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Ask HN: Leaving as founder, what happens with equity?
82 points by throwaway1948 on Nov 12, 2015 | hide | past | favorite | 42 comments
I'm leaving a startup I founded due to disagreements over team/strategy. I worked on it for about half a year.

When we founded the company, there was prior work done, so we vested some equity up front to acknowledge that. Since that time, we've pivoted and also recently added team members. Now that I am leaving, the other founders are asking me to return some/most/all of the equity that was vested up front.

Is this reasonable? Do I have any obligation to return/surrender the vested equity?

Additionally, when I voiced objections to returning the vested equity, they brought up the fact that they may start a new company on the same idea and reset the entire equity metrics altogether. Is this common?

So, you own part of a company as an investor now -- think of it in this context to transform your relationship into a positive one. If they can afford to buy your interest out for a reasonable sum, you might agree as a matter of courtesy.

You should carefully engage an attorney to look at the by-laws of the company to verify you are protected as an investor. In some cases, holding onto shares of a company (LLC, for example) could open you up to substantial tax liability without personal disbursements to cover expenses. If these protections are not there (tax distributions, etc), and if you're going to remain an investor, you should ask for reasonable investor protections -- they'll need these anyway.

Most employment agreements have a non-solicitation (for employees and clients), non-disclosure (of trade secrets), and non-compete clauses. These would probably be quite enforceable against business co-founders. If they try to leave you at the side of the road, no need to get worked up about it till they've been successful (get an attorney advice though).

If the existing co-founders are going to invest more of their time in the company, you could, as a part-owner of the company, offer to dilute (on same terms as other owners) as their continued engagement may make your prior labour have value. Ask if you could be on their board to help them see problems in their strategy -- while you probably don't have enough equity to change course, your voice as a technically-minded investor could be positively channelled to help them; they might be lucky to have your kind and productive assistance.

Hi, would you please point me to a link that talk to the potential tax liabilities that you mention could happen in the LLC case. I have spent a lot of money because my lawyer and an investor's lawyer were arguing whether such liabilities exist or not. I walked away from the deal by then but I still want to know whether my lawyer was right. I would really appreciate more information.

Unlike C Corporations, LLCs are pass-through tax entities. This means profits and losses pass through to the individual members. [0]

[0] https://www.sba.gov/blogs/6-things-you-need-know-about-your-...

Thanks a lot! .. and you would think a lawyer who charges $700 per hour should know that. Motherf*$&er!!

Convertible note might be a good way to avoid Tax-liabitlies. But check with your accountant/lawyer.

I like this answer

The equity is vested, you own it. You have no obligation to return or surrender it or even sell it. This is why companies have vesting schedules. Additionally, starting a new company with the same idea with the same team would most likely open them up to legal liability. The only thing to remember is that the equity is only valuable if the company succeeds, so it may be worth compromising by having them buy you out, or giving the company an option to buy you out at the next funding round.

Do yourself a favor and talk to a startup lawyer (one that's not used by any members of your team). S/he will be able to explore your options with you and help you decide on a good course of action.

And get any agreement in writing if you are going to wait till next funding round you should say you want a multiplier ie pay me x now or x +50% in 6 months x +100% in a year.

What do you mean by a multiplier? Why not just cash out at the valuation established in the funding round?

Payment for the extra risk and to take account of the time value of money e.g. $1000 now is worth more than $1000 in a years time.

Can't the other owners simply do a "squeeze out"?

Can you explain this?

I once read that one owner can force another owner to sell their stock if the first one owns the majority of the stock. Like if you own 95% and another one just 5% you can make them sell.

I believe they mean granting additional stock to everyone else on the cap table except you.

Keep your equity, you don't give back vested equity for nothing(trade it by all means for something you think worthwhile).

As was already said you could sue if they create another company.

Finally go talk to a good lawyer(pay, lots if you have to). That is probably the most useful advice you'll get on here.

Your co-founders are not your friends now and will screw you over if they think they can get away with it.

Maybe you could get a lawyer to write a scary letter on what would happen if they startup another company to convince them otherwise.

I am no expert but I suppose if they start new company (and they are successful) you could sue them. The prior work that was justification for the vesting was market-tested by the startup. The result was negative but I suppose your share was not conditioned like this. Also the pivot happened while you were still part of the company, right? In general I would say the best option for both sides is to reach a consensus somewhere in the middle.

IANAL and a lot depends on the type of company, where you incorporated (Delaware C Corp?), and whether you have any type of shareholder agreement. (This scenario is the #1 reason to have a shareholder agreement.)

That said, you presently own vested shares in the company, and that means you [likely] have minority shareholder rights. If the company does not act in your best interests as a shareholder, then you have cause for a lawsuit. So, they can't play games with your shares without opening themselves up to a lawsuit.

