

Getting shares back from my co-founders - talsraviv
http://www.ecquire.com/blog/getting-shares-back-from-my-cofounders/

======
mcherm
Really a class act on the parts of Ariel and Anton. I hope that if I found
myself in their position that I would be as gracious.

~~~
aneth3
Could you guys expound on why this is the "right thing?" I see this very
differently.

Personally, I would never have agreed to this based on my understanding of the
situation. It's clear from the article that Ecquire evolved from Dropcard,
even if it is an entirely different product now:

"Ecquire was getting further and further conceptually (and technologically)
from Dropcard"

Almost every tech company evolves dramatically, and rarely resembles its
former self after four years. If one contributes substantially in the founding
stages of a company, I believe one should end up with something, even if it is
a reduced stake. The company would not have made it where it is without Ariel
and Anton's participation in early failed ideas or admission and participation
in the incubator.

It's safe to assume their contribution exceeds zero percent, which is what the
Tal pushed for and Ariel and Anton agreed to. No investor would have agreed to
this, why is it right for Ariel and Anton?

~~~
tatsuke95
> _Ecquire evolved from Dropcard, even if it is an entirely different product
> now"_

What does that even mean, really? If they have nothing in common (and they
might in this case, I don't really know), then the evolution is irrelevant.
You can't stake a claim on all my future ideas because we once shared an idea
together.

> _"If one contributes substantially in the founding stages of a company, I
> believe one should end up with something, even if it is a reduced stake."_

This has to be determined case by case, which is why I think the early equity
split is meaningless. _What_ did they contribute? Money? Code that is still
being used? Other ideas that got implemented? It's pretty easy to put a price
on these things. If you can't point to _tangible_ contributions to the new
business you don't _deserve_ anything. I think the courts would agree.

~~~
macspoofing
>What did they contribute?

Sweat equity, most likely, for which they were rewarded with an ownership
stake.

>I think the courts would agree.

Courts would side with Arel and Anton, should they decided to retain their
shares.

~~~
tatsuke95
> _"Sweat equity, most likely, for which they were rewarded with an ownership
> stake"_

Sweat equity doesn't occur in a vacuum; something is created from that effort.
If they wrote code and that code earns money, they are entitled to a portion
of those earnings. That's inarguable.

It is my understanding that the original "idea" (I have trouble calling it a
company) didn't take hold. If nothing is created and the company never amounts
to anything...what are you getting an "ownership stake" in?

Had Zuckerberg and a friend opened a candy store on the Harvard campus in
2002, and it had failed, that friend is not entitled to anything Zuck does
with Facebook because he put in labour on the candy store. Now, if Zuck was
operating Facebook under the same legal entity as the candy store in which his
partner had equity, said partner might have a claim, though it would be hard
to establish _if the partner produced no work for the new idea_. That said, if
this is analogous to the situation in the article, what on earth are these
guys doing getting bogged down with convoluted equity agreements when they
should be working on the product?

I'll repeat: if the other co-founders provided something tangible --be it an
idea, code, money, whatever-- to the new project, they deserve "their share".
If they can't point to something tangible, they _deserve_ nothing.

~~~
aneth3
> if Zuck was operating Facebook under the same legal entity as the candy
> store in which his partner had equity, said partner might have a claim,
> though it would be hard to establish if the partner produced no work for the
> new idea

Now, IANAL, but to my knowledge this is just patently false and represents a
complete mischaracterization of the purpose and legal implications of a
corporation.

In this case, Facebook would be owned by the flower shop entity, not Zuck.
Regardless of what work his partner put in, Facebook is still owned by the
flower shop entity, and each has ownership stakes as contractually or legally
established. Neither Zuckerberg nor his partner would have any personal claim
to Facebook, only to their equity in the owning entity. Zuck would not
suddenly get more equity in the entity because of the work he did.

This is one of the most basic functions of equity and the reason for investing
time or dollars in exchange for equity - so that your wealth increases
disproportionately from the work of others. If ownership was determined by
judges proportioning by sweat equity, those who left Facebook after 2 years
and now have $10M+ would be in trouble.

There are numerous legal complications if Zuckerberg claimed that Facebook was
NOT under the flower shop entity, however given your statement that he
explicitly placed it under the flower shop, the case is quite simple. Zuck
would not have been able to extract Facebook without buying out his partner.

I am way over my head in trying to get into this part, but depending on state
law, I understand there are de facto partnership agreements in the absence of
a written one (generally an equal split) and sometimes ways of getting rid of
"dead weight" partnerships. These are not things you want to happen.

This sort of situation occurs _all the time_ in small businesses and often
leads to their demise. You are doing a great disservice to anyone who takes
your advice.

