substantially in the founding stages of a company, I believe one should end up with something, even if it is a reduced stake. The company would not have made it where it is without Ariel and Anton's participation in early failed ideas or admission and participation in the incubator. It's safe to assume their contribution exceeds zero percent, which is what the Tal pushed for and Ariel and Anton agreed to. No investor would have agreed to this, why is it right for Ariel and Anton?
  - ori_b 14y ago
    > No investor would have agreed to this, why is it right for Ariel and Anton? Because they agreed to it. It's not like they were swindled -- They had an offer to discuss the price and be bought out for a fair price. But they decided that it wasn't worth the effort, and perhaps they felt like giving the startup that they helped found a gift. If you ask for something nicely, and people are willing to give it to you without being browbeaten, I don't see anything wrong. In short, it's the right thing because they decided it was the right thing.
  - tatsuke95 14y ago
    >Ecquire evolved from Dropcard, even if it is an entirely different product now" What does that even mean, really? If they have nothing in common (and they might in this case, I don't really know), then the evolution is irrelevant. You can't stake a claim on all my future ideas because we once shared an idea together. >"If one contributes substantially in the founding stages of a company, I believe one should end up with something, even if it is a reduced stake." This has to be determined case by case, which is why I think the early equity split is meaningless. What did they contribute? Money? Code that is still being used? Other ideas that got implemented? It's pretty easy to put a price on these things. If you can't point to tangible contributions to the new business you don't deserve anything. I think the courts would agree.
    - macspoofing 14y ago
      >What did they contribute? Sweat equity, most likely, for which they were rewarded with an ownership stake. >I think the courts would agree. Courts would side with Arel and Anton, should they decided to retain their shares.
      - tatsuke95 14y ago
        >"Sweat equity, most likely, for which they were rewarded with an ownership stake" Sweat equity doesn't occur in a vacuum; something is created from that effort. If they wrote code and that code earns money, they are entitled to a portion of those earnings. That's inarguable. It is my understanding that the original "idea" (I have trouble calling it a company) didn't take hold. If nothing is created and the company never amounts to anything...what are you getting an "ownership stake" in? Had Zuckerberg and a friend opened a candy store on the Harvard campus in 2002, and it had failed, that friend is not entitled to anything Zuck does with Facebook because he put in labour on the candy store. Now, if Zuck was operating Facebook under the same legal entity as the candy store in which his partner had equity, said partner might have a claim, though it would be hard to establish if the partner produced no work for the new idea. That said, if this is analogous to the situation in the article, what on earth are these guys doing getting bogged down with convoluted equity agreements when they should be working on the product? I'll repeat: if the other co-founders provided something tangible --be it an idea, code, money, whatever-- to the new project, they deserve "their share". If they can't point to something tangible, they deserve nothing.
ascendant 14y ago
Glad to see they were reasonable about it and +1 for going through with it. Hats off to everyone involved.
wilfra 14y ago
I know it's very un-hn and I'm going to get downvoted but.. HAHAHAHAHAHAAHAHAHA!!!
tibbon 14y ago
Forgive my shear ignorance, but why would two original co-founders who are no longer active holding 0.5% each scare off investors and such?
- macspoofing 14y ago
  They wouldn't. The active founders were greedy.
  - talsraviv 14y ago
    Also sort of true. @bretpiatt nailed the administrative side, but @macspoofing you are right in that we also wanted to free up equity to attract talent. It made more sense that the first equity to be set aside for employees shouldn't dilute active founders and investors if possible.
    - macspoofing 14y ago
      >It made more sense that the first equity to be set aside for employees shouldn't dilute active founders and investors if possible. It doesn't dilute investors. It dilutes you. I'm not as understanding of your motives as others may be. You're lucky the other founders were really cool. The reality is that Ariel and Anton took on risk by being in the startup originally, and presumably put in a lot of work and effort towards your company - so it's completely fair and reasonable that they have something to show for it - no? Whether or not the current product looks like the original is immaterial.
- bretpiatt 14y ago
  Each additional major shareholder is a required signature on documents, it is a question that has to be asked, "Why aren't they with you any longer?" For 'the next Facebook' investors aren't going to care if they're able to put money in at a valuation they like. For a more marginal investment the extra time to look through stuff like that may shut the deal down. To compare, think of it like a personal resume. If you're a developer applying for a development role but you took two years out of the last five to go teach English to kids in an emerging market nation where you coded on the side (and could show Github / other public repos) anyone taking the time would commend you for the activity. Someone rushing through reviewing resumes may toss yours on the floor.
ckdarby 14y ago
This guy should have kept this quiet instead of going for the PR anyone in the future who is looking to invest into this company is going to come across this article. As much as everyone is stating how gracious this is this would actually be a warning sign for me to invest any amount of money into this company. Two previous co-founders willing to throw away a combined 1% of the company for less than an hour of effort. Puts the real valuation of this startup into view when you have two previous co-founders literally throw their equity away. Consider this startup marked to avoid in the future of any round...
- marquis 14y ago
  As long as the paperwork is clear, and there is genuinely a marked difference between the original work and the work that has gone on the last couple of years by the new owners, I don't see it as a problem. People are dropping out of companies all the time, and I see this as an amicable agreement and also highly creative.
  - koide 14y ago
    I think they sold it cheap. They should have asked for something more involved than dancing where nobody even glances at you. For example, getting invited as audience to a live TV show and yelling something of interest/funny.
