Ask HN: Co-founder wants me to leave but won't entertain a buy out offer

[fortydegrees]

I'm the technical co-founder of a pre-revenue startup. We were 51/49% to them and took a small round of pre-seed funding (~$100k) so our cap table is approx 40% for me and co-founder, 10% option pool and 10% investor. We have very standard shareholder agreements for 4yr reverse vesting with 1yr cliff.

My (non-technical) co-founder spent $10k to create the initial website over a year ago with the idea. I joined about 11 months ago and since then the idea has changed a bit, we've built loads of products, grown from 2k users to 60k users and continuing to grow due to dominating SEO for our niche.

Recently my co-founder said they wanted to work on it themselves. I said I didn't want to leave. They suggested I go down to 3% equity and they continue. I said they would need to buy out my equity at a fair price.

My co-founder doesn't have the money, and the business only has around $40k cash in the bank right now. My co-founder also won't entertain the idea of raising external money to buy me out, or monetizing the site right now.

To me this seems ridiculous as I'm literally just giving away my equity after spending 11 months building the tech and growing the business. Right now if we stuck adsense on the site, we'd generate $5k/mo, and we have inbound sales leads looking to spend upwards of $40k with us. Basically, the business is primed to make money.

They will not entertain the idea of me buying them out for cash.

What are my options here? It's basically being presented to me as "Take the 3% otherwise you'll own 40% of nothing". I don't really want any equity in the company at this point if I'm not involved.

[ohyes]

It sounds like you own 40% of something fairly valuable and now that it's 11 months into your contract other founder who needed your help is getting greedy and trying to push you out before you are owed anything.

You said it yourself, you've grown hugely, you're dominating SEO since you joined, and built loads of products. This is your 'partner' getting greedy after you've done a lot of hard work. It wouldn't have happened without you. Don't undersell yourself.

Your 40% is worth $400k based on that initial funding valuation, right? Assuming it's as successful as you seem to be implying, it is almost certainly worth more now.

Everyone is telling you to roll over but seriously, fuck them. This other toxic guy is the one who should be getting pushed out, not you.

The other investor ultimately has power in this situation, not you or him, so whoever convinces them that they are the person to go with gets the seat and gets to continue with the project.

If he has a good relationship there you're probably fucked, but results matter... and if you can prove you've done great stuff since joining and and have great plans for the future, he can be replaced.

To be clear: this guy has decided to blow up the project so he can get a bigger share, if it all fails now he can only blame himself.

[rat9988]

Do NOT sell. keep 40% of nothing, matter of pride first and for all. Secondly, they are more than likely bluffing. They don't want to put advertising that would generate 5k/mo means they are trying to make things look artificially worse so you leave and keep the rest for themselves.

Don't fall for the 40% of nothing once you are close of making money. They just don't want to share the pie.

[phkahler]

If it really were 40 percent of nothing, the other party wouldn't want it so bad ;-)

[moomin]

I’ll just add: write down everything. Guy is trying to run a bait and switch on you and there’s a very good chance this ends up in court. Be ready.

[dheera]

Hmm... a few objective points here:

- If OP keeps 40% and doesn't do work for the company, the company is highly unlikely to succeed. The company needs to be able to dish out equity to future employees and likely investors to succeed, and having 40% locked up in an entity that doesn't do anything for the company is not going to be attractive to those future participants.

- If OP keeps any equity, they should be doing it with the hope that the company succeeds, so that the equity will be worth something. Don't keep equity to spite your co-founder. It's not going to benefit you in any way if that causes the company to fail and your equity ends up being worth $0.

- If OP wants a fully cash deal, it's not realistic if the other co-founder doesn't have a ton of personal cash (most don't). Raising a round to buy out a co-founder at 40% of valuation isn't something ANY investor is going to want to do. That's almost half of an investment thrown in the trash, from their perspective, and they'd probably rather invest in a less complicated competitor.

- It sounds like the human relationship between OP and co-founder is broken and it is not worth pursuing working together, as that alone would likely lead to the failure of the company even if everything else works out.

That said, my thoughts would be:

(a) Stall for a month to get to the cliff so you have slightly more leverage.

(b) Work out a deal where you're not keeping that much equity, but you're keeping an amount such that the company is still bound for success, and that your smaller amount will actually be worth something. Owning 40% of $0 is still $0. Owning maybe 5% of $1 billion is something.

[ericd]

Vesting schedule means he has 0% right now, 10% in a month, and then 1/48th of 40% every month thereafter.

[jacquesm]

Agreed. And also: if you give up that 40% then for sure there will be a play to give up the rest.

