

Ask HN: Leaving a startup that I co-own - How should I be compensated?  - legalhelp

Here's the deal. I'm the developer and an owner of a startup but my belief in its future success is dwindling. We have only maybe been profitable one month out of the past 2 years and I don't think the next pivot will work at all.<p>I've been slacking w/ my tasks and subsequently, the other partners are not happy with the amount of time I've been putting in. My passion for this company is not what it used to be at all. You could say I'm burnt out.<p>We've signed agreements breaking the company up evenly between 4 people. This is where the whole situation gets a little bit tricky - it's still registered as a Sole Proprietorship and I believe I still own the IP.<p>For the past 2 years, I've given a lot of my time and energy and would like to get something out of it if this company makes any money in the future. I built the platform this company will grow from and I spent considerable amounts of time building the brand.<p>Having the current owners buy me out doesn't seem like it could happen. (The company is not making money, who would buy into a company that's losing money?). The option they brought up is basically a stock issuance. I would assign IP and give up my ownership stake in exchange for a certain amount of stock.<p>How would you suggest I be compensated for the work I've put in? Should I even expect anything if I leave before it's making money? Are there any negatives w/ going for a stock issuance?<p>I know I should get a lawyer to write up the final agreement and am considering it. I would just like to know the community's opinion on what I should do and then bring that to the lawyer so we can just get down to business when it's time to pay.<p>Thanks for your help and advice!
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RiderOfGiraffes
This is the situation that shares were intended to solve. They're not perfect,
they're not ideal, but they do at least provide a way of thinking about the
problem. This is simplistic and intended to give you a point of view from
which to reason about it. It's not the end of the story.

Let's suppose there are 100 shares, and you each own 25 of them. You can't
think in terms of the effort you've put in so far. That's sunk money/time and
you need not to think about it at all. You need to think about the value of
the company/idea/project as it is now.

And that's right now, not in two years time. You don't know what it will be
worth in two years time. Given that you've lost your enthusiasm, in your heart
of hearts you must think it's not going to be worth much in the future. If you
honestly, truly believed it was worth pursuing then you'd take a day or two
off to recharge, and then get stuck in again.

But you want to hedge against the million-to-one chance that this will all
take off without you. So value your expectation of the company's worth.

With 50% chance, you think it's worth nothing.

With 30% chance you think in two years it will pay the bills, but only just.
Company worth - $100k

With 15% chance it will be a really good, on-going business. Company worth -
$400k

With 4% chance it will soar and be worth $1m.

With 1% chance it will really take off and be worth $7m.

Is that how you see it? Change the figures to match.

That makes the expected value ofthe company:

    
    
        0.5*0 + 0.3*100k + 0.15*400k + 0.04*1000k + 0.01*7000
      = 0 + 30k + 60k + 40k + 70k
      = 200k
    

So your share at the moment, based on this belief, is currently worth $50k.
Each share is worth $2k, and you have 25.

Tell me - would you sell me your holding for $50k? If you snapped my hand off,
then that valuation is too big. Are you really sure you wouldn't sell it to me
for $50k?

Honestly?

So you need to adjust those figures down. Honestly, how much would you take
for your 25%?

Now you want to walk away and leave your colleagues to take all the risk. The
point is, they will continue to put time, effort and money into the venture.
As they do so, they should be compensated, but you shouldn't. So they need to
put in X and receive newly minted shares in return. Yes, your holding gets
diluted, but the value of the company should be going up. The value of your
holding doesn't change, so long as they're getting linear returns for their
further investment.

Suppose they all put in an additional $10k. The company will then be worth
$230k. They should each receive 5 newly minted shares, so there are 115 shares
issued. You now hold a smaller percentage of a larger valued company. You have
done nothing, and the value of your share holding reflects that.

Suppose they all put in another 6 months of work. How much is that worth?
Based on what's happened so far it's a quarter of the time spent so far, so
they should each get an additional 6 shares.

And so on.

Their proportion of the pot is increasing because they are continuing to put
more in.

Now here's the kicker. You can trade your shares with them. If your valuation
of the company is greater than theirs, you can put money in, getting shares in
return based on the mutually agreed valuation (splitting the difference). On
the other hand, if you think the company is going down but they don't, you can
offer to sell back you shares.

So here's the question again - what would it take for me to buy the 25% from
you and have you walk away completely?

~~~
kirpekar
Sorry, but why are you adding the probabilities? They are not mutually
exclusive.

If there is a 1% chance that the company hits $7M, it's value is $70k --
that's it. It would have achieved all the other milestones you mention.

~~~
RiderOfGiraffes
That's only true if the other 99% of the time the company goes to the wall.