However, you're bailing after only six months, which implies that you believe you'll be able to create more value for yourself by doing something else rather than seeing it through with a startup. It also means that the company must create all the value while you sit back and pursue something else; there was prior work done, but how does that compare to the work that needs to be done to make your shares worth something? Your shares are essentially deadweight that disincentives the remaining teams (and investors).

A typical shareholder's agreement will specify that the company and/or other shareholders will buy back your shares for the present valuation. It is also pretty typical for such a shareholder's agreement to specify a "method valuation", like a penny/share, in case you have not yet taken outside investment.

If you do not have a shareholder's agreement that covers this scenario and you have not yet taken VC and the company still has a substantial way to go (all of which seems like your scenario, since you're asking on HN rather than acting in accordance with a contract), then the honorable thing to do is sell your shares back to the company for a token amount. You're getting off the bus; in exchange, you don't have to ride the bus, and that's worth a great deal to you.

> you believe you'll be able to create more value for yourself by doing something else rather than seeing it through with a startup.

Just pointing out that there are other reasons to leave aside from rational economic thought about this individual's expected ability to produce higher output elsewhere. They may dislike the team, pivoted idea, or leadership decisions. But they may also want to keep hold of the equity in case it gets big (or they can sell it or a liquidity event occurs).

Indeed, those are all other non-monetary ways to create more value for oneself. :-)

I understand the desire to want to keep hold of the equity in case the startup gets big, but having dead weight shareholders is a really good way of ensuring a company doesn't get big. It is hard to judge—maybe the company is really on its way to growth and success and the OP has earned the equity—but more likely it's the psychology of not wanting to let something get away "just in case", and that's not what startup sweat equity is about. There probably needs to be some consideration, but if one doesn't believe in the future direction of the startup, hey, you are getting a whole lot of time and hassle back in exchange for surrendered shares.

The vested equity clearly has value to both you and to them. You should not return it without compensation commensurate to that value. If they were serious about starting a new company, they would have done that already. They likely have not and (maybe) will not for several reasons. First, there's a lot of distraction and expense of going through that process (if they flush their idea again, do they start a new company again?). Second, there may be legal reasons they cannot start a new company: if they leave the old company, does that make you, as a shareholder, able to sue them via a non-compete clause or have other actions for remediation available to you?

As others have stated, given that you and they believe there is value in the equity you own and have earned, get an attorney on your side and find out what your options are to preserve that value. At a bare minimum, if the equity you have vested is considered so valuable to them that they are prepared to follow through with their threats of ditching the old company and starting a new one, that course of action has an $X,000 cost to them in legal, accouting, and opportunity costs. Therefore, it's in their best interest to offer you up to $X,000 to part with the equity you own.

It will be legally hard for them to "reset the entire equity metrics" if they're using similar ideas and codebase to your company. But if they work on a separate idea not related to the old company, this seems much more possible as then it's the same as them quitting, and then deciding to do another startup.

Another issue you need to think about is how much actual drag you'll cause by holding onto your shares. You should give up half your equity if this doubles their chance of succeeding. This seems more likely if you own a large vested chunk like 30% and less likely if you have just vested 10%.

Morally, you've put in a certain amount of work already, and it's not like everyone forgot about vesting. The vesting schedule is supposed to be designed anticipating that if someone leaves before vesting is over, the vested amount is kept by the leaver. It seems to make vesting pointless if you know for sure beforehand you'll renegotiate a substantially different amount.

Depends on how much was vested, and how much prior work was done, and how much of a hardass you want to be. You're under no legal obligation to return it, but you might want to in some scenarios.

Let's say you had 2 co-founders and you all vested 33/33/33. I would personally feel unethical about keeping the equity if I left after 6 months. At that point, you're now free-riding on the remaining co-founder FUTURE work. Furthermore, you keeping that much equity will screwing the company (and yourself) since it will limit ability to raise money, bring on key executives, open up an option pool. In this case, I'd return a good chunk (but not all) of the equity.

BUT if the equity vested was really for PAST work, as you imply here, then yeah, keep the equity.

>BUT if the equity vested was really for PAST work, as you imply here, then yeah, keep the equity.

isn't that the default? That's what a vesting schedule is for.

Don't company Articles of Association (or the local equivalent) usually have clauses that govern these situations - shotgun clauses or similar?

However, my main recommendation - talk to a lawyer, the trick is finding a lawyer who actually knows about this stuff at the right level.

If you disagree on strategy... do you think the company has any chance to have a favourable exit in a reasonable time frame? It might be better to keep your equity for now, and let them buy your equity at the next equity round. Cash out and never speak to them again.

> Additionally, when I voiced objections to returning the vested equity, they brought up the fact that they may start a new company on the same idea and reset the entire equity metrics altogether. Is this common?

Not if you have investors...

