
Ask HN: Co-founder leaving a startup for free without equity? - mickeyM
Hi there,<p>We are 2 co-founders - I own 40% and (let’s call him) Jim owns 60%. Jim invested $12.000 (funded the development), I’ve invested about $1.000. Most of the work except of programming (we hired freelancers to develop a sharing economy app) was done by me - I’ve done the initial sketches &amp; app flow based on Jim’s idea, created us a website, got us a payment gateway, communicated with accountants, handled app submissions, marketing &amp; social media, whole design &amp; branding stuff, handled Android programmer, etc. Jim mainly handled the iOS programmer and a lawyer. The overall hours spent (and work done) are maybe in 85:15 ratio.<p>The app was released a few months ago, got some first users and great feedback from the startup community, but some huge bugs occurred so it’s currently in the stage of fixing them (it’d be done in like 2 weeks)<p>Now I’ve decided to leave after almost 2 years. I’ve proposed to Jim that my share from the potential sale of the startup will be reduced to 30% immediately and will be gradually reduced ever further over a period of 4 years to 5%.<p>Jim said that it’s absolutely unacceptable for me to retain ANY equity after I leave. He wants to pay me my share of the incorporation fee that I’ve paid and that’s it. He argues that once I leave the company I’m not entitled to any money he gets from the potential acquisition.<p>Do you think this is fair? I’ve tried to explain to Jim that what I want is a norm in the startup world and that the equity that I would retain is a compensation for the work that I’ve done to this point, but without any success.<p>If we don’t agree on my exit (taking my share of the incorporation fee) I think he will create a new company and operate the app like that - the thing is that he paid for the app development with his own money (not the corporate ones) so he argues that he owns the app.<p>I’d be really glad to hear your opinions &amp; I will share them with Jim too<p>Thanks :)
======
mch82
Before you start, create a plan to stop

My #1 rule for ventures, especially with friends, is to create an “ejection
seat plan” at the beginning. The ejection seat is designed to save friendships
and prevent teams from holding on to ideas too long.

Write down a list of milestones that must be achieved in 1, 2, 3, and then
every 3 months up to 48 months. Agree that either partner can choose to eject
without blame whenever the milestones aren’t met. Agree how much equity will
be retained in the event of ejection. Follow the plan.

I credit five inspirations for the ejection seat plan. (1) Tim Ferris’
“dreamline” concept from 4HWW, (2) news stories about “golden parachutes”, (3)
my friends who learned this with me the hard way because we didn’t do it, (4)
the Stripe Atlas guide to founders equity, (5) my friend who helped me
validate that it can work.

~~~
ada1981
I think the ejection plan is also really good in romantic relationships.

If we are committing to each other, what does it look like if one of us
decides we don’t want commitment?

Do we agree to do couples therapy for a X number of months where X is an
agreed upon ratio of time spent together?

~~~
maerF0x0
That's, kind of, a prenuptial agreement. However, these are frequently
contested in court. The ejection plan probably will have the same issue. A
contract is only as good as your ability to defend it in the court. And if it
costs more to defend it than to pay the person off...

~~~
ada1981
I meant more for the emotional side of things.

I really do think an ability to agree to a process you’d go through if you are
wanting to leave could be useful.

------
whiddershins
I’ve written similar things before here, but what I would say is there’s a
very small chance that you will lose some huge fortune by just walking away
with nothing.

On the other hand, the emotional distress, distraction, and destruction of
personal relationship(s) that can happen from arguing over this sort of thing
is tremendous.

Your cofounder probably feels emotions surrounding you leaving. You probably
do too.

That emotional context colors the conversation, and you both currently value
everything you contributed so far in that context.

I would strongly urge you to consider prioritizing an amicable parting of ways
over other considerations.

When you look back years later you probably will realize you were negotiating
over such minor things, while risking the truly important stuff, like your
personal energy.

~~~
mickeyM
Thank you. I've hoped to resolve this peacefully and I plan to continue along
that way. I'm pretty short on money right now, so getting couple thousands for
a buyout or as a share of the sale of the company/source code is pretty
significant for me and missing on it would be a real blow for all that work.

~~~
PopeDotNinja
I cashed out of my private company a few years back. Advice that me & my
partner got was that I should leave with no equity, as any ownership stake I
retained would feel like there was still a business relationship where I had a
say. The deal my partner worked out for a sale was a fixed price of X. 25% of
the sale price of immediately, and the rest was worked out as a deal where I'd
be paid out over 18 months. It worked great. Lawyers and tax people helped
with the legalese and taxes.

~~~
mickeyM
Thank you, the thing with scheduling payments over some sounds good to me,
I'll try to propose it to Jim

~~~
adventured
I don't know what kind of money you're thinking of (you mentioned a couple
thousand dollars), if the sum is relatively small - eg $3,000 or less - I
would not schedule payments over time. Try to get the partner to pay you out
immediately and walk. If it's a larger sum, it _might_ make sense to schedule
it into payments (particularly if it means a consequentially larger payout).
The ideal is to have no outstanding agreements whatsoever between you and Jim.
Next week or next month when the app fails (or xyz happens), he might decide
he doesn't think you're owed the rest of the payout because of said failure
('but the thing no longer exists, I am not paying for something that
failed!'). It's a lot of bullshit for $3,000 in regards to a contract and
payments over time. If he decides to stop paying for any reason, now you have
to consider suing him, which is a lot to go through for $1,000 or $2,000 or
whatever is remaining (more likely the balance is lost at that point).

Right now Jim probably thinks there is serious value in the app. The odds are
overwhelming that isn't true. While he believes that, your likelihood of
getting paid are dramatically higher, so again go for the 100% immediate
payout if you can.