Take 100 companies and look at where they are in two years. 50 have gone to
the wall, 40 end up worth $100k, and 10 end up worth $1m. The 100, in total,
they are worth

    
    
      40*100k + 10*1,000k = 4,000k + 10,000k = 14,000k
    

The average value of the companies at the start is then 140k.

Now choose one of the companies. You don't know which it's going to be, but
the expected value of the company you've chosen is 140k. The calculation I
gave is the expected value, just as the "expectation" is computed in
elementary probability. In the long run, you'll make 140k per company.

To compute the expected value, you find all the possibilities, compute the
probability and value, multiply them, and add up the answer over all cases.

    
    
        expected_value = 0
        for case in possible_cases:
    
            prob = case.probability
            value = case.value
            expected_value += prob*value
    

or

    
    
        sum( [ case.probability * case.value for case in possible_outcome ] )
    

========

ADDED IN EDIT: If you seriously don't understand, and this doesn't help you,
email me and we can work out where our understandings diverge, and pin down
the calculation.

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junklight
So first of all - you kind of want it all ways. You think its going to fail
but you want a piece of the action "just in case".

First step - pick one.

If you think its going to fail and your partners are just wasting their time.
Sign it all over them. Assign them the IP and walk away.

If on the other hand you think that while your involvement has come to an end
- that they still have a chance then sit down with them. Get it setup in a
form where you can have equity and agree what share of that equity you will
have - but it sounds from the agreement you already have you have 25%. Sign
over the IP to this entity (they won't be able to sell it or do anything if
you don't do this - and you want to give them a fighting chance). If you still
want to be an advisor or they do - then that is your choice. The net result of
all this is that you will be a shareholder with your investment being the work
that you did.

A Note on amount of equity: You have put two years work in at the riskiest
part of the game (at the very start when everything is unknown). They might
want to argue you down a bit because it's still very high risk - and that
would probably be fair - but I would say that's their call if they want to go
down that road. Ask yourself if they would have _any_ chance going forward
without those 2 years work.

~~~
kleine2
I think you also need a valuation for the company so that as they continue to
put money in (and assuming you will not) you know how much you should get
diluted by.

~~~
junklight
Yes. Sorry was assuming all that.

You do need to become an investible entity which involves a valuation , cap
tables and all that nonsense.

We needed to do this early on as well - because we had some early people who
we paid in stock and not all of which worked out for one reason or another.
Its a pain at first but to be honest it also brings a bit of rigor and
discipline to the company as well.

~~~
roel_v
Any care to explain or post a link to an explanation of what a cap table is?

~~~
roel_v
I'm seriously wondering what is up with the voting the last couple of weeks.
This is a genuine question, asking for an explanation of a term that I don't
know. Why would anyone vote this down? Is there a 'basic knowledge' rule I
violated here?

(sorry about asking about downvotes for the second time in two days - I'm just
wondering what changes I need to make to my posting to not annoy people so
that they don't have to vote me down).

~~~
junklight
Well I didn't find it annoying.

So basically the cap table is a spreadsheet of who has what percentages of
equity (and numbers of shares) in the company and then for any given dilution
event (typically investment) shows how your percentages will change - and
being a spreadsheet obviously you can play with the values to understand how
things change.

So it lets you model how investment alters your share holding. It lets
incoming investors understand the share structure of the company (and who
holds power etc) and ours has a couple of columns of what we might earn at
given exit values - this is kind of incentivising but its also useful once you
start talking about preference shares and multipliers. It is also a useful
tool when negotiating on an investment because you can see what the
implications are - for example say an investor was asking for 2% more - you
might be able to see that it hardly makes any difference and isn't worth
arguing about - or it might be absolutely critical.

Investors seem to want to see this as well.

~~~
roel_v
Thank you.

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hellweaver666
If you think it's going to fail, just call it a day and walk away, signing
everything over to them. 25% of nothing, is nothing so it's not like you'll
loose anything.

If you don't think it's going to fail, take a week off, get your shit together
and get back in the game.

~~~
legalhelp
I think with enough determination the current owners could pivot into
something that makes money. They would be building on top of the branding,
website and traffic that I put time into building.

Maybe it's not a question of if it will fail or not, it's a question of how
long and how many pivots until the company becomes profitable?

I just don't want to stick around for the pivots. It would be nice to get
something in return if the company eventually becomes successful. Am I being
too unreasonable in wanting something if - and only if - the company starts
making money if what I helped build enabled the team to get to that point?

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jacquesm
Figure out what you want for your stake, ask the other party(s) to do the
same.

Whoever offers the highest valuation for their own shares gets to buy the
other party out at that same valuation.

Simple.

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SemanticFog
Keep in mind that if you have 25% of the stock now, it's very unlikely you'll
get 25% of any purchase, if there is one. The buyer will direct most of the
deal toward earn-out for employees they want to retain, and try to minimize
money that goes to shareholders. It's also easy to dilute minority
shareholders over time, e.g., by giving currently employed founders big option
packages. Generally speaking, common shares owned by a founder no longer
active in the company are seldom worth anything, unless the company is a major
success.

On the other hand, given that the company hasn't really succeeded so far, it's
not clear that your efforts to date are worth all that much. If the company
goes forward, the real value creation is still in its future. So you're not
really being screwed over, you're getting fair value for what you've done. The
tough part is recognizing that even though you've put in a lot of effort, and
invested a lot of emotion, the results so far just aren't worth that much. You
sort of recognize that by walking away. But now you want a share of what the
other founders create in the future, which isn't fair. You only deserve a
piece of what's been created so far, and by your own description, it doesn't
sound like that is very much. You can't have it both ways.