~~~
tatsuke95
> _"Now, IANAL, but to my knowledge this is just patently false and represents
> a complete mischaracterization of the purpose and legal implications of a
> corporation."_

So, these guys filed the paperwork and were running a _corporation_ , rather
than just a business partnership (you realize there's a difference)? Before
they even had a business model? Again, that's ridiculous and a complete waste
of resources at an early stage start up.

> _"This sort of situation occurs all the time in small businesses and often
> leads to their demise."_

Really? Do you have source for this assertion?

> _"You are doing a great disservice to anyone who takes your advice."_

Oh, spare me. You realize that these guys essentially followed what _you_
recommend doing, and if it wasn't for the co-operation from minority
shareholders would have been stuck with dead weight partners owning part of a
business in which they did not participate. Establishing an equity arrangement
_before_ they knew what they hell was going on in the business was the _cause_
of this problem. If there was no formal agreement, no partnership and in the
end no business, _none of this would have happened_. The two founders would
have moved from Dropcard to Ecquire, and the old co-founders would have _no
claim_ on the new product. Just as a reasonable person would expect.

But by all means, have people heed _your_ advice, and form corporations before
there's a business model, so that the shareholders have a claim on _anything_
you do in the future. That's spectacular advice.

~~~
aneth3
I am not suggesting people form corporations as a first step, only that they
come to a general consensus on equity and commitment as early as possible.
Personally, I've had long discussions with potential cofounders who suggest
exactly what you say, and when pushed they offer 2% because they are the great
idea and execution genius who can pull funding. All those people failed to
find competent partners or raise money.

Had these founders not had an agreement, corporation or not, the founders who
left would continue to have a very substantive claim on the business as part
of the partnership.

You can read here about what happened in one case when this went wrong:

[http://www.milwaukee-business-lawyer.com/what-happens-
when-o...](http://www.milwaukee-business-lawyer.com/what-happens-when-one-
partner-leaves-a-partnership/)

Courts hold that a partner who leaves a business lacking an agreement does not
lose rights to their portion of the business. If it can be proven that there
is absolutely no relationship between the old and new product, perhaps it
could be shown that a new partnership was created. This is not a lawsuit you
want to deal with.

That is why pretty much anyone giving competent advice instructs partners to
decide how they should split equity and on a vesting agreement ASAP. That
doesn't mean these agreements can't be changed as commitments and roles
evolve, but the existence of an agreement makes those conversations necessary.
Without one, fundamental disagreements often lurk.

Over and out.

~~~
tatsuke95
> _"Courts hold that a partner who leaves a business lacking an agreement does
> not lose rights to their portion of the business."_

So what is the big worry?

That is _exactly_ what I have said throughout this thread: you don't need to
have a formal agreement to protect your stake in the company. The courts will
protect you from being screwed out of something you're entitled to. Which is
why I disagree that it is so vital to get an agreement in writing as soon as
possible, _before you even know what the business is_. That's what happened in
the original article, and that's what my hangup is, and that's what I've been
commenting on.

Yes, I agree, you don't want to be in a lawsuit, but having a formal agreement
_does not_ prevent a lawsuit if you have an equity dispute, nor will it
supersede reason or rationale in a judgement if you end up in court.

> _"Had these founders not had an agreement, corporation or not, the founders
> who left would continue to have a very substantive claim on the business as
> part of the partnership."_

As they should! If they produced work or contributed money, and the business
grew and provided income they have a claim on that income.

> _"That is why pretty much anyone giving competent advice instructs partners
> to decide how they should split equity and on a vesting agreement ASAP."_

Well, that's nice. It's also why there are 2 person shops running around the
Valley, with someone titled "CEO" (but no board), calling themselves
"businesses", taking in investment money but not producing a nickel worth of
value, ever: priorities are often out of whack.

Agree to disagree, I guess. I'm not here to offer anyone advice. Nor do I care
that while I'm working on solving problems and investing in others that are
doing the same, competitors are in-fighting about their equity.

