What to do with equity when leaving a startup you co-founded?
I have already read many of the posts here about this topic and I got very good insights already but I was hoping to get some tailored advice for my situation.
I have been working two years in a startup as co-founder and I am now leaving because I disagree with the other co-founders on many vital subjects like business vision, business strategy, company culture and investment strategy.
It's been a very hard decision but given that for the past 6 months or so I had to fight for every little thing I wanted to do and all we have been doing was arguing about everything, I felt like taking a leave was the only right thing to do.
Now the best bit: what to do with my shares? I've got a significant stake (a bit less than a fifth), the company has been incorporated in the UK and we signed a shareholder agreement with no vesting in place.
The company will apparently get to finalize the seed round (we have been self-funding until now) in a few months.
My leave is very recent and so far we are still friends but when we started to discuss what to do with my equity I felt things were getting a bit dodgy.
I politely proposed that we apply a kinda retroactive vesting so that I can keep the shares I have already earned but they see me owning some shares as a problem when dealing with further investors.
The option they are discussing now is to leave me with a ridiculous amount of equity (<1%) at that is it.
To be honest, I don't want to hold on to my equity, I'd be happy to cash it out whenever they close their seedround or I am open to do it in trances if they don't have enough cash.
I haven't talked to a lawyer yet but I was thinking to do it. I have no experience with attorneys and I was wondering if it's common for them to give free advice and charge a commission at the end of the transaction. Unfortunately I am broke so I cannot afford to pay legal fees.
4 Answers
You absolutely want to talk to several lawyers. Most of the good ones will spend an hour with you to listen to your story and give you basic information. Shop around and compare first. Then go with the one you are comfortable with, if at all.
Before you meet lawyers, read 3 times every agreement you signed to make sure you understand it all. You did the right thing by asking here as well: the more ideas you can brainstorm, the more productive your discussion with lawyers will be.
Now to answer your question: assuming you have the right to keep all the equity, you are in position of relative strength. Do you feel like keeping your shares and seeing if the company will succeed and make a large amount of money, or do you not believe in your co-founders and would rather get some change now?
The best advice I received for such negotiations: whatever you do, don't alienate the other co-founders. Once it gets emotional, everyone loses.
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I do believe they have some chance of success, but the value they are creating from now on it's theirs so I wouldn't want to be part of it. I'd just like to be fairly recompensed for the work I have done and then be out. – Throw Away 222 12 years ago
The option they are discussing now is to leave me with a ridiculous amount of equity >(<1%) at that is it.This sounds odd - you own the equity, your partners cannot just "take it". The company has a valuation. Assuming no other investors/debt/fringe situations, you own your % of that valuation (or % of capital accounts, or whatever depending on your corporate structure). They either pay you your % in cash/on a payment plan to buy you out, or you agree to take a lesser payment as a courtesy considering the oversight in not having a vesting agreement.
Your partners are right, the new investors will likely want you largely out of the ownership picture. Since you want cash, now is the best time for everyone, since the valuation is low now before the money is raised. They can buy you out now, putting it on a payment plan, and raise money after the fact. Full disclosure to the investors of course.
Just some quick thoughts - as the others have said, you'll want to talk to a lawyer.
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The problem I see with getting paid now is that the company does not have an evaluation. A seed round is in progress for a set pre-money evaluation so I am afraid investors won't like the fact that we are setting up an evaluation just because I am leaving. Also, what would be the evaluation right now? The other problem would also be that they don't have any cash. It would be easier (and better for me :)) if some of the investors or VC bought me out when the round will happen. – Throw Away 222 12 years ago
I read this approach elsewhere on onstartups. If they offer to buy our out at some silly low number, say 0.01/share. Make them a counter offer to buy their shares at that price. After all, it is a fair price, right?
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Haha great one! :-) – Throw Away 222 12 years ago
When you set up a company with equity there normally is a contract. Based on that contract there are options left to the remaining co-founders as to what to do in case one leaves. If there is no contract you have no choice but to consult a lawyer that will explain to you what your options might be and defend your options in court if necessary.
Normally in situations like this the remaining co-founders have an option to buy you out of your vested equity. As far as equity that has not vested save contract the options vary based on the laws of the country where you are incorporated and the general demeanor of this break up.
So if you don't want to go the lawyers round I suggest you put an amount on your equity and give them payment options and it is likely that they will accept them, save that you might just go to another party like their VC or an Angel investor and simply offer up your shares to them, not likely a worthwhile scenario for them but you never know.