~~~
mickeyM
Thank you, good point. I'll try to get as much upfront as possible

------
andreshb
First, Read "venture deals" by Brad Feld

Then understand that what both of you should have done is 4 years vesting with
12-month cliff.

With that come to an agreement that since you did two years, you should keep
only half of your equity (20%), freeing up the remaining 20% so Jim can
acquire better talent.

 _Long version_ (Excerpt from a post I wrote):

"These are the legal concepts you can use to protect founders from each other,
the company from the founders and founders from a hostile board.

Let's run an Example assuming I'll be your co-founder and the company will
grant me 48,000 shares for each of the legal concepts (The number 48,000 was
chosen to simply math but does not reflect typical number of shares per
founder):

1\. Cliff

• If founder stays less than 12 months, no equity.

Example: In this case I receive 0 of my 48,000 shares.

• After 12 months 25% of stock is instantly vested.

Example: In this case I receive 12,000 shares of my 48,000 shares.

2.Vesting

• After the cliff, founder vests 1/36th of granted stock each month.

Example: In this case I receive 1,000 shares a month, on top of my previously
earned 12,000 shares after the cliff for a total of 48,000 shares over a total
of four years. If I leave in month 24 my total number of shares is 24,000.

3\. Acceleration Triggers

• Single trigger: all stock is vested upon change of control or sale of the
company.

Example: Let's say Google buys our company in my month 24 of vesting, in order
to prevent google from firing me right after the acquisition in order to stop
my remaining 24,000 shares from vesting, all my shares accelerate are granted
immediately, thus accelerating the vesting

• Double trigger: some stock is vested upon termination without just cause.

Example: This provides a dis-incentive from investors, the board, or a co-
founder from firing me if I am not done vesting, in order to free up equity to
hire a lot more other people, if I am fired and it's not due to committing a
crime like fraud then I will earn some stock, normally 12 months, without
having to remain at the company for 12 months."

 _Even longer version_ : [https://www.linkedin.com/pulse/startup-survival-
guide-recrui...](https://www.linkedin.com/pulse/startup-survival-guide-
recruiting-co-founder-andres-barreto/)

~~~
mickeyM
Thanks a lot for both the examples & a book tip. It was really a mistake that
we didn't think about this earlier & I'll definitely have this put in place
the next time I'm involved in a startup or other type of arrangement that
could result in the problem I have now

~~~
eloff
This is the bog standard arrangement, please ask Jim if he will abide by that
standard. If he doesn't agree, he's really acting in bad faith. There's not
much you can do with a bad faith co-founder and no pre-existing arrangement.

~~~
MrDunham
Not to mention that Jim could be in a precarious position. OP retains all of
their shares that were initially agreed upon so offering to retroactively do
vesting helps Jim a bit.

However, since OPs cofounder paid out of pocket for the app, I'm not sure what
the StartupInc actually owns. But that also means the possibility of piercing
the corporate veil - which is also bad.

I'm not a lawyer, but I did have a startup where my cofounder gutted the
company after trying to stage a coup - then created a very similar company.
He'd signed all the NDAs, non-competes (these ARE enforceable, even in CA,
with co-founders/execs) etc.

I never went after him.

Instead, I waited to see: would he be able to steal my idea, connections, and
clients to be successful on his own. If so, I planned on getting my share
through legal proceedings.

Short version, a few years later one of his 3 co-founders quit, a year later
the other did, and now the company is gone.

I'll avoid giving OP advice based on my one story, but another poster made a
good point: there is very little to be gained.

Legally, though, I believe that - short of creating a new corporate entity or
watering down the stock (both possible, though they come with risks RE getting
sued by OP) - OP will retain all of their shares.

Of course, being not a lawyer, there are likely major gaps in my understanding
and OP should at least have a chat with one.

------
chasing
Stupid question, but if you straight-up own 40% with none of the usual
options/vesting stuff, then can’t you just tell Jim to go stuff it until he
comes up with an offer to buy that 40% back that sounds reasonable to you?

You came together a couple years ago with a plan to make something and own it
60/40\. Now you have something and you own 40% of that thing. I’m not sure how
your continued employment matters at this point. It’s like saying someone
needs to be employed at Apple to own Apple stock. They don’t.

Maybe I’m missing something.

~~~
rolltiide
> Maybe I’m missing something.

That the entity was never capitalized and the 60% founder paid for the app
development out of his own pocket and plans to just reincorporate another
entity and sell the app that way

~~~
mickeyM
Thanks chasing, the problem may be what rolltiide mentioned - I'm not 100%
sure whether Jim just can't establish a new company without me

~~~
chasing
In your position I would assume I have rights of ownership and act like it
until I was told definitively otherwise. He put in money, but you put in time
and expertise, which is also a high-value thing. He can start a new company
but he can't sell something he doesn't own. And if he does, keep a tab on the
new company. If they do well, you may be able to go after them for being built
on software you partially own. Don't just flip over and shrug.

~~~
mickeyM
Yeah, after some comments from others I've realized that Jim doesn't really
own all of the code/app. I guess that would be what I would do if he just
starts a new company - wait and see what happens and if they get somewhere, I
can go after them as you've mentioned. Thank you!

------
jedberg
The mistake you made was two years ago, by not putting in vesting in your
initial contract. But since we can't fix the past...

You appear to own 40% of the company, which means you own 40% of the IP.
Whether Jim paid for the development or not isn't super relevant, the relevant
part is the contracts between Jim and freelancers. Who is assigned their IP?
Who is listing as hiring them on the contract, the company or Jim?

Jim can try to play games by re-incorporating and moving the IP around, but
you'd still be entitled to 40% of it. But you might have to sue to get it.

The good news is that you can just walk away now, and if it gets really big
later, you can file your lawsuit if it might actually be worth something (see
Facebook). In the meantime no need to stress about it.

Of course I'm not a lawyer etc etc, but from my experience this is how it
would go down.

BTW if you wanted a fair deal, you'd get 20% of the stock now and forever.
That's what you would have vested in with a standard four year vesting
agreement.