[valuearb]

The founder and investor can fire him and easily dilute him down to 3% without violating any agreement. He’s got zero leverage here unless his agreement had anti dilution protections.

[visarga]

What if the other party switches activity over a new company in the meantime?

[basseq]

Since you have a 1-year cliff and have only been there 11 months, sounds like as of today you have 0% equity. So the immediate question may be whether your co-founder can fire you.

In 1 month, you've vested 25% of your grant, or 10% of the company. So I would try to get to that mark to strengthen your negotiating position. Any references to 40% are red herrings at this point.

Unless there's a specific buyback clause in your stakeholder agreement, they're under no obligation to buy you out at any time. (They may have the right to do so. That's not uncommon.)

Of course, you're under no obligation to resign, either. So this is a negotiation.

So the way I see it, you have a few options:

1. You take your 10% and leave. You "don't want any equity", but better something you don't want than nothing.

2. You agree to a buyback, potentially at a discount to FMV. If you don't know what FMV is, it's hard to negotiate one way or another. It's v. likely not $1M. Sounds like this is a no-go.

2B. You agree to a non-cash buyback, e.g., in IP. You spent 11 months building the tech: what if you took that with you?

3. You flip the script and buy your co-founder out.

In any case, your relationship is over. You might walk away with nothing.

[clarkevans]

10% might be a good target from another perspective -- the investor put in 100k to get to 10% -- is that about how much "sweat-equity" that the OP has put in? Alternatively, just pretend the vesting was happening monthly.. how much is that 9.16%? The surviving founder does need enough incentive to continue. The OP should make sure it is hard equity of the same class as the investor's shares, where there are tax liability distributions and other preferences. If the OP is before the vesting cliff and your co-founder is fixated 4%, then perhaps think about the balance as unpaid sweat equity, disbursed as deferred compensation at a reasonable interest rate, as a percentage of revenue, to be paid off before co-founder raises their owner draw? Critically, the OP should assume best intents and look for win-win situations. Finally, seek competent legal advice!

[gkoberger]

Can I give you some advice that really sucks?

Walk away. It's not fair, but starting a company isn't like getting a job. It's a relationship and a risk that doesn't always work out. Sometimes you find more money and success than you could ever dream of, and other times you waste 11 months.

Here's my thought process. You and your cofounder aren't going to be able to work together after this. The company has no money and no value, so you're trying to get your portion of something that doesn't exist. Them raising money to pay you just kills their chance at ever being successful... plus, who would give a company money just to pay someone out? Same goes for accelerating vesting on the 40%... there's no way they can build a company when someone not involved owns a huge stake.

You could spend time and money trying to right this injustice. And yeah, it is an injustice. But the worst thing you can do is tie your identity to this. There's not much upside to fighting it; all you'll do is spend more time, money and energy you could be using to start something new.

I've had this happen to me before, so I completely understand what it's like. You feel helpless and shitty and like you wasted a ton of time. Rather, do your best to put it behind you, and focus on what benefits you got out of it.

Did you learn about a new space that will make you extra valuable to another company? Even just having a founder mentality will raise your value to a startup. Did you learn things you would do differently? You can start another company, and do it better this time.

I know it sucks. But I'm 99% confident you won't get anything out of this, so it's best to just walk away. It's cheesy, but "success is the best revenge." Your relationship with this company failed, but you haven't. Don't tie your personal journey to this one company.

Good luck, and my emails in my profile if you want to talk!

(Also, a few years ago I wrote about going through it: https://medium.com/@gkoberger/five-years-time-6a6ae1157a66)

[isatty]

I am not a founder but this does not seem like sound advice. In a month, that 3% pittance becomes 10%. Also, it does not seem that the company has no value at all, if it is primed to make money. The extrinsic value on the 40% is worth negotiating over and not giving it up and walking away. Nobody should do that unless there is gross misconduct or negligence involved.

[lifeisstillgood]

I disagree - keep the 40%, this will at least force them to come to you with why they want you to leave.

The obvious answers are

- they are a jerk to work with and they won't admit it - you are a jerk to work with and they won't tell you - something else

If it's something else and there is real money at stake both of you should be able to work something out.

Otherwise it's one of the first two - which is much harder to deal with

[Aunche]

Maybe it's just because I'm an outsider, but startup finance is complete nonsense to me.

>Same goes for giving you the 40%... there's no way they can build a company when someone not involved owns a huge stake.

This actually happened to one of my professors, which represents the opposite end of the absurdity. He started the company with a friend. The company pivoted to a completely different direction and the friend left because it was outside his expertise. My professor wanted to "do the right thing" and preserve their friendship, so he let the friend keep all the equity. In the end, the friend ended up getting millions of dollars despite producing 0 value to the company.

