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Ask HN: Ex-Founder. Should I take lowball buyout offer?
152 points by throwaway21121 on May 29, 2017 | hide | past | web | favorite | 158 comments
Anonymous for obvious reasons.

I am the ex-founder of a company that has had some moderate success, and I own a 5% equity stake. They're about to raise money at a $XX,000,000 valuation. I am skeptical of the company's future and want out. The hardball CEO offered $100k. What should I do?




Ask the CEO whether the investors would buy your shares as part of the funding round. I've seen a company do this. It's a win for everyone. Offer a moderate discount (10-20%) to make it worth their while.

- Company gets to re-concentrate their ownership among active investors/employees, and remove "dead wood" ex-founder with small stake from the cap table. This alone might make it worth their while.

- Investors get shares more cheaply than they otherwise would

- You get cash and get to wash your hands of the company

Where this might get complicated is that you likely own founders' shares/common and the investors are getting shares with a bunch of preferences.

If the latest funding round is $20mil, 5% of that would be 1mil. What's the 409(a) value on the common shares? I doubt the shares would be worth more than 500-600k given the numbers above, so with a 20% discount, you're looking at 400-500k. I have no idea what the headline valuation is but you can probably work something out. Email is in sig if you want to talk.

EDIT: Another option would be to sell a portion, but not all, of your shares as part of the funding round. That might allay any "we can't afford it" concerns from the company while still giving you a bit of upside in case the business is a real home run. Would they take 10% of your position for 100k? That might be a good option.


Excellent advice and worth suggesting, but talk to the CEO first to make sure the company speaks with one voice otherwise you might imperil the funding round.


This. Ex-employees appearing out of the woodwork just before a funding round and wanting to divest all of their shares is definitely a scenario which (best case) gives the investors an extra weapon with which to put pressure on the valuation/terms of the deal and (worst case) could even get the deal called off completely.

Even if you're not on great terms with your ex-cofounders, think of your ex-employees (and your own share value)

EDIT: I was thinking from the perspective of the company and not the individual. Getting sued is indeed the worst case (if we're being pedantic then also assuming you lose the suit of course).


That's not the worst case. The worst case is where the other shareholders sue you for damaging the company.


Maybe I am not just into that area, but how can you win such a suit, by that logic you could sue anybody who short sells a company...


There is a huge difference between short-selling stock in a public company or offering privately held stock when you are not an officer. selling stock of a company that you are C-level exec of (or founder) and that you hit with 'bad news' during a fundraising round is not going to make you any friends.

Your co-shareholders could easily make a claim, whether it will stick or not is as always up to a judge but it's very dangerous territory, and you are likely operating outside your shareholder agreement (at least, all the ones that I've seen) and also likely outside of your mandate as an officer of the company (depends on your role, but usually you would be). These things have to be handled with some diplomacy and tact otherwise you could very well harm the company directly in such a way that the harm would be easy to quantify. Which is a very bad situation to be in, so make sure you play by the book when doing these things.


Not sure about the US and not a lawyer, but often as a founder/board member you sign a shareholder agreement which includes a provision not to undertake anything which would deliberately cause damage to the company/other shareholders. There are perhaps other points as well. I imagine the US is more litigious here than Europe (where my experience comes from)


jacquesm is talking about corporate officers harming the company, not random investors


Exactly.


I would open to advisory roles, part time or golden handcuffs (stay for a year) when you speak with CEO. Rounds are hard to get (despite Hollywood) and investors are super turned off by founders arguing. In startups, getting 0 is the norm.


That's always good tactics, regardless of whether or not you get taken up on it or whether they take it serious.


+ The difference in long term vs short term capital gains could be a factor - depending how long you held exercised shares (83b election etc). If those are held longer than one year it would fall into long term capital gains which is a large tax benefit [short term capital gains is calculated as regular INCOME]. E.g. if you have held shares for 10 months I would see if you could wait to sell your options for 2 months - your shares will probably time align with the other founders so it could be an easy sell.


Selling existing shares does not raise money for the company. They have no more incentive to take this offer than to buy him out now.


Yes they do. Cleaning up the captable at a discount is an extremely common thing during funding rounds, if they have to do it at a later date or as a separate transaction there is a lot of overhead. If it can be rolled in there is a much better chance of getting it done.


This supposed overhead is not worth >300 thousand dollars.

If I saw a founding member trying to divest himself at a 20% discount in a funding round for petty cash, I probably would find something else to invest in.