jamster 14y ago
I think it was terrible deal. Why give up shares you earned?
tatsuke95 14y ago
Kudos to the minority shareholders for giving up a legal entitlement graciously... ...but why on earth is there a stringent corporate structure and equity doled out years before there is even a concrete idea or tangible business?
- ColinWright 14y ago
  Because if you don't do it at the start when there's really nothing to bid for and nothing at stake, you have to do it later when there's lots at stake, and the negotiations become difficult and unpleasant. Best to have a genuine agreement up front, and keep it fresh.
  - tatsuke95 14y ago
    >"Best to have a genuine agreement up front, and keep it fresh." Seems to me that's what happened in this situation, and they ended depending on the good will of co-founders. Where as, had they simply dissolved the relationship with the first business and started anew, we wouldn't talking about this.
    - ColinWright 14y ago
      Knowing when to dissolve a "previous business" is really hard. And it's even harder if you don't have formal or semi-formal arrangements in place from the start. You get to what is effectively (to you) a new business, and the early founders, now no longer involved, can start saying - "But part of that is ours." You asked: " ... why on earth is there a stringent corporate structure and equity doled out years before there is even a concrete idea or tangible business?" ... and I answered. You have it to avoid the problems of not knowing what everyone else believes. Formally dissolving the previous business would have been the right thing to do, but even then, having the formal structure definitely helps.
- gyardley 14y ago
  Because they did it correctly. When you start working with others on a company, structure and ownership needs to be sorted out before, not after. Yes, it ended up being a bit of a pain for this guy and his startup, but it's not nearly as painful as the conflicts over IP and equity that result when you don't hammer this stuff out before building.
nickler 14y ago
Innovation wins again. Way to disrupt the 'shareholder negotiations' space with a crowd sourced, freemium model. The only issue with scaling, however, is the music licenses as there's value being exchanged. Napster meets reverse Angellist, well played.
jfarmer 14y ago
The "official" way to do this is through what's called a 409A Valuation, a process designed to assess the fair market value of your common stock (and other classes, eventually). You can do one yourself (note: talk to your CFO first -- you have someone handling that if you've closed a convertible note, right?), or pay a third party (usually a bank) to do it. They're relatively inexpensive. You'll have to do one if you ever want to grant options (or RSUs) to potential employees. How else do you set the options' strike price?
aneth3 14y ago
If the early shareholders invested significant time and effort into the business, I don't see why it's 'right' for them to give up their shares. While they are certainly entitled to do so, pressuring them to drop even their 0.5% seems unethical to me. If those early founders actually did not contribute much in those early days, I would revise this opinion. However as it stands, it seems akin to asking an early financial investor to return his equity. If I give you $50,000 and you pivot ten times, I should still own a piece of your company. Same goes for early founders. The early founders had already agreed to diminish their share to 1% combined. Pressuring them to go any lower seems greedy and unnecessary assuming they invested significant time and energy over a long period of time, even if it was for an earlier idea. Unlike most of the comments here, I'm not sure this was a class act. Given that the early founders voluntarily gave up their equity, I suppose the continuing founders deserve some benefit of the doubt. I don't think I would have agreed to give up my last bit of equity as I would feel 0.5% was fair simply for being a part of the early team formation, ideation, and apparently discarded product development work. I would probably be annoyed by the offer and ignore it.
- wtvanhest 14y ago
  The problem is the "size" as in number of participants, in the Cap table rather than what people are getting paid in the event of an exit. All else equal, you want less people on your cap table for each round. Big cap tables increase complexity. I wouldn't be suprised if the current CEO were to pay them on the backend regardless of his dance. [edit] I shouldn't guess what the CEO that I do not know would do, but I would expect myself to reward them later, just not contractually. This is really relationship/person dependent.
  - pbreit 14y ago
    Is that really true? Two original founders with 0.5% each?
  - aneth3 14y ago
    Two former cofounders with a combined 1% of equity should not have any effect on the future of the company. Even if it did have some minor impact, those shareholders earned and deserve their shares. Companies regularly give shares to advisors, board members, employees, friends, landlords, etc... I could be off a bit, but I don't think "extra" shareholders become an issue unless their stake is large (>5%) or there are a large number. Regardless, two minor former cofounders hardly seems a significant burden, and eliminating their stake for minor convenience is suspect. If this was the justification used by the continuing founders, they were either ignorant or taking advantage of their former partners' ignorance. > I wouldn't be suprised if the current CEO were to pay them on the backend regardless of his dance. I wouldn't count on it. This is not generally human nature, nor is it compatible with the behavior reflected in this article.
anonymoushn 14y ago
Are your dashes masquerading as underscores?
damoncali 14y ago
I would never have done that, from either side of the table. But it brings up a good question: when is a "pivot" a new company altogether?
- aneth3 14y ago
  I ultimately decided not to join a cofounder who was in a situation analogous to this. An investor owned > 1/3 of the company, but cash was almost gone and the original idea had failed due to TOU issues with a third party. The only option was to pivot entirely, with little money and investors owning a huge chunk. I saw this as unfair, and pushed for a new company - the investors after all had invested in the original idea, and should take some responsibility for its failure. I would also have agreed to investors putting in more money, combined with issuing additional shares to the founders to keep their stakes the same, or to the investors reducing their stake. The thing is, investors to my knowledge will never be as "gracious" as Arel and Anton. There is a lot of grey area between pivot and new company where ethics and legalities come into play, and I don't know the right answers. I'd love for someone like pg to expound on this.