------
tibbon
Forgive my shear ignorance, but why would two original co-founders who are no
longer active holding 0.5% each scare off investors and such?

~~~
bretpiatt
Each additional major shareholder is a required signature on documents, it is
a question that has to be asked, "Why aren't they with you any longer?" For
'the next Facebook' investors aren't going to care if they're able to put
money in at a valuation they like. For a more marginal investment the extra
time to look through stuff like that may shut the deal down.

To compare, think of it like a personal resume. If you're a developer applying
for a development role but you took two years out of the last five to go teach
English to kids in an emerging market nation where you coded on the side (and
could show Github / other public repos) anyone taking the time would commend
you for the activity. Someone rushing through reviewing resumes may toss yours
on the floor.

~~~
macspoofing
>Each additional major shareholder is a required signature on documents ...

You can structure your corporation in many ways. If the old co-founders were
cool enough to give up their shares, they would be cool enough to, say, give
the current founders proxy rights.

>"Why aren't they with you any longer?"

It's a 3 second answer _if_ it actually comes up (and it wouldn't). Lots
start-ups have "lingering" shareholders/founders who may or may not be part of
the company. It just isn't a big deal.

~~~
Lewton
>You can structure your corporation in many ways. If the old co-founders were
cool enough to give up their shares, they would be cool enough to, say, give
the current founders proxy rights.

A possibility, but certainly this is much simpler?

------
tatsuke95
Kudos to the minority shareholders for giving up a legal entitlement
graciously...

...but why on earth is there a stringent corporate structure and equity doled
out _years_ before there is even a concrete idea or tangible business?

~~~
gyardley
Because they did it correctly.

When you start working with others on a company, structure and ownership needs
to be sorted out before, not after.

Yes, it ended up being a bit of a pain for this guy and his startup, but it's
not nearly as painful as the conflicts over IP and equity that result when you
_don't_ hammer this stuff out before building.

~~~
tatsuke95
> _"Because they did it correctly."_

Huh? They split up equity in a non-existent business that ended upcoming back
to bite them on what amounts to a completely different project that the other
co-founders did not participate in whatsoever. It was only through the honesty
of these other co-founders that they were able to steer away from real
trouble. Those co-founders could have given up _nothing_ had they so chosen.

That's the _correct_ way to do things? Looks to me like this is a lesson in
the exact _wrong_ way to do it.

We have laws in this country to prevent people from getting screwed. Work with
people you like and trust, and focus on building a product, not on what your
"stake" is.

~~~
nrser
I think your start-up is going to be huge, and I'm willing to help in whatever
way possible. to help you out even more, I'll just take a little equity as
compensation. but let's not hassle with it now, lets just wait until I can
stop your financing or sale with the threat of litigation to figure out how
much. it will work out great, promise :)

~~~
tatsuke95
> _"lets just wait until I can stop your financing"_

It's not just my financing; it's _your_ financing as well. I suppose you're
more than welcome to have a stake in something worth nothing, of your own
volition.

> _"but let's not hassle with it now"_

You're going to have a hell of time proving your case then, aren't you?
Unless, of course, you can prove to the arbiter that you've done the work that
is deemed sufficient for the stake you're claiming you deserve. In which case,
I guess I shouldn't really have an issue giving you that share. Working as
intended?

I'll throw one at you: we agree you take a "little equity", say, 2%. You do an
assload of work for me, and I imply on occasion that I'll up your stake, but
never actually do. Then I sell the company for billions. You're going to be
pretty happy that you just might have a case that you deserve more than you
got, in spite of our contract.

~~~
nrser
something makes me think you haven't been through this sort of thing.

hint: it's the "proving your case" part. in this scenario, the parties rarely
go to trial or arbitration.

i don't really need a basis for a case, just a basis for a threat. 'rattling
the sabres', so to speak. it's sad, but true.

~~~
tatsuke95
> _"something makes me think you haven't been through this sort of thing."_

By "this sort of thing", do you mean an equity dispute? No, I haven't.

But as someone part of running a mid-size company, I have been party to being
threatened by baseless accusations. Guess what happens when there is "no basis
for a case"? Nothing. Nada. Zip. Business as usual.

So, judging by your comment that you "don't really need a basis for a case", I
can assume that you haven't been through this, either. But, if you're curious,
go ahead and try to sue someone with no basis for a case, and see how the
system deals with you.

------
jamster
I think it was terrible deal. Why give up shares you earned?

------
ckdarby
This guy should have kept this quiet instead of going for the PR anyone in the
future who is looking to invest into this company is going to come across this
article.

As much as everyone is stating how gracious this is this would actually be a
warning sign for me to invest any amount of money into this company.

Two previous co-founders willing to throw away a combined 1% of the company
for less than an hour of effort. Puts the real valuation of this startup into
view when you have two previous co-founders literally throw their equity away.

Consider this startup marked to avoid in the future of any round...