Not to you, but you don't matter. The investors and the other shareholders matter.

If the company is doing well in the eyes of the CEO, the remaining shareholders and the investors this is their chance to get a larger slice of the pie at a discount.

Founders are not by law or the shareholder agreement required to stay with the company across its lifecycle, and founders being bought out during funding rounds is common and does not immediately lead to investors bolting from the deal when presented with a good enough story behind it (such as someone wanting to move on, or being tired). It's actually quite rare to see a 5 year old company where all co-founders are still active and in their original roles. Nothing worse for a company than to have a bunch of ex-founders who no longer produce anything and that are holding on to sizable blocks of shares and that do not wish to sell. In investors parlance that's called 'dead wood' and the more you have of that the harder it will be to raise money.

Now if all of the founders want to take money of the table that is known as a buy-out and tends to be looked at differently, but even those deals are made, usually at some kind of discount. The version where other employees of the company elevate themselves to the C level is called an MBO and is also quite common.

Optionally there will a bank involved to fund part of the operating capital of the company depending on the amount and liquidity of the companies' assets.

Source: veteran of a bunch of deals involving my own company and being closely involved in another 50 M&A or investment deals or so, usually on the investors / buyers side.


Why?


Well, it makes an investor happy, because they received a 10% discount.

Also, although it doesn't help the other founders that much, if one investor sells stock to another investor, it also doesn't HARM them at all.

Why should they care if two investors trade shares between each other? If you own 5%, thats what you are. An investor.


Investors are happy with a 10% discount from preferred when buying common shares with no liquidation preferences?


Not every company has onerous terms.

But you could still factor that in to whatever the fair market value is.

Call it a 50% discount if you like, to get to the "market value". But that still sounds like a much much better deal than what the CEO is offering


Even a 1X liquidation preference knocks a lot off, and that's hardly onerous.

There's a reason why the 409a value is often only 10%.


Right, so why does it matter when it occurs?


An investment round is a way for the company to aim for a higher future level than they would otherwise achieve. That's the moment when the shares are presumably the cheapest, and there is already a deal in progress so it is very easy and convenient to roll in another transaction. Since the lawyers are getting paid anyway and money is flowing at an established valuation it is an excellent moment to offer your shares.

Later on you might have to re-establish a valuation and you will have to make a lot of overhead on a relatively small transaction.


That 5% is deadweight on the cap table. The investors don't want 5% of the company owned by a founder who is no longer employed by the company.


Moreover, you're handing over more control to this new investor. If he guy doesn't want to take it then he can still sit on his shares.


First of all, you're not an ex-founder. You're a founder. You happen to have moved on to another project.

Second, you're a shareholder of the company. You're a big enough shareholder that they'll ask for your signature on the paperwork when they recapitalize ("raise money").

Third, any variant of "you suck. I don't want anything to do with you." is a poor opening gambit in a negotiation strategy, even it's true.

If I were you I'd ask to sell some, but not all, of your shares into this financing round. You can simply say you need some liquidity. This isn't a bizarre request. They may turn you down, but they won't think the less of you for asking.

If they're raising money on a $40 mill pre-money valuation, that pegs your 5% stake's paper value at 2 megabucks. Selling a quarter of your stake into the round will get you $400K even if you give them a stiff discount. That's more than the $100K. And, you still have some upside if you're wrong about their prospects.

That being said, you're probably right about their prospects. Been there. Done that. Didn't even get a Tshirt.


If the company is raising money at a valuation in excess of 10 million then your stake is worth at least 500k and possibly much more. If you know the amount that they will raise simply roll your sale into the transaction. If you need to sweeten the pot then do so but as far as strategy is concerned you don't need to sell at all.

The lowball offer is a good indication of how they estimate your negotiation skills.

Waiting a little longer will likely get you a (much) better offer, also consider selling only a part of your shares in case the company strikes it big down the road (made that mistake myself with something that became huge long after I left).

You might get pushback on that last point but that gives you some leverage to raise the price for all of your shares.


Having been through a very similar situation, here are a few ideas:

- Get a good lawyer, it seems expensive, but is cheap compared to getting a bad deal.

- In deciding between cash vs. equity, a useful way to re-frame is "If I had it all in cash now, how much equity would I buy at this price?"

- The CEO has much better knowledge about the company, and an offer to buy may be a signal that there's positive information unknown to you.