100 points by talsraviv 14y ago

Really a class act on the parts of Ariel and Anton. I hope that if I found myself in their position that I would be as gracious.

cera 14y ago
Agreed, and I believe they did the right thing in this situation. Hats off.
aneth3 14y ago
Could you guys expound on why this is the "right thing?" I see this very differently. Personally, I would never have agreed to this based on my understanding of the situation. It's clear from the article that Ecquire evolved from Dropcard, even if it is an entirely different product now: "Ecquire was getting further and further conceptually (and technologically) from Dropcard" Almost every tech company evolves dramatically, and rarely resembles its former self after four years. If one contributes substantially in the founding stages of a company, I believe one should end up with something, even if it is a reduced stake. The company would not have made it where it is without Ariel and Anton's participation in early failed ideas or admission and participation in the incubator. It's safe to assume their contribution exceeds zero percent, which is what the Tal pushed for and Ariel and Anton agreed to. No investor would have agreed to this, why is it right for Ariel and Anton?
- ori_b 14y ago
  > No investor would have agreed to this, why is it right for Ariel and Anton? Because they agreed to it. It's not like they were swindled -- They had an offer to discuss the price and be bought out for a fair price. But they decided that it wasn't worth the effort, and perhaps they felt like giving the startup that they helped found a gift. If you ask for something nicely, and people are willing to give it to you without being browbeaten, I don't see anything wrong. In short, it's the right thing because they decided it was the right thing.
- tatsuke95 14y ago
  >Ecquire evolved from Dropcard, even if it is an entirely different product now" What does that even mean, really? If they have nothing in common (and they might in this case, I don't really know), then the evolution is irrelevant. You can't stake a claim on all my future ideas because we once shared an idea together. >"If one contributes substantially in the founding stages of a company, I believe one should end up with something, even if it is a reduced stake." This has to be determined case by case, which is why I think the early equity split is meaningless. What did they contribute? Money? Code that is still being used? Other ideas that got implemented? It's pretty easy to put a price on these things. If you can't point to tangible contributions to the new business you don't deserve anything. I think the courts would agree.
  - macspoofing 14y ago
    >What did they contribute? Sweat equity, most likely, for which they were rewarded with an ownership stake. >I think the courts would agree. Courts would side with Arel and Anton, should they decided to retain their shares.
    - tatsuke95 14y ago
      >"Sweat equity, most likely, for which they were rewarded with an ownership stake" Sweat equity doesn't occur in a vacuum; something is created from that effort. If they wrote code and that code earns money, they are entitled to a portion of those earnings. That's inarguable. It is my understanding that the original "idea" (I have trouble calling it a company) didn't take hold. If nothing is created and the company never amounts to anything...what are you getting an "ownership stake" in? Had Zuckerberg and a friend opened a candy store on the Harvard campus in 2002, and it had failed, that friend is not entitled to anything Zuck does with Facebook because he put in labour on the candy store. Now, if Zuck was operating Facebook under the same legal entity as the candy store in which his partner had equity, said partner might have a claim, though it would be hard to establish if the partner produced no work for the new idea. That said, if this is analogous to the situation in the article, what on earth are these guys doing getting bogged down with convoluted equity agreements when they should be working on the product? I'll repeat: if the other co-founders provided something tangible --be it an idea, code, money, whatever-- to the new project, they deserve "their share". If they can't point to something tangible, they deserve nothing.