I've been in this situation before and I returned the equity because I felt like there was still a lot of work to do. The company ended up selling for $3 million four years later, so I would have make some cash, but I still feel like I did the right thing because I wasn't leaving an angry situation, I felt like they didn't need my expertise after they pivoted.

Ultimately I think reputation matters the most, but if you feel like you are on solid ground here is what I recommend: The company will probably fail, so sell half the shares for a smallish sum and keep the other half in case they really succeed.

> I've been in this situation before and I returned the equity because I felt like there was still a lot of work to do

Generally vested equity represents work done and unvested equity represents work still left to do. Did you guy just not do any vesting and award everyone's equity at the start?

We didn't have a cliff so it was only 3 or 4 months of work.

It sounds like they do not want to have you on as an investor. It also sounds like you no longer want to invest in them. So figure out what your equity is worth and get rid of it.

First off, apologies for the non-fun situation.

"the other founders are asking me to return some/most/all of the equity that was vested up front."

Don't do this. Most likely this will be used to redistribute this share to themselves or the option pool. They WANT this potential share for themselves if the company is successful, and it's not in your interest to give it up.

You've started things, most likely, and if things were standard-ish, you might have been vesting your stock at 1/48 (or maybe 1/36 or something?) of the total each month (founder shares may also not sometimes not require a year's service to vest). You legally earned what you got during the 1/48 and have no obligation to return anything. The pre-vested up front stuff might have also been sizeable, and most likely will be a foundation for future work that this business produces.

The downside is your last comment about "may start a new company", which seems like they might not be above board. In this case you may need a lawyer, but it might not hurt to contact the board if you have investors on it. If there's no investment, you might have a harder position and you may (I am not a lawyer) need to watch them to see if any of those entities exit. In other words, you might have to sue to get what you are owed for the stock games. Most likely this is an empty threat, and you should probably indicate you are aware of your legal options and reserve the right to exercise them if this happens.

I don't have a great understanding of what happened there, but think about Facebook and what it has done with screwing initial employees from time to time, and they seem to have won at least in part.

Given, if the startup is already crippled due to not being able to work together, the chance of success at the end is reduced. Don't give up your shares - but don't count on them being a thing either.

They should be happy that you still have your shares because you have an interest in seeing them still be successful and are not ALSO going to form a company in the same space. Perhaps. Depends what your exit agreements were, if any. And you should be careful what you sign there as well.

But yeah, sounds like they are asking for things that are not in your interest.

"Now that I am leaving, the other founders are asking me to return some/most/all of the equity that was vested up front."

What are they offering in return? Is what they're offering in return worth more to you then the equity?

The rules are written clearly in your shareholders agreement. Don't ask hacker news for the answer, find the answers in the agreement.

What stage the company is in? If it's too early stage, I don't think anyone can predict the success and it might end up as just another failed startup. Remember, the startup is more about execution. I would suggest to contact a lawyer to get any credible advise on it.

The correct thing to happen in this scenario is for the other founders to buy out your share based on today's valuation (which should be modest but accurate according to what you've been telling investors). Anything else will involve a lot of lawyers and grief.

If they walk away and start their own company, they're handing control of this company to you along with all its investment and property, and that no-poaching clause in your contract says they can't hire away your team. I don't think they want to do that.

Sounds like they're planning on screwing you (new company).

So ask yourself this: when you flush a toilet, what happens to the toilet paper?

You receive the equity not for being around on the day the decision to found a company was taken, but for being around from day 1 until the company stops being a startup. (Well, some of the equity may also be for other reasons.)

The other founders expect you to be around during that period. One commits in part because the others do.

When you leave earlier, you should estimate how much of the period is left and talk to the others about the portion of equity that corresponds to that period — how big it is and how you can use it for the betterment of the company. Are some new people taking over what you would have done? Perhaps they should get some of the equity, on fair terms?

If you receive equity for being around for the long-term, shouldn't that actually be written down somewhere and made a hard requirement of retaining that equity? Otherwise it's just wishful thinking, not reality.

It sounds like this consideration was already made. Only some of his equity was fully vested up front to reflect prior work - presumably the remainder of his equity was vested on a schedule (which at half a year he'd be entitled to none of most likely).

If the above is true, then it would be inappropriate to re-examine what amount of equity is fair.

Reexamination is proper because there's disagreement.

IMO, as he lays out the facts, he shouldn't give away more than a token amount. But the other founders see the facts differently. So the right thing to do is to agree on what the equity is for and then discuss what the numbers should be and why.

The "right thing" was to agree on that before the work was performed. It's too late to go back on that now. The original vesting agreements are all that should hold. If the other founders want to come to a new agreement with some cash compensation or other special status in exchange for his returning some of the company's equity, that's up for negotiation.

I've never been in a vaguely successful startup where people do the right thing. What people do is approximate, do well enough to survive and grow, and defer the Right Thing until later.

Doing the Right Thing takes time.

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