How can a departing co-founder be compensated for giving back already vested shares?
I'm leaving a startup I co-founded, with some of my shares already vested. The other shareholders want me to give back more shares than specified by our vesting agreement. It does seem to make sense to do this to make the company more attractive to future investors. Legally I own these shares, and they have been well-earned through a year of extremely hard work, all the sacrifices you'd expect from a co-founder, as well as some personal financial investment.
Am I right to expect some other form of compensation in return for giving back these shares? What form could that reasonably take? Startup has been going for 12 months with 4 co-founders. The product is built and launched, but hasn't achieved traction or revenue yet.
Current equity split is: Co-founders: 40, 20 (me), 10, 5; Option pool: 10; Investors: 10; Advisors: 5
I am leaving on good terms with everyone involved.
Vesting started at 25% with the rest vesting quarterly over 3 years (via Repurchase Rights). Under the agreement, the company will have the right to repurchase 50% of my shares, leaving me with 10%.
The existing investors want to lead an Angel investment round, but say they are unwilling to do so with a non-active member having as much as 10%. They would want me to have 2% at most. This does not seem a fair amount to reflect the effort put in and risk taken.
It seems best to sort this out before they attempt to raise more cash, so they can go in with a clean ownership structure that reflects the active co-founders, investors and advisors.
Obviously I realize that if me holding 10% is going to block future investment and therefore growth of the company, it is better for everyone (including me) to release some of that equity back to the company / other co-founders.
My question is: what would be a fair and reasonable way to be compensated for doing that? The company is bootstrapping so could not easily buy back my shares for cash.
Options I've thought of:
a) The company buys back some equity at an agreed future price, to be repaid from future cash flow? (effectively converting the equity to a loan)
b) Current investors buy back some of my shares ahead of next round
c) I take a hit for the good of the company and accept giving back some equity (e.g. 5%), staying on as an advisor, so I am still playing an active role in the eyes of new investors?
d) any others options?
What would you advise?
Thanks.
Co-Founder Equity Founders Investment Vesting
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Once a co-founder leaves, it's usually a sign that the company is going nowhere so I wouldn't worry much about the value of these shares. And for sure the odds of getting any funding are now about 0: if a co-founder isn't willing to invest his time in the business prospective investors are just going to keep clear. – Frenchie 11 years ago
2 Answers
I would recommend a promissory note, created through a lawyer, that purchases the shares back in exchange for a fair market value.
This will allow the team to recognize the value that you have provided without doing short- or long-term harm to their current cash position, and without hindering their ability to raise future money. You would be able to keep your "stake" in the company without having to give anything away for free.
Calculating FMV, on the other hand, is a much tougher question to answer. You're going to have to agree on a number somewhere between "What's the company worth now?" (not much) and "What's the company going to be worth in the future?" (hopefully a lot), while recognizing that you're no longer taking any risk for the company's future performance. When I did this with prior co-founders, the company ended up buying back the shares at a price that roughly came to $10K for a year's worth of 20-to-30-hour weeks.
Good luck. And make sure you run everything by a lawyer, or at least someone who went to law school.
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Thanks Josh. With a promissory note, what conditions would be appropriate to trigger the payment? We can base the amount on the valuation at the last investment, which wasn't too long ago. (and yes, we'll get this properly drafted, or at least reviewed, once we have worked out the fundamentals of the agreement) – Dan 11 years ago
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I am not sure I would be so free with taking a promissory note. I would want either cash now or a some "put" with a time limit on it - in exchange for an option price now. You shouldn't give them unlimited upside with no price to pay now. That doesn't seem fair to me. If I were in that position I would want money in exchange - not a promissory note with nebulous valuation. With that being said, it's also not fair for you to get upside from their continued efforts. You should only get what it is worth right now. – Tim J 11 years ago
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With all respect, that is bull. It is totally fair that they have the unlimited upside for THEIR PROPERTY. Did not want that - you should have put in a repurchase agreement at leaving with a defined price. Once the shares are vested, they are owned. Any interference with ownership is not fair. Unlimited upside? He worked for that chance for all the shares that have been vested. – Net Tecture 11 years ago
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I'm not suggesting a note with nebulous valuation - the note itself has a value. @Dan, I would encourage you to put significant REVENUE triggers in place, as well as staggering the pay-out (rather than having it be paid at one time). You don't want triggers that pay out based on raising money from investors - no investor wants his money immediately paid out for past work done rather than future value. – Josh Sam Bob 11 years ago
Why do you have to leave? Sure, you could move away from day to day involvement, but you know the business inside and out, why not move to a less active roll, keep your 10% and give them 20% of your time? This way they get your experience and knowledge, you stay involved in the business (while spinning up a new one I suppose), and the angel investors see all 4 co-founders still engaged in the business.