ascendant 14y ago

Glad to see they were reasonable about it and +1 for going through with it. Hats off to everyone involved.

wilfra 14y ago

I know it's very un-hn and I'm going to get downvoted but.. HAHAHAHAHAHAAHAHAHA!!!

tibbon 14y ago

Forgive my shear ignorance, but why would two original co-founders who are no longer active holding 0.5% each scare off investors and such?

macspoofing 14y ago
They wouldn't. The active founders were greedy.
- talsraviv 14y ago
  Also sort of true. @bretpiatt nailed the administrative side, but @macspoofing you are right in that we also wanted to free up equity to attract talent. It made more sense that the first equity to be set aside for employees shouldn't dilute active founders and investors if possible.
  - macspoofing 14y ago
    >It made more sense that the first equity to be set aside for employees shouldn't dilute active founders and investors if possible. It doesn't dilute investors. It dilutes you. I'm not as understanding of your motives as others may be. You're lucky the other founders were really cool. The reality is that Ariel and Anton took on risk by being in the startup originally, and presumably put in a lot of work and effort towards your company - so it's completely fair and reasonable that they have something to show for it - no? Whether or not the current product looks like the original is immaterial.
bretpiatt 14y ago
Each additional major shareholder is a required signature on documents, it is a question that has to be asked, "Why aren't they with you any longer?" For 'the next Facebook' investors aren't going to care if they're able to put money in at a valuation they like. For a more marginal investment the extra time to look through stuff like that may shut the deal down. To compare, think of it like a personal resume. If you're a developer applying for a development role but you took two years out of the last five to go teach English to kids in an emerging market nation where you coded on the side (and could show Github / other public repos) anyone taking the time would commend you for the activity. Someone rushing through reviewing resumes may toss yours on the floor.

ckdarby 14y ago

This guy should have kept this quiet instead of going for the PR anyone in the future who is looking to invest into this company is going to come across this article. As much as everyone is stating how gracious this is this would actually be a warning sign for me to invest any amount of money into this company. Two previous co-founders willing to throw away a combined 1% of the company for less than an hour of effort. Puts the real valuation of this startup into view when you have two previous co-founders literally throw their equity away. Consider this startup marked to avoid in the future of any round...

marquis 14y ago
As long as the paperwork is clear, and there is genuinely a marked difference between the original work and the work that has gone on the last couple of years by the new owners, I don't see it as a problem. People are dropping out of companies all the time, and I see this as an amicable agreement and also highly creative.
- koide 14y ago
  I think they sold it cheap. They should have asked for something more involved than dancing where nobody even glances at you. For example, getting invited as audience to a live TV show and yelling something of interest/funny.

jamster 14y ago

I think it was terrible deal. Why give up shares you earned?

tatsuke95 14y ago

Kudos to the minority shareholders for giving up a legal entitlement graciously... ...but why on earth is there a stringent corporate structure and equity doled out years before there is even a concrete idea or tangible business?

ColinWright 14y ago
Because if you don't do it at the start when there's really nothing to bid for and nothing at stake, you have to do it later when there's lots at stake, and the negotiations become difficult and unpleasant. Best to have a genuine agreement up front, and keep it fresh.
- tatsuke95 14y ago
  >"Best to have a genuine agreement up front, and keep it fresh." Seems to me that's what happened in this situation, and they ended depending on the good will of co-founders. Where as, had they simply dissolved the relationship with the first business and started anew, we wouldn't talking about this.
  - ColinWright 14y ago
    Knowing when to dissolve a "previous business" is really hard. And it's even harder if you don't have formal or semi-formal arrangements in place from the start. You get to what is effectively (to you) a new business, and the early founders, now no longer involved, can start saying - "But part of that is ours." You asked: " ... why on earth is there a stringent corporate structure and equity doled out years before there is even a concrete idea or tangible business?" ... and I answered. You have it to avoid the problems of not knowing what everyone else believes. Formally dissolving the previous business would have been the right thing to do, but even then, having the formal structure definitely helps.
gyardley 14y ago
Because they did it correctly. When you start working with others on a company, structure and ownership needs to be sorted out before, not after. Yes, it ended up being a bit of a pain for this guy and his startup, but it's not nearly as painful as the conflicts over IP and equity that result when you don't hammer this stuff out before building.