~~~
mickeyM
Thanks a lot! To address one of your points:

> Who is listing as hiring them on the contract, the company or Jim?

Jim is the one. People around here suggested though that it doesn't really
matter because for example I've contributed something to the app as well
(sketches, app flow, design, etc.) and the app was clearly made for the
purposes of the company

~~~
cwkoss
I'd tell him that he has two options:

\- Find an amicable agreement to buy you out in the short term

or

\- You'll back up all of your documentation around incorporation and wait
until the app gets larger, hire a lawyer and go after 40% of the significantly
higher value. You have a solid claim, and this would be much more painful for
him. He has a fiduciary duty to protect the value of your share, if he takes
action to attempt to devalue your portion he could be personally liable to
make you whole for more than 40%. Especially egregious action could rise to
the level of criminality.

Either way, probably worth consulting with a lawyer now.

~~~
mickeyM
Great take, thanks!

------
seanrrwilkins
I recommend reducing the equity stake to something like 5% now, with an
expiration of 5 years.

This should be small enough that it won't effect him or the bottom line for
the business, but provide value to you in the long term if the business does
sell or raise significant money.

If you want to retain a working relationship with Jim, and keep some interest
in this company moving forward, it sounds like the responsibility is on you,
based on the way Jim countered.

Otherwise, it might just be that you walk away and take a hit, but you gain a
valuable lesson for next time. Always have a written operating agreement to
define how you will both act in situations like this. Codify the ins and outs
from the beginning, get it on paper and take the emotion out of the process
should you need to separate later.

~~~
mickeyM
That's right, lesson learned :)

I would agree with such an equity stake & expiration, that sounds reasonable

------
smoyer
"I own 40%"

If you own part of the company you don't just give that up without there being
express wording in the charter (or whatever contract/paperwork you used to
create the company). The problem you have is that right now, you own 40% of
nothing so you're going to pay the lawyer you talk to (rather than have them
work on contingency).

I should also note that this seems like a weird time to leave a startup ...
did you really think you could cash out in just two years? Perhaps you haven't
been "invested" in some time?

~~~
mickeyM
Yeah, there's no way I'm hiring a lawyer for this ($).

When we were starting the thing I was 19, kind of naive and inexperienced. Now
that I'm 20 I've experienced a couple of other things along the road and it
made me realize that I'm probably wasting my time here. Also, problems that
seemed unlikely in the start arose so I believe this is the best decision
right now

~~~
mch82
I like to look at similar losses from this perspective: To learn what I did,
would I pay about the same amount for a college course?

In the scope of your life, $1000 probably isn’t that much and it’s about the
same as a college course. You’ve learned a lot. Those lessons are valuable.
This hasn’t been a failure.

~~~
mickeyM
That's true, I've definitely learned a lot, I guess during my time with the
company I was able to cover a lot of curriculum on various topics :)

It would just feel bad to me to walk away for free from something I was
working on that can be tomorrow sold for couple (tens of)thousands (the value
doesn't really matter in this case) for free

------
onion2k
The fact is you've only just launched, you've not proved the market for the
app actually exists yet, there are still technical problems to overcome, _and_
the hard part of running a startup, eg getting customers and scaling up,
hasn't actually started yet (feedback means very little; it's all about actual
sales for real money).

You could just walk away and keep the shares, but as you're a minority
shareholder your stake will be diluted to approximately nothing fairly soon.

You're in a really bad position here. If Jim wants to be a %^&% about this
then you're going to get screwed.

~~~
mickeyM
I'm not sure how it would work in this case in the US, but we're from Europe -
my 40% will stay 40% forever. I want to part our ways on a good terms though
and don't want to leave the startup in a situation like this. On the other
hand, the work I've done is pretty significant and I wouldn't like to see
myself empty-handed if the company is sold in the near future

~~~
onion2k
_my 40% will stay 40% forever_

I don't think it will.

Jim can issue new shares so long as the majority of shareholders agree (which
is Jim agreeing with himself) and just not give you any. Consequently the
percentage of the available stock you own is diluted, and you end up with less
and less of the company. This is how it works in the UK (where I am).

