
Ask HN: Co-founder leaving amicably. Convertible debt an option? - mistakes
Three of of us started this startup a while back. For more than a year we didn't get very far and finally cofounder A decided to stop working on it full time, at which point his stock stopped vesting. However, based on our vesting, A still owns X% which is a non-trivial percentage. Since A left, and we refocused the company onto a different product line and gained much more traction, becoming close to cash flow positive.<p>Based on the fact that A's contribution to our current efforts is zero, he volunteered to bow out of the company. We are still too early to put a valuation on his share and buy him out. Is there a fair way to compensate A for his early efforts but 'cap' his share in growth to which he did not contribute?<p>One option we are considering is converting his share into a convertible note for an amount equal to the salary he gave up by working full time on the startup, with little or no interest and a twenty percent discount at first round. Is this a good idea?<p>Are there any other options?
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pwim
However you decide to work out things financially, I'd be careful not to
undervalue his effort. You say he contributed nothing to your current product,
but I find it unlikely that was the case. Even if you are working on a new
product, surely you learned something from the previous one. Also, if it
wasn't for his efforts, perhaps you wouldn't have got so far with your
previous product, and would still be working on it. A business is a fluid
beast, and what you set out to create usually isn't what actually makes you
succeed.

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mistakes
_You say he contributed nothing to your current product_

Actually, I said

A's contribution to our current _efforts_ is zero

It's an important difference and I chose the word carefully. Our early efforts
with him did not succeed, but based on my experience it is almost impossible
to succeed without making mistakes first and learning from them. We value his
contribution, which is why I am trying to determine a fair way to compensate
him for this efforts.

Edit: Let me expand on what I said. It is hard to talk about separation while
sounding entirely positive, because separation is not a positive event. I
wouldn't even have met my other cofounder if it were not for A. So, rest
assured, however this separation is structured, in my mind he will have earned
his keep.

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jrockway
Personally, if I was "A", I would just keep the shares. My time is already
gone, so I might as well have a chance at a payoff at a later date.

If I needed money, then I would go for "an amount equal to the salary I gave
up by working full time on the startup", which you seem to be offering.

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mistakes
Actually, I said "a convertible note for an amount equal to"..which gives him
a chance for a payoff at a later date and (as I understand it), provides a
floor for this payoff while limiting the ceiling to a certain extent.

However I am not sure if this understanding is correct.

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maxniederhofer
An option for you guys could be to wait until you do your first round of
funding and have the incoming investors buy him out. I've seen that done
before and it worked well.

Lesson: always include an option to redeem the shares of a founder who leaves.
Redemption can specify whether that takes place at nominal or market value of
the shares. There should be a good leaver/bad leaver clause that outlines what
happens if a founder is fired or leaves voluntarily.

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sajid
If you're on friendly terms with your cofounder then it's just a question of
reaching an agreement both sides are happy with. The best option would be
along the lines of what davidu has suggested.

If you're not on friendly terms then it's basically irrelevant that he didn't
contribute anything to your current success. There's nothing you can do
without his consent.

A 1 year cliff is standard, and he stayed with the company for longer than a
year. And since you had a vesting schedule in place, the cofounder is clearly
entitled to the stock he's accrued.

It seems to me that the mistake you've made is having an overly generous
vesting schedule. 4 years is standard, in which case he would have only
accrued about 8%.

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davidu
Go get any reasonable SV lawyer to have him sign back his stock to the company
and then cancel the shares. You can make him an advisor and give him a grant
to recognize him for his early efforts.

You will need all the equity you can as you build your company and being nice
now giving a big chunk to a non-participating founder will make you bitter
later.

If you don't think it will, then let him keep his ~25% vested. He'll be
diluted, just like you and everyone else as you raise more.

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mistakes
This may be a stupid question, but by 'grant', do you mean a stock grant? Why
would he agree to a grant of less than X% (which he currently owns)?

The last option is the default, and we are o.k. with it if it comes to that.

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davidu
Hey may agree to less than what he has today because by giving back a huge
chunk of equity to the company it can allocate it to future hires. That way he
is hopefully increasing the chances of his somewhat smaller stake being worth
more later.

In other words, he'd be better off owning less of something huge than more of
something small. :-)

This is not unheard of. It might not be common, but I've only been in silicon
valley six years and I've seen it at least a handful of times.

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mistakes
Thank you for the perspective. It makes sense.

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fleitz
What is the outcome you want to optimize around? Friendship? Current cash on
hand? Maximizing equity for the remaining founders?

I suspect the best thing is to focus on the biz, it's much more important to
have a big pie to argue about dividing than to have a fair division of nothing

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cyanbane
"I suspect the best thing is to focus on the biz"

Agree with this, whats done is done. Keep pushing forward and keep an open
mind about his opinions, you never know when a piece of advice from an
'outside' mind might help. Just because he may not have been there during the
formative part of the biz doesn't mean his thoughts about it can't make
everyone money and see things that other people wrapped up in growth don't
see. Hell he/she might even turn out to be an asset as they don't see the day
to day and also know you and your other partners faults via the slow time.

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zaidf
Next time have a cliff so if a founder leaves within the first yr, he gets
nothing.

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mistakes
We had a one year cliff. He left some time after it.

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zaidf
Ah my bad for assuming you didn't have one.

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jonpaul
I'm curious, do you have an LLC or a C-Corp? Does anyone know, is this kind of
situation easier to handle if you have a C-Corp?

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davidu
It doesn't have any impact on it. You can deal with this in either case just
fine.

OpenDNS was an LLC for it's first 3.5 years of existence and then we converted
to a C corp when Sequoia Capital invested.

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cgherb911
Do the math on what x% is in dollars based on your premoney evaluation. Give
him the note for that amount and treat him as if he were a friends and family
investor.

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mistakes
Good idea but this would require us to wait till we raise funding, and
therefore have a valuation. We are wondering if there is a way to resolve this
right now so that it doesn't complicate an already complicated fundraising
process.

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cgherb911
Have you pitched any VC's or angels? What premoney are you giving them?

If you don't have a premoney, then cut him a fair salary for the time he
worked in a convertible note. The convertible note will be the optimal way to
have a nice looking cap table.

I just suggest that you deal with this matter quickly while everyone is in a
good mood. Success in a business after someone leaves can be dangerous...

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mistakes
Agreed that we need to deal with this matter quickly. Thank you for your
advice.