~~~
marquis
As long as the paperwork is clear, and there is genuinely a marked difference
between the original work and the work that has gone on the last couple of
years by the new owners, I don't see it as a problem. People are dropping out
of companies all the time, and I see this as an amicable agreement and also
highly creative.

~~~
koide
I think they sold it cheap. They should have asked for something more involved
than dancing where nobody even glances at you.

For example, getting invited as audience to a live TV show and yelling
something of interest/funny.

------
jfarmer
The "official" way to do this is through what's called a 409A Valuation, a
process designed to assess the fair market value of your common stock (and
other classes, eventually).

You can do one yourself (note: talk to your CFO first -- you have someone
handling that if you've closed a convertible note, right?), or pay a third
party (usually a bank) to do it. They're relatively inexpensive.

You'll have to do one if you ever want to grant options (or RSUs) to potential
employees. How else do you set the options' strike price?

------
nickler
Innovation wins again. Way to disrupt the 'shareholder negotiations' space
with a crowd sourced, freemium model.

The only issue with scaling, however, is the music licenses as there's value
being exchanged. Napster meets reverse Angellist, well played.

------
damoncali
I would never have done that, from either side of the table. But it brings up
a good question: when is a "pivot" a new company altogether?

~~~
aneth3
I ultimately decided not to join a cofounder who was in a situation analogous
to this. An investor owned > 1/3 of the company, but cash was almost gone and
the original idea had failed due to TOU issues with a third party. The only
option was to pivot entirely, with little money and investors owning a huge
chunk. I saw this as unfair, and pushed for a new company - the investors
after all had invested in the original idea, and should take some
responsibility for its failure.

I would also have agreed to investors putting in more money, combined with
issuing additional shares to the founders to keep their stakes the same, or to
the investors reducing their stake. The thing is, investors to my knowledge
will never be as "gracious" as Arel and Anton.

There is a lot of grey area between pivot and new company where ethics and
legalities come into play, and I don't know the right answers. I'd love for
someone like pg to expound on this.

------
anonymoushn
Are your dashes masquerading as underscores?

------
aneth3
If the early shareholders invested significant time and effort into the
business, I don't see why it's 'right' for them to give up their shares. While
they are certainly entitled to do so, pressuring them to drop even their 0.5%
seems unethical to me.

If those early founders actually did not contribute much in those early days,
I would revise this opinion. However as it stands, it seems akin to asking an
early financial investor to return his equity. If I give you $50,000 and you
pivot ten times, I should still own a piece of your company. Same goes for
early founders.

The early founders had already agreed to diminish their share to 1% combined.
Pressuring them to go any lower seems greedy and unnecessary assuming they
invested significant time and energy over a long period of time, even if it
was for an earlier idea.

Unlike most of the comments here, I'm not sure this was a class act. Given
that the early founders voluntarily gave up their equity, I suppose the
continuing founders deserve some benefit of the doubt.

I don't think I would have agreed to give up my last bit of equity as I would
feel 0.5% was fair simply for being a part of the early team formation,
ideation, and apparently discarded product development work. I would probably
be annoyed by the offer and ignore it.

~~~
wtvanhest
The problem is the "size" as in number of participants, in the Cap table
rather than what people are getting paid in the event of an exit.

All else equal, you want less people on your cap table for each round. Big cap
tables increase complexity.

I wouldn't be suprised if the current CEO were to pay them on the backend
regardless of his dance.

[edit] I shouldn't guess what the CEO that I do not know would do, but I would
expect myself to reward them later, just not contractually. This is really
relationship/person dependent.

~~~
pbreit
Is that really true? Two original founders with 0.5% each?

------
ascendant
Glad to see they were reasonable about it and +1 for going through with it.
Hats off to everyone involved.

------
wilfra
I know it's very un-hn and I'm going to get downvoted but..

HAHAHAHAHAHAAHAHAHA!!!