 _Normally_ share dilution happens when new investors come on board and put
some money in which increases the value of the company so the value of the
shares doesn't really change. If there are 100 shares in the company and the
company is worth £1000 each share is worth £10. If you own 40% that's 40
shares worth £400. If 100 new shares are issued and sold to an investor for
another £1000 then the company is worth £2000 and there are now 200 shares
still worth £10 each. Your percentage has dropped to 20% but the value of your
investment is still worth £400 (ignoring the value of dividends, voting
rights, etc). The same mechanism can be used to screw people though if more
shares are issues without a commensurate increase in value.

~~~
mickeyM
Yeah, that's right, but in our country, there are no shares in our type of
company, so the ownership is derived from the initial investment (this is most
of the times fictional, in our case it's 60:40 as mentioned before), so even
if Jim owns the majority stake, he can't do anything about mine

~~~
onion2k
Ah. Cool. That's quite fortunate then. :)

~~~
mickeyM
Yeah, I would have been in a much worse situation if we had the company
structure you've mentioned :)

~~~
droithomme
If it's all as you say then since Jim is saying he wants everything and you
should get nothing despite the fact hat you legally own 40% of the company
without condition, I'd now be a hard ass, assert I own 40% of the company, and
that I intend to defend that ownership. Put Jim on the defense. By saying you
owe nothing he just told you he intends to steal two years of your full time
work, which I'd estimate has a street value of at least $250,000. Someone who
just told me they plan to steal a quarter million dollars of something I own
is my enemy and a serious threat that requires professional legal assistance
to defend against. Your ownership might be worth nothing that you can ever get
back, but the labor and expertise you contributed still has a value that you
yourself invested in the company and morally validates your ownership of 40%
in addition to the already established legal fact.

~~~
mickeyM
Right, thanks a lot. We are friends and I've told him that I'm flexible &
willing to find a reasonable solution that would be fair to both of us, but
the fact that he doesn't want to talk about it at all really puts me in the
position you've described. The thing I'm not sure about though is the
ownership of the app - if he said to me that he'll simply form another
company, I guess I'll wait if they make something of it and then I'll come
back asking for a fair share

------
easel
I think you need to be realistic about the valuation of the company, and take
it from there. I may have spent 10,000 hours perfecting my basket weaving
technique and business, but if I can only sell my business for $1, that's what
it's worth.

You may feel the value is yet to be realized, but then you should probably
stick with the company. Jim's planning to do that, I assume because he thinks
his future efforts in addition to what's already been done will make it
valuable.

One other thing I'll throw out there. In general, maintaining a complex cap
table for an early-stage company is very bad. Jim will have a devil of a time
getting investment or funding when he has a 40% share holder who is no longer
involved. The optics are bad and will spoil the deal. Given that, I'd consider
being willing to part ways for future cash, perhaps cash payable upon closing
the first $X in deals or something. Basically converting your equity to debt.

------
c89X
In my opinion, retaining equity, this early in the process, does seem unfair.
By far most of the value of the company is yet to be created and if you choose
to not be a part of that, it's hard to see why you would have a stake in it at
all.

Leaving you 'empty handed', or only paying you the share of the incorporation
fee also sounds unreasonable - you did invest time and effort and that largely
remains unvalued in that case.

In the past I have dealt with similar situations by agreeing on the amount of
hours and effort spend, and attach a market value to that. The leaving party
then is paid that amount (either in whole, or stretched out over a period) and
no equity is retained.

~~~
mickeyM
Hi, thanks a lot. The thing is that if I were to put a price on my work for on
$10/hour, my compensation could reach $10.000, maybe even more and the co-
founder would never pay me anything close to that. I actually don't see him
paying me even $1000.

The thing is that I think it's pretty possible that he will sell the startup
in the coming months - the startup itself may not be worth much right now, but
since our programmers took far less than they should have, the source code has
some value.

~~~
droithomme
> if I were to put a price on my work for on $10/hour

That's an absurd valuation and what he is willing to pay is irrelevant. Your
time for this level and value of investment as a cofounder is worth more like
$250/hr. Plus the fact you've been going without salary or compensation for 2
years gives this a risk multiplier. People routinely pay business consultants,
legal experts, and other such professional help $300-$500 an hour outright.
When the expert accepts equity in lieu of pay, the expected payout to account
for risk is much higher. That's why angel investors might spend $10,000 on
something and invest 100 hours, and end up with a $100 million return. So
their time was worth $1 million per hour.

~~~
dasil003
When you found a startup the value of your work is the value of what you
create. Pinning some prevailing market value for high priced consultants or
FAANG engineers in a sellers market is also absurd.

At this point it’s hard to argue for any cash value, but he definitely earned
some equity.

~~~
mickeyM
Right, thanks!

------
raiyu
It sounds like the country you are in has very strong protections for your
equity, and very likely if you do nothing then you would continue to own 40%.

You have already offered a generous offer to the cofounder to reduce your
equity stake over time and without knowing their side of the story, that seems
like a great deal to take. You did put in two years of work, at a reduced, or
$0 salary, and as a result there should be some equity that you retain.

You could simply just ignore everything and move on, and if the company sells
get your 40%. You have already made an offer that he could have accepted, but
chose not to for whatever reason.

So why stress more about it?

Agreements should be set in place beforehand as others have mentioned,
specifically around vesting schedules and also control structures and so
forth, but this is a good learning lesson for both of you.

So if you make a generous offer and instead of accepting it that person comes
back and says you should have 0%, why are you continuing to put that person's
needs first?

~~~
mickeyM
Well, the type of company we have isn't suited for startups or companies with
a similar structure, so there's nothing he can do about the equity without my
agreement.

Thanks!

------
partingshots
As long as you have it legally recognized, there’s absolutely no reason why
you should let go of your share.

If your co-founder can’t understand this, then maybe it wasn’t meant to be in
the first place.

~~~
frenchman99
I think the same. I would never walk away with nothing. Your co-founder has to
find a way to convince you, whatever that is (buying your shares at a
reasonable price, or giving you some other reason that makes you happy).

~~~
mickeyM
Right, thanks!

------
drelihan
You own 40% of the company right now and Jim owns 60% ( assuming all common
stock ). If you sold the company right now, that should be the ratio to use to
divvy up the proceeds due to the common shareholders.