~~~
legalhelp
Great points about the buy-out and non-active founders shares.

I'm not trying to ask for a piece of what they create in the future. If the
company makes money, I'd like to get paid back for the platform that I helped
build which enabled them to get to the point where they are making money. Do I
deserve to ask for that?

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b3b0p
You mention burned out. Could you not take a break away for bit? You also
mentioned you spent a considerable amount of time building the base, thus I'm
assuming you have put in more time and effort than the others. Why not try and
take a week or a month away (either doing something else or vacation) and see
if you feel any different? You will get a chance to think and solidify your
decision to leave.

Could you maybe change roles in the company? Do something that brings back the
energy you once had towards it?

However, by the tone in your first 2 sentences it might be too late. It sounds
like you have already made the decision to leave and do not believe in the
company at all. In which case, the others might not even want you there
anymore anyway and I can't blame them.

~~~
legalhelp
It's more than just being burned out. I don't believe the owners are good co-
founders. This was my first venture into entrepreneurship. I think there's
local value in the brand and potential for it to transform into something
profitable. I think it would take another 6-12 months to find something
profitable before everyone gives up on it. My problem is I don't want to wait
that long.

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damoncali
Here's a simple fair way, if you can get everyone to agree.

Forget about the sole proprietorship. Pretend you all vested your stock over a
traditional 4/1 vesting schedule. Go back and figure out what you've already
vested - keep that and move on. (so if you've put in 2 years, you get 12.5% of
the common).

The company should pay for this legal work, because it's something that should
have been done a long time ago. Getting this right is in the company's
interest as much, if not more than, your own.

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minalecs
I would just say finalize the equity. Give what is owed to the rest or your
partners. Stay on as board of director role, or advisor. Theres no reason for
you to just give up completely .. why not just work on a new project you have
on the side to avoid burn out. A lot of times for us developers we think more
features will bring more customers.. but I think its up to your partners to go
out and sell the crap out of the product, and you should be given some relax
time.

~~~
legalhelp
I'm already working on many other projects outside the scope of this company.
Everyone is putting money into the company to keep it going right now. They
don't think it's fair - and rightfully so - that they keep paying while I stop
paying and reap the future benefits if any.

Are you suggesting I step back and be just an advisor still? Also, if I did
step back and they decide to take out a loan in the company's name, wouldn't I
be responsible for a portion of that loan even if I didn't know about it?

~~~
btilly
Why don't you agree on a dilution scheme where the more money they put in, the
less of it you own?

For example you could agree that everyone gets X shares of stock. Agree on how
the company is currently valued, and how it will be revalued going forward,
and allow money to be put in by purchasing additional stock. (You could also
reward effort put into the company going forward with even more stock.)

If all shares are equal, your ownership interest will naturally diminish over
time.

Whatever you agree to, get a lawyer to make it official.

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trizk
Ask them to assess when they think the startup will be profitable, considering
everything invested to date, then reproportion your equity accordingly. So if
each of you have 25%, the consensus is 2 years to profitability, and you spent
2 years there already, then you should agree to reduce your share to 12.5%,
splitting the other 12.5% between the remaining 3 founders. You can also offer
to play an advisory role for a bit more.

~~~
bluethunder
This seems like the right split. Also the founders would have the capacity to
issue more shares - so if it takes longer than 4 years then they can issue
stocks to whoever sticks around after that.

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staunch
The most important factor is what stage the company is at. Since the company
is doing very badly and will likely fail you deserve very little credit if it
doesn't. You do deserve something though. I'd say around 5% would be fair.
That assumes you will act in good faith to hand over any IP assignments
necessary, etc.

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dgudkov
If I were one of the remaining founders I would offer you the following
scheme: 1) Make evaluation of the company asap(say 0.5mln). 2) Define your
share as fixed amount (say 125K), as you leave and don't put any more efforts
for company to survive, contrary to other founders. Your shares and IP goes to
company. 3) In case company gets funded/profitable, you'll get your
125K+inflation. If not - not. That would be fair, IMO.