There has to be some middle ground here, like offering options to the company to buy back OP's shares at the current valuation plus interest. If company still can't afford a buyback a few years later, then they didn't grow the company enough to deserve to own those shares anyways.

[mattmaroon]

I know you mean well, but this could not possibly be good advice because there isn’t enough information in that post for even a lawyer to give good advice. You don’t know what’s In his contract. Maybe his cofounder can’t fire him. Maybe He could but that would trigger the vesting. Maybe he could put it to the board and fire his cofounder.

Maybe his cofounders threat that it’s 3% or nothing is bluffing. It doesn’t really make sense for his cofounder, because that guy maybe is in the same situation if OPs contract is favorable. Maybe It’s 40% or nothing for him.

The only acceptable advice here is to go talk to a lawyer. That’s it. Internet advice about things like this is always bad even when it is meant well

[chuckus]

Agree with this, 3% of something is better than 40% of nothing. I was a technical co-founder was that left a startup early on, and because we didn't have a vesting agreement from the very beginning, I was entitled to my 40%, even when I left the company. While it was to my advantage, I didn't want my co-founder to give up when I left, so I gave most of it up. For my next startup, I'll make sure to have a goals-based vesting agreement from the very beginning i.e. co-founder gets x% on first sale, x% on first raise

[lostsoul8282]

I agree. They can fight this and drain energy but they will only get what they deserve up to this point. Which might be worth fighting for but if you believe that that you can do better, I would walk away - no agreement/liability to the company and if they are passionate about the idea rebuild it with a stronger team quicker.

The difference this time is they is more knowledge, clearer path and knowledge of what a competitor is doing. Consider it draft 2..if that's a direction you want to go.

[stale2002]

> Them raising money to pay you just kills their chance at ever being successful

> there's no way they can build a company when someone not involved owns a huge stake.

So what? That sounds like their problem, not his.

> But I'm 99% confident you won't get anything out of this, so it's best to just walk away.

Possibly. But is that is the case, why not just keep the 40%? He's got nothing to loose. So in that case, there is no need to give in to someone else being unreasonable.

[jacquesm]

Disagree. Normally I would agree, but this is such an outrageous situation that the OP should just dig in and tell the other side to GFT. Let's not set precedent that a-hole co-founders get to cut out their technical co-founders after almost a year for zero compensation without a fight.

[Nowado]

Got to agree, this advice sucks.

[jelliclesfarm]

i agree. you are not left with a lot of options. walk away. having been in somewhat similar position, i can tell you that it's not worth it. good luck.

having said that, you can walk away. and still piss on their cake.

but this a toxic partner. you cannot work with them. that's for certain. you will have to walk away.

[piyushpr134]

Best revenge would be to shut down the effing website and watch the other one go up in flames as non tech guy won't know how to switch it on. JK

This is very unsound and simp like advice. He has built it. If anyone walks away it is the other guy and not him

[bryanrasmussen]

I think the idea that they will not be able to work with the co-founder again really depends on the type of person that co-founder is. If the co-founder is just doing this as a strategic move, expecting things are going to become quite valuable soon and considering the 10% cliff it may be that if their strategy does not work they will not have any problem continuing the partnership - although if that is the case I would (when things became profitable/ much improved) negotiate for some kind of exit because obviously the co-founder is not trustworthy.

[the_cat_kittles]

if you can emotionally check out but legally remain, thats ideal. you are mostly likely getting pushed out, so recognize that you are in a 100% adversarial relationship and separate yourself from any kind of personal emotional investment. a completely detached self interested approach is totally warranted given the circumstances, and would significantly increase the probability that you will be compensated more fairly.

[okokwhatever]

You know, I like your position here dude. Keeping out of discussion the money (everyone of us work to pay bills) I think sometimes to give up maintaining a high profile is better. Anyway, the personal situation of the founders is unknown to me and dont want to talk too fast. But i get your point here.

[pdutt111]

I agree to the point that the company is probably done at this point, but of the off chance that it succeeds I'd get the 10% and then walk. if he raises another round etc. then that's a bargaining chip to get something (probably would amount to 0 but better to have it)

[captainredbeard]

Rolling over because it's the easiest path is not a good option. That type of attitude will be apparent to people around you and you will likely get taken advantage of.

[tyingq]

I'd say first things first. You have 11 months and a one year cliff. Find a way to stall for a month and your position gets much stronger. This is a great environment to find a way to stall. Tell your co-founder to write up a proposal so that you can have a lawyer look at it. That's easy to turn into a month of stalling.