Assuming no vesting / clawback agreement was in place:

Simple option: have Jim buy your shares at fair value, which may be very close
to 0.00. If Jim is unwilling / unable to pay with cash, have the company write
you a note for the shares. In both cases, Jim ends up with 100% equity, which
is what you say he wants, while you are compensated for value created to date.

~~~
mickeyM
Yeah, Jim buying me out would be a preferable option now

------
abannin
1) Talk to a lawyer. Details are going to vary wide depending on where you are
and the documentation that exists.

2) Your work has value, quite possibly more value than the capital put in by
Jim.

3) If you own 40%, Jim has to buy your 40%. You position as a shareholder is
not related to your position as an employee. Ownership doesn't disappear. I
don't quite understand how/why you would reduce to 5% from 40% (without
dilution events).

4) Don't sign anything until you talk to a lawyer.

~~~
mickeyM
Thank you. We're not from the "better" European countries, so I'm not sure
whether my work would have that much value. Maybe it would, but Jim would
NEVER pay that kind of money. In that case I would most likely end up with
some equity and nice bill from a lawyer, which isn't something I can afford
right now.

------
adonese
A similar situation is happening to me currently and it’s quite killing, I
thought I’d share it with you. We are 4 partners, we have created a startup a
year ago. We work in electronic payment systems, I have done our whole
infrastructure including the payment gateway integration and PCI
certifications, etc and my best friend and college had done the Android part.
We are in a very critical situation now as he’s leaving to pursue a masters
degree (studying abroad). It has been since then the worst time of my life. I
have never talked to him about it and I frankly so mad at him that I just want
him to leave.

I own 20% of the shares, it’s quite unfair but I really couldn’t care less.
All i wanted is to make our startup work.

It might be irrelevant but I just thought I’d write it here

~~~
mickeyM
Thanks for sharing your experience - that sounds pretty bad, I hope you work
it out somehow. I think the vesting schedules should be talked about more
especially among starting entrepreneurs so they can prevent situations like
ours.

If you are comfortable sharing it - what is the reason the guy leaving the
company doesn't want to negotiate something with you? Does he want to retain
his full equity?

------
carimura
Many comments here say this already but from the way you describe it, most of
the work by far is ahead of you. Most startups put vesting schedules in place
for this very reason, and two years in you'd typically end up with half of
your equity. Even IF that were the case here, Jim _should_ be pretty bummed to
let someone walk away with 20% of his company at this early of a stage. If I
were him, I'd fight anything more than say 3-5%, or maybe paying out the fair
market value of your work.

I'm not a lawyer, but if there's an invention assignment agreement in place
the IP would be owned by the company, not Jim, despite his $ in, and thus it
would be hard (not impossible) to dissolve and re-form.

Fail fast and move on to something new. Good luck.

~~~
mickeyM
Thanks - both 3-5% or paying me the market value for my work sounds good to
me.

The contract to develop an app is between Jim and programmers, so I'm not
really sure how this would play out.

Right, I'm happy that I'm moving on now. If nothing else, I will have a very
valuable experience

------
logfromblammo
Stop working immediately on anything relating to the company.

If you walk away right now, you own 40% of the company. There are some
business-world dirty tricks Jim can do to cut you out without paying, but they
can take some time to pull off, and some are grounds for a civil lawsuit (in
the US).

That 85:15 ratio in your favor should have accumulated some sweat equity. The
initial cash infusion works out to 7.7% you, 92.3% Jim. In order for that to
work out to 40% you, 60% Jim now, the company valuation with minimum-viable
product should now be $22333.33, and the value of the work you added via labor
should be $7933.33, and the value Jim added by labor should be $1400.

If that seems reasonable, so too should the 40/60 split.

The value produced by the programmer-contractors doesn't count toward equity.
They converted cash into company assets as a consequence of the business
structure you set up. The only reasonable ways for Jim to ethically increase
ownership share after you leave is by putting in more sweat equity, or by
infusing more cash directly. But legally, the ownership share was established
with the expectation that Jim put in more cash, and you put in more work, and
anything happening after would require renegotiating the agreement.

With respect to Jim contracting the developers directly, that would not matter
in the US (with a decent lawyer). Clearly, he was doing that as an
owner/officer of the company, so the work product belongs to the company. In
business shorthand, he loaned the cash to the company he owns, and then
immediately paid it out as majority owner to a contractor. The work product
goes on the books as belonging to the company, along with a zero-interest debt
to Jim. Or perhaps the initial capitalization was in the form of IOUs from Jim
to the company, and in paying the contractors, he simultaneously redeems those
IOUs. We can't say for certain without seeing the incorporation documents.

You are actually being _too_ reasonable. Demand an independent valuation of
the company. Take 40% of that as cash buyout. If the company valuation grows
over time, take 40% of that, whenever Jim feels like buying you out. Jim is
trying to lowball the current value of the company, in order to screw you out
of the value you put in after the initial investment.

Remember that whatever deal Jim may propose to you, you could use the same
valuation strategy to buy him out. If you could be bought out by paying your
share of the incorporation fee, would it be fair if you paid him his share to
buy him out?

~~~
mickeyM
Thanks a lot, great tips :) That's very reasonable, I'd gladly agree to that.

------
toxik
Depending on your country, him paying out of pocket for business expenses does
not necessarily mean he privately owns the product of those expenses. I would
guess that in most countries, if he made it clear that this was for the
company, and let you work on that code, i.e. "donated" the product of the
expenses, then he is simply owed the amount by the company. He borrowed money
to his company, in short. A court would easily see through that argument.

Now, that is but a tiny legal detail -- I think the other comments on
interpersonal relationships are much more important. He can screw you if he
really wants to, and so can you.