nickler 14y ago

Innovation wins again. Way to disrupt the 'shareholder negotiations' space with a crowd sourced, freemium model. The only issue with scaling, however, is the music licenses as there's value being exchanged. Napster meets reverse Angellist, well played.

jfarmer 14y ago

The "official" way to do this is through what's called a 409A Valuation, a process designed to assess the fair market value of your common stock (and other classes, eventually). You can do one yourself (note: talk to your CFO first -- you have someone handling that if you've closed a convertible note, right?), or pay a third party (usually a bank) to do it. They're relatively inexpensive. You'll have to do one if you ever want to grant options (or RSUs) to potential employees. How else do you set the options' strike price?

aneth3 14y ago

If the early shareholders invested significant time and effort into the business, I don't see why it's 'right' for them to give up their shares. While they are certainly entitled to do so, pressuring them to drop even their 0.5% seems unethical to me. If those early founders actually did not contribute much in those early days, I would revise this opinion. However as it stands, it seems akin to asking an early financial investor to return his equity. If I give you $50,000 and you pivot ten times, I should still own a piece of your company. Same goes for early founders. The early founders had already agreed to diminish their share to 1% combined. Pressuring them to go any lower seems greedy and unnecessary assuming they invested significant time and energy over a long period of time, even if it was for an earlier idea. Unlike most of the comments here, I'm not sure this was a class act. Given that the early founders voluntarily gave up their equity, I suppose the continuing founders deserve some benefit of the doubt. I don't think I would have agreed to give up my last bit of equity as I would feel 0.5% was fair simply for being a part of the early team formation, ideation, and apparently discarded product development work. I would probably be annoyed by the offer and ignore it.

wtvanhest 14y ago
The problem is the "size" as in number of participants, in the Cap table rather than what people are getting paid in the event of an exit. All else equal, you want less people on your cap table for each round. Big cap tables increase complexity. I wouldn't be suprised if the current CEO were to pay them on the backend regardless of his dance. [edit] I shouldn't guess what the CEO that I do not know would do, but I would expect myself to reward them later, just not contractually. This is really relationship/person dependent.
- pbreit 14y ago
  Is that really true? Two original founders with 0.5% each?
- aneth3 14y ago
  Two former cofounders with a combined 1% of equity should not have any effect on the future of the company. Even if it did have some minor impact, those shareholders earned and deserve their shares. Companies regularly give shares to advisors, board members, employees, friends, landlords, etc... I could be off a bit, but I don't think "extra" shareholders become an issue unless their stake is large (>5%) or there are a large number. Regardless, two minor former cofounders hardly seems a significant burden, and eliminating their stake for minor convenience is suspect. If this was the justification used by the continuing founders, they were either ignorant or taking advantage of their former partners' ignorance. > I wouldn't be suprised if the current CEO were to pay them on the backend regardless of his dance. I wouldn't count on it. This is not generally human nature, nor is it compatible with the behavior reflected in this article.

anonymoushn 14y ago

Are your dashes masquerading as underscores?

damoncali 14y ago

I would never have done that, from either side of the table. But it brings up a good question: when is a "pivot" a new company altogether?

aneth3 14y ago
I ultimately decided not to join a cofounder who was in a situation analogous to this. An investor owned > 1/3 of the company, but cash was almost gone and the original idea had failed due to TOU issues with a third party. The only option was to pivot entirely, with little money and investors owning a huge chunk. I saw this as unfair, and pushed for a new company - the investors after all had invested in the original idea, and should take some responsibility for its failure. I would also have agreed to investors putting in more money, combined with issuing additional shares to the founders to keep their stakes the same, or to the investors reducing their stake. The thing is, investors to my knowledge will never be as "gracious" as Arel and Anton. There is a lot of grey area between pivot and new company where ethics and legalities come into play, and I don't know the right answers. I'd love for someone like pg to expound on this.