[andjd]

Hey. As a former lawyer, I'm going to echo the many comments in this thread to consult a lawyer. If you find a good one with relevant experience, it should only take a few hours at most to properly understand the exact situation you are in and know your options. Your rights could vary drastically based on the specifics of the company and the employment/equity agreements you entered into, in addition to where you and the other founder are, and where the business was incorporated or registered. If there aren't formal agreements to this, but you have emails or other documentation that's short of a formal contract, that can also be relevant. Regardless, the co-founder and the investor owe you, an equity holder, a fiduciary duty. The threat to tank the business if you don't surrender most of your equity is a pretty cut-and-dry breach of that fiduciary duty, and you are fully within your rights to demand relief, which could be monetary, but could also be equitable, such as requiring your co-founder to relinquish control of the company, or to transfer ownership of the company's source code, domains, and IP to you. Whether any of this relief would be practically available to you would require expert legal advice and would depend highly on the specifics of your situation.

To others in this thread, if you're looking to join a startup as a technical co-founder like this, 'We have very standard shareholder agreements for 4yr reverse vesting with 1yr cliff.' is not standard in the same way it is for other early employees. In this situation, your equity should be in real shares from the get-go, not options that vest over time. You should also have a partnership agreement or similar document that outlines how board-level decisions are made, and for a business with a few mostly-equal owners, such decisions should typically require consensus of the owners, even if one person controlls 51+% of the equity. This is the most reliable way to protect your interest in the business, and this is what true co-founder status looks like. If the O.P. had asked for this before signing on, my guess is that the co-founder would have balked, and the O.P. would have known from the get-go what the dynamics would be, and could have walked or insisted on a higher salary to reflect the fact that he's being treated like an employee not a business partner.

[guytv]

If you're willing to buy out his share, I would approach the investor, explain the current dead lock, and get his support to force your partner to do a BMBY (Buy Me Buy You), where you offer him a price per his shares, which he either accepts or have to pay the same sum to you and buy your part.

[gwbas1c]

I think this works if fourtydegrees has some bucks in the bank.

Reading between the lines, I suspect fourtydegrees is young and doesn't have the kind of money to do this.

(I also suspect that lawyers may be out of fourtydegrees' budget.)

[fortydegrees]

I can't imagine my co-founder accepting this as they don't have the cash to buy my shares, so they would be forced to sell?

[sbinthree]

Agreed with this. Retain your own counsel and do this.

[jtchang]

This is commonly referred to as a shotgun clause.

[mmastrac]

First of all, in a case like there where you have founders at odds so early on, your company is basically on life support and probably dead already.

You have very little to lose by digging in and waiting for your co-founder to fold. If your co-founder has done this at this point of the business where the stakes are so low, they will absolutely try to screw you out of the 3% through other nefarious means.

It sucks that a single founder can tank a promising startup, but that's how it goes (unless you've already got a shotgun clause or equivalent in your shareholder agreements).

[swat535]

I'm going to go against the grain here and say that you shouldn't make decisions based on what random people on the internet say. By all means read all the replies but the best course of action is to seek professional counsel and guidance from an attorney.

You may or may not have to go through a legal battle to get your share.

You should document everything as soon as you can, text messages and emails. The more paper trails you have, the better. Don't agree to anything verbally or sign anything.

Finally, don't make hasty decisions on an impulse. It would be best to be cautious and consider all possibilities.

[cyphertruck]

You must get a lawyer now. Below us my thoughts given several decades experience As founder-

You have a strong position here, since you built the products. Don’t walk away. The ultimatum is counting in you being non-confrontational and wanting to cave.

This cofounder has betrayed your trust at this point, so some sort of exit is needed. Non-technical is a lot easier to hire- you can get marketing or whatever expertise he has easily.

He should be the one leaving. Maybe offer to buy him out at current equity value paid over 20 years at %6 interest, secured only by company stock.

If he forces the issue he will destroy the company in the ensuing lawsuit. So this is a mutually assured destruction situation.

What is the ownership of the software? Did you retain rights to it? If you are forced out can you recreate the company quickly using the software you already created?

Get a lawyer, now. You need an advocate who is ready to play ball and who can be the “bad guy” for you.

Your cofounder will likely try to spin it, try to portray any resistance from you as evidence of bad faith, etc. Don’t let him.