~~~
mickeyM
Wow, thanks a lot! I'm not sure how our country's law would look at this
argument, I think it will be unclear and depend on the judge's decision, but
it's definitely something that could bring Jim to senses - after all, he's got
more to lose than I do. Thanks again!

~~~
mch82
Keep in mind that while 40% equity means you get 40% of dividends, it also
means you’re on the hook for 40% of losses (or of the minimum annual tax bill
if your company has no profit).

So retaining your equity may not be free.

~~~
mickeyM
Good point. It's definitely something I'll consider. I guess in case I retain
some equity, it would be sort of an agreement that I'll receive XY % in case
the company is sold, so technically I wouldn't have a stake in the company &
be responsible for the tax stuff

------
pulse7
mickeyM: Please read and learn from the story how Paul Allen departed from
Microsoft. From Wikipedia [1]: "In 1983, Gates tried to buy Allen out at $5
per share but Allen refused and left the company with his shares intact." So
you can leave and retain your shares. If Jim continues developing existing app
under a new company, he effectively steals the code you co-own... Remember
that you also invested your work into this app (sketches & app flow)...

[1]
[https://en.wikipedia.org/wiki/Paul_Allen#Microsoft](https://en.wikipedia.org/wiki/Paul_Allen#Microsoft)

~~~
mickeyM
Wow, I didn't know such thing happened to Microsoft too :) Always it's only
Gates who gets the spotlight.

Yeah, toxik also pointed to the fact I co-own the code (app), although from a
different perspective. Thanks a lot!

------
pickle-wizard
From my personal experience.

I was a co-founder in a startup. It was split 50/50\. I did all the
development work and my partner did the business development work.

I had to drop out due to health reasons. I retained 1%, which I felt was fair.
The main thing is they needed to bring in new people to replace me and needed
equity to offer them. We did formalize it, and I have the legal documentation
showing my shares in the company.

They have gotten investment so I'm sure my share is diluted quite a bit by
now.

That was about 5 years ago that I left. At this point I'm ok if I don't get
anything out of it.

~~~
mickeyM
Thanks a lot for sharing your experience. From what others have suggested
here, I guess it was your generosity that you've only retained 1% & got no
cash. I understand that there have to be equity left for others, I just wanted
to protect myself in case Jim sold the company a month after I left (without
him doing any extra work that would "devalue" my contribution) when I
suggested the initial 30% stake that would then go down sharply

~~~
pickle-wizard
In my case I felt the 1% was fair. We had brought on a couple of people to
help and we had offered them 1%. So I ended up getting what they got. I should
have mentioned that my post, but its been so long I forgot about that. I might
should have fought for more, but I was having some pretty severe health
problems I needed to focus on.

I think it is important to honestly look at it. Not with what if, but how
likely something is to happen. How likely is it that it can be sold as is in a
month? How likely is it is that it is going to be profitable? How likely is it
that more development work needs to be done? My gut tells that the answer to
the first two questions is pretty low, as if there was a really good chance of
making a profit or selling, you wouldn't be wanting to leave. Instead you'd be
looking forward to the incoming money.

Do you have any sort of a written agreement, or was it a handshake deal.

~~~
mickeyM
I understand. I hope your health issues are resolved now.

The funny thing is that the only way it would make sense for Jim to sell the
company in a month is when I leave. Otherwise it doesn't in such time frame.

Yeah, we have a company together that operates the app, but as I've mentioned
before it's unclear whether Jim couldn't simply establish a new company and
operate the app under it (since the app development itself was paid for by Jim
+ has a contract about it stating that he's the one requesting the
development)

------
Aeolun
Your 40% share isn’t going anywhere unless there is something of the kind
specified somewhere in your contract/articles of incorporation/bylaws, even if
you walk away now and never look back.

Your offer is generous, but I can see why Jim would rather own the entire
company. He would have to buy you out though, and I can see how just the cost
of your incorporation fee is hardly enticing.

If he starts running the app by himself with a different company though, I
think that’s a case for lawyers. A fairly clear cut one too.

------
mooreds
Did you have a vesting agreement? Sounds like not. Always prepare the divorce
papers before you get married (when you are founding a company). It's awkward
and hard, but that's the best time to do it, because if you agree you're all
done and if you can't agree, you shouldn't be running a business together.

I think you should absolutely be paid for your time and effort, preferably in
equity. Given the structure of your corporation (and how the app was paid
for), you may have few options.

Contact a lawyer.

~~~
mickeyM
Thank you. Yes, not having the vesting agreement is a mistake. A lawyer is
currently too expensive for me, so I'll try to get it done myself. Even if
they found some way to get me out without my consent/go around me, the fact
that I've done most work about the app apart from programming means that Jim &
whoever he hires would have a hard time understand & navigating it wihout my
help & advice

~~~
mooreds
I think that maybe a trusted advisor that you both know might help. You don't
want to tear down the company and neither does Jim. How can you both get what
you want?

What do you want? I thought it was equity when I first read this, but some of
your comments read like you'd be ok with some money. I would think carefully
about this before moving any further.

Someone made the point that the equity isn't likely to be worth much. I agree,
but for me I'd be digging my heels in because of fairness. At the same time,
maybe that doesn't matter as much to you right now.

~~~
mickeyM
Yeah, after some comments and thinking I think the walk away money would be
more reasonable to go for than the equity. Thank you!

------
phanindra_veera
If you guys have no paper agreement regarding equity, then you can forget
about it. If you do have one then I think your proposition is good. Again that
depends on the type of the deal.

~~~
mickeyM
Well, we both own the company (Jim 60% and I 40%) that operates the app, so
there's no way Jim can get me out of the company.

The question remains whether he can simply take the app & create a new company
since technically he paid for the app and the contract with programmers is
only between Jim and programmers

~~~
gamblor956
Yes, he could do that now quite easily since right now it sounds like the app
isn't worth much under generally accepted valuation methodologies

~~~
mickeyM
Right, so that may be something they can use against me. Although since I've
done the most work, I know all the ins and outs and not having me available
for occasional consulting would be pretty bad for them

~~~
gamblor956
TBH, if the app doesn't currently have any traction, it's current value is
essentially nil. If that's the case, knowing the ins and outs doesn't provide
much value, especially if they have to rework the app as it would generally be
cheaper to just start from scratch.

~~~
mickeyM
Thank you. They won't rework the app until they make some money off it first,
so for the time being they would pretty much leave it as is. Since the
freelance programmers (unknowingly) took very little money, the real value of
the source code could potentially be a few tens of thousands. Even if it was
just the $11.000, there is a value just in the source code

~~~
Aeolun
There’s only value to the source if someone wants to buy it, regardless of how
much money was put in to make it.

------
kerkeslager
It sounds like you should get a lawyer and stop talking about this online, as
anything you say here can be used against you.

------
jiveturkey
This is a very interesting question, no less from a 19^W20 year old. Honestly,
most Ask HN are dull.

Normally, (90%ile) investors get paid back and founders do not (founders own
common stock). In this case, Jim owns 92.3% of the preferred stock.
Additionally, he paid for a developer out of pocket, not with corporate funds.

Without insulting you, trust me, whatever your idea was it's not going to
unicorn status. You are going to fall into the 90%ile. You must already know
that -- you're leaving of your own accord.

I would suggest that you propose reducing your equity stake immediately to
3.85%, based on your preferred stock ownership minus 50% to reflect Jim's
personal payment for iOS work. Hours spent != effort and effort != stake. If
that were true, founders would make kagillions and investors would make
pennies. Get over the idea that your efforts justify reward ... it's a lottery
not a skills test.

Given Jim's so-far absolutist position, I would further explain how you can
make his life hell by making him and the company look bad on social media,
directly to investors, etc. (Pls ignore the fact whether you would or not --
you are negotiating here.)

3.85% is perfectly reasonable on both sides so this should be a good offer.

~~~
smileysteve
> I would further explain how you can make his life hell by making him and the
> company look bad on social media, directly to investors, etc.

For U.S. law this could be considered extortion, slander, or at best bad
faith.

Also consider that op wants a job in the future, maybe even to talk to
investors in the future.

~~~
jiveturkey
It's extortion to use such leverage to reduce your stake from 40% to 3.85%?
Worst extortionist ever!

------
lostsoul8282
Our firm has policy that equity is not to be held by non employees. I've seen
this in certain investment partnerships. When someone leaves, we have a
formula to buy them out, usually some multiple of EBIDA. We can discuss the
timing is there is cashflows issues but overall I've seen that work.

~~~
mickeyM
Interesting. I guess that's Jim's main problem - that a non-employee would own
equity. Thanks!

------
ReD_CoDE
I think this is one the best resources for founders:

[https://www.businessinsider.com/how-to-allocate-ownership-
fa...](https://www.businessinsider.com/how-to-allocate-ownership-fairly-when-
forming-a-new-software-startup-2011-4)

------
stevewilhelm
What keeps Jim from creating a new corporation, have that new entity tender an
offer to buy the assets of the "current startup" for $100? Could Jim, owning
the majority of equity accept the offer and pay our OP his $40?

~~~
mickeyM
Nope, Jim can only sell his equity (60%) - in other words, he has no right to
sell my equity without my agreement

------
tiffanyh
See Seth Godin “Shotgun Clause” (#6)

[https://seths.blog/2006/11/dont_make_a_bad/](https://seths.blog/2006/11/dont_make_a_bad/)

~~~
mickeyM
:) Thanks, sounds good!