[MoJoPokeyBlue]

It's too late for this idea in this situation, but it might be of interest to others thinking about getting into a partnership. Because most partnerships eventually go south, there is something known as the "Shotgun Clause". (I don't know who named it this, but this is what I've always known it as.) If your partner wants you out and comes to you with a lowball offer, you can invoke the Shotgun Clause, which gives you the right to buy him/her out at exactly the same terms, and THEY HAVE to accept. It's the risk they take by making an offer. It's designed to get them to make a "fair" offer, or one that they would accept.

[tmakks]

Get a lawyer or at least someone who deals (talks) with them, asap, you are in a war.

Important question: If they gave notice today would the notice period "help" with staying longer than 1 year and hence, not falling into the 1 year cliff?

All further advice depends on above question, so once we know the answer we can give proper advice.

[jashmenn]

Sorry to hear you're going through this. I went through something similar and it wasn't fun.

As much as you have shareholder agreements etc. none of that matters too much if the business fails and so it's basically about what the two of you can negotiate.

In my case, I've paid off a former business partner much like a loan. You can negotiate all sorts of parameters on this: monthly payments, grace period, cash triggers, funding triggers etc.

Basically you set a valuation for the business (at least as set by the price of the round of the last investor, if not more because of growth) and then he buys your ownership.

Idk what "reverse" vesting is, but if you had normal vesting it sounds like your 49%, after the 1 year cliff, would be worth e.g. 12%. So you can either keep that 12% or if he wants to buy you out he could pay you your 12% vested * last valuation * growth factor.

It sounds like it's not going to work for the two of you to work together, so now it's just about negotiating the details before the conflict kills the company

[memossy]

It's important to see if you are before or after the cliff.

If before then depending on your employment agreement and other docs there could be a scenario where you are fired/let go and get 0% shares.

Your last round valuation was $1,000,000 post so that price would be $141,000 or so for your 14% stake, can include some triggers on when that occurs that doesn't impede the business (ie $xm raised, $y profits).

If not then your ownership of the company is basically 10% on good leaver terms and that is the floor you should accept.

To illustrate assuming 100 total shares

Now: 40.8: him 39.2: you 10: option 10: seed investor

Goes to new cap table of: 40.8 him (57.6% ownership) 10 you (14% ownership) 10 option (14%) 10 seed investor (14%)

You're not going to get bought out now although you could say that your stake is purchaseable in the future at the last round valuation, which is very reasonable and keeps the cap table clear, probably $140,000 per the above with some sort of trigger for that (eg $xm raised, $y profits)

[manuelflara]

Just because your co-founder just now feels like "working on it alone" doesn't give him/her the right to force you out, specially if he or she doesn't have any leverage (as you say, the investor is remaining neutral). So what is preventing you from just saying "no, thanks, I'll keep my 40% and keep working on this". What would he/she do, then?

[jedberg]

It sounds like you and the investor together control more than 1/2 the shares. Is the investor a friend of your cofounder or more neutral?

If they're a neutral party, it might make sense to get them involved, or at least threaten to get them involved. You and your investor could potentially vote out your other cofounder, and knowing that might make your cofounder change their tune.

On the flip side, if the investor is a friend of your cofounder, be aware that they have a lot of leverage here and could vote you out.

[kqvamxurcagg]

Lots of advice but none seems to have a basis in law and how this will play out in reality.

You have an employment contract and rights. Your co-founder cannot fire you without cause (in most legal systems). Continue working and fulfilling your duties. Document everything and all conversions with dates and times.

It's unlikely you can be forcibly removed as your co-operation will be required to ensure the product continues to operate. If you are forced out you'll have to present evidence to a court or employment tribunal so proceed with this in mind.

You should start off with negotiating for your full 40% share, but accept 20%. Reverse vesting a non-issue if you are unlawfully terminated.

However I suspect there is more going on here as very unusual to see this kind of dispute (smoke) without cause (fire).

[momokoko]

I don’t know if you can still delete this, but this is way too specific and way too many people read HN for your co-founder to not see this.

I would email dang at [email protected] to see if they can at least delete the body of this post.

Please seek legal advice and the personal advice of contact you can trust that has angel investment experience if you have one.

[dustingetz]

The problem with your ask is that early stage capital is for growing the business, not liquidating founders, and investors are not interested in giving anyone cash to liquidate a founder. Additionally, your valuation is currently underwater and even that is assuming a functional founding team.

[hedgehog]

Find two people to advise you, an attorney and someone with founder or angel experience. Gather up copies of all employment agreements etc + directly related correspondence for them to review. Don't sign anything, don't discuss this issue more with your cofounder until you get advice. Also don't read too much into anonymous internet commenters who don't know the details of your situation. You can be fired but you have some leverage because this kind of dispute is a red flag for any prospective investor. Feel free to e-mail me.