------
johnwheeler
This is silly. If you own the equity you don’t have to give him any of it,
unless there was an agreement beforehand

~~~
mickeyM
Yeah, there was no such agreement

------
lmeyerov
This will be controversial as it balances heroic efforts of founders vs the
less risk-taking yet sizeable community who are 99.99% necessary to follow
them. Overall theme is, what you did as a founder is great and you should be
rewarded, but even 10% is pretty unfair and suffocating dead weight to the
people who likely need to come after. You want ownership in something that
succeeds.

1\. This is why 4 year vests are critical. For co-founders, IMO, 4 year really
should be 6 year. So 40% should really be 10-20%.

2\. Focus on good/bad cases. Frankly, the value of OP's contrib is high wrt
current company, and low wrt the necessary work to be done and effort/risk
compensation for the people to do it:

a. Failure -- who cares. This is the 95% case.

b. Small exit -- so let's say they get releaseable (tech), enough micro-pivots
to solve early product/market fit (product), get early traction (marketing),
some sales, some hiring & management, and given current state, more investment
by co-founder. WOW that's a lot of time/$/work still to be done, say another 2
years and maybe now it's Jim and a few contractors or ever 5-20 people, to get
to a small M&A. Those folks will be taking low pay, hard hours, & a ton of
risk, and they can't all get 10%. If a $5-10M exit through that many other
people and investors, how much is OP really responsible for, $1M? $500K? IMO
most of the hard work is still to be done: initial app launch is pre-product-
market fit and pre-traction. This is the 4% case.

c. Big exit -- First they need to do above product/market fit iterations,
could be a couple years. Then they need to build the actual business. So they
bring in investment and build an operational & growing business. Let's say 1-3
rounds @ 20% dilution each. Takes another 5-9 years over ^^^: figure out
sales/marketing, turn that crank, hiring, a pivot mid-way through, etc.. And
exit at 50-200 employees for say $100M. So much more work to be done. A _lot_
of people's work to pay out on: if everyone got 1%, wouldn't be enough.
Arguably your 2yrs is worth than a senior infrastructure engineer spending
nights and weekends for 2yrs replacing your code so it could scale to 10M
people, but is it worth 10X more? 100X more? Riding the labor of others to the
tune of $1-2M is just 1-2%, so starting with 5% now is still great.

3\. Future investors and acquirers may look at the cap table and see OP's dead
weight on it. It's very solvable.

"5%? That'd be equity for 10-50 employees, who is this person? Let's agree to
a smaller acquisition with small/zero payout, and invest in that new company."

Or "5%? As an acquirer, we want to pay the people we're trying to sign on to
our team, not some dude on a beach who wrote some stupid app that isn't even
what the company does today, let's shift proceeds to sign-on bonuses." So
weirdly, in your favor not to be big dead weight. Even 10% is dead weight.

4\. For remaining founder, so much heavy lift & investment & risk is still to
go -- esp if a 5-9 year journey from here -- that 20-30% is demoralizing.
Let's say they want to hire another CTO and give them say 20-40% (VESTING!!!).
So your remaining cofounder has to do a huge years long lift for... 20%?

------
chasing
You've said your age, but out of curiosity: How old is Jim?

~~~
mickeyM
Yeah, I'm currently 20 and Jim is over 30. That is one of the reasons I've
decided to leave - I don't want this to sound cocky or something - but it was
apparent that I'm more capable than Jim, or to put it other way Jim doesn't
really have an idea what he's doing. I was able to discourage him from some
crazy things he wanted to do along the way, but after some time I realized
that it's leading nowhere.

I guess the turning point was when we were talking to a journalist and he
asked us what are our KPIs (key performance indicators). Jim had no idea what
that is, so he just told him some nonsense - I had to step in to make it
clear. I just don't want to imagine the embarassment if we were sitting with
investors instead

~~~
jmalicki
> it was apparent that I'm more capable than Jim, or to put it other way Jim
> doesn't really have an idea what he's doing

In other words, you're leaving because you believe the value of your shares
are approximately $0.

Why are you spending your valuable time, energy, and creativity fighting to
retain your 40% of $0, rather than moving on to doing something more useful?

------
RocketSyntax
I reduced my equity from 55% to 12% when i left. it felt fair.

~~~
mickeyM
That would feel fair to me too :)

~~~
quaquaqua1
I'm confused, how much is 12% worth when acquired?

If we aren't talking about $3x,xxx or more USD, then the acquisition isn't
really very financially significant.

As such I would tell the cofounder that litigiation is a waste of time for
both parties and that he really should just give you 12% or etc before you are
forced to ruin a relationship and pursue legal action, which would be a net
loss for everyone except the lawyers.

~~~
mickeyM
True, thank you

~~~
quaquaqua1
Good luck!!! Sad that he is refusing to meet you in the middle. Stick to your
rights.

~~~
mickeyM
Sure, thanks! :)

------
RocketSyntax
what’s the actual vesting schedule??

~~~
mickeyM
There's none, that's the thing (lesson learned).

It's just that Jim owns 60% and I own 40%, that's it

~~~
wheelerwj
> It's just that Jim owns 60% and I own 40%, that's it

well that seems pretty cut and dry.

------
not_a_cop75
It's ridiculous to expect anyone to stay forever, but you should both agree as
to what is a good period of time to be vested. Probably you should have agreed
on that in advance, but now you have to give and take and agree to compromise
on something that works for both of you. Also, this guideline would be good to
help others to be vested in the future. You have to consider what works in the
industry.

------
the-dude
Would you please read the guidelines and make this a 'Ask HN' ?

~~~
mickeyM
I'm sorry, thanks for reminding me - done

~~~
the-dude
Thnx. No need to apologize. I am not a moderater.

------
droithomme
Obviously you need to see the best lawyer you can find immediately. You should
not be asking people on the internet to resolve this for you.

~~~
revel
Strongly disagree. At this point the app has made almost no money and legal
fees will quickly eclipse the rest of the money that you've spent on the app.

Speaking of lawyers, I'm not sure who did your incorporation work but it's
honestly pretty disappointing to see that they didn't even suggest a vesting
schedule. This is startups 101 stuff; any competent lawyer would have told you
this.

~~~
mickeyM
Right, hiring a lawyer for me isn't realistic right now and as you've
mentioned I could lose more money than make with such action.

I guess another lesson for me other than having a vesting schedule is having a
responsible lawyer.

~~~
droithomme
You side with those against you meaning your main problems are internal and
psychological.

Your situation where your contract gives you 40% ownership of the business
without a vesting schedule is massively preferable from your standpoint
legally and vastly superior than one where you have restrictions on equity.
You are in as they say, in the cat-bird seat.

Why do you continue to side against yourself and with those who seek to harm
you? I don't need an answer nor can I answer that for you. It's something you
need to resolve for yourself.