In my case, I refused the lowball offer though the amount of cash was tempting, figuring they were making an offer for a reason. A few months later, I was offered 4x the price as part of a funding round. I took it without further negotiation, since that was enough to make a significant lifestyle change.


I agree with hiring a lawyer. A hired hand, to dispassionately argue on your behalf is very useful. The lawyer will just do his job; no personality clash or old history to get in the way.


Don't be a shmuck. Don't sell. Get an attorney, talk with the CEO only through the attorney. Find someone like jacquesm or I can refer you to someone to help you negotiate.

5% of XX,000,000 is at least $500k; you're a fool to take less.


The valuation of $XX,000,000 is typically based on investor purchase price, which almost always includes a liquidity preference likely not factored into OP's shares. If an investor buys 10% of the business with a 2x liquidation preference for $2,000,000, it's not accurate to say "the business is now worth $20,000,000". But TechCrunch and other news outlets will omit this all the time. (And let's not leave out that his stake will be diluted after the round.)

Furthermore, "a bird in the hand is worth two in the bush". Don't neglect the value of having money here and now you can invest in other assets: a downpayment on a home, stock market investment, etc. Many people in SF would have done better to have just purchased a modest home in 2010-2012 or bought TSLA than to have played the startup lottery over and over.


What does "2x liquidation preference for $2,000,000" mean?


Liquidation preference means they are preferred when there is a liquidation. So if the company is sold the person with the liquidation preference gets their money out first at the liquidation preference ratio. In this case, $2Mx2 means if the company is sold for $10M even though they only own 10% they get the first $4M.

http://www.investopedia.com/terms/l/liquidation-preference.a...


It means that if the company liquidates -- IPO, sale, or dissolution being the more common forms -- the investor is first in line for $4,000,000. Then, any remaining money gets split among the other share holders. If there's less than $4m in the pool, then the investor gets it all and everyone else gets nothing.


I'm surprised how many people are so firm in comparing the value of preferred shares to common in these comments.


Sell at the valuation, e.g. 5% of $XX,000,000. Maybe offer them a 20% discount on the shares if you really want to sell. Otherwise don't sell. Not selling is your leverage, as they clearly want you to sell.


It doesn't sound to me like they clearly want the OP to sell. It actually sounds like the opposite. The OP wants to get out, and they responded with a lowball offer which, if anything, would motivate the OP not to sell.


No, they responded with a lowball offer because they feel the OP is motivated to sell at any price.

His best bet is simply not to sell and to wait for them to make an offer.

OP is confused about the shareholder and employee roles, they are not linked other than through vesting and the shareholder agreement (which they have presumably signed).

He can easily quit as an employee while remaining a shareholder in the company. Those roles need not be connected forever and there usually are - vesting excepted - penalty free ways of stepping out of a company while you keep whatever shares you already have. Clawbacks in a situation like that are very rare.


You are assuming all wrong.

Start by offering a tenth of what you would agree to pay. All you risk is that they accept your offer.

It's standard business practice. Works more often than not.


Why a tenth? Why not 1%?


Where "what I'm owed" is quite vague, or has only recently increased as in the case of growth companies, 10 or 20% might actually be accepted, or at least interpreted as a good faith start to negotiations.

An offer of 1% is more obviously not the correct amount, and encourages people to lawyer up rather than counter offer (it screams "we're only offering this token amount because someone suggested our original plan of not giving you anything might not work")


Note that he probably owns common shares, and the investors are buying preferred shares. Also, he's going to be diluted below 5% in the post-money era.


Which is irrelevant is they actually want to acquire his stake. That said, I would offer them a 20% discount on his post money share. Who ultimately acquires the shares doesn't matter either, could be the company (they would destroy the shares) or the new investors (the shares could be modified to become preferred shares upon acquisition)


I would work out the difference between the salary at say Google vs what you took during your tenure at the startup then double it because of lack of upside.

Aside: If the co-founder is an HN reader, then they probably know the throwaway account is you. That is going to skew this negotiation.


I believe this is a sunk cost fallacy. The present value of the shares not based on the OP's previous foregone financial opportunities.


Agree with this. What the OP could have made at Google is not his CEOs problem.


Might also be the other party testing the waters.

edit: of course, parent's comment regarding the other party is still sound and valid :).


lol, it is.

for the record, i'd probably do it if i was offered $500k.


Then ask for 500k.


I've had this situation happen a few times in my career, my advice is take the money and don't look back. Invest the money, burn it, buy rental properties with it,or go on a trip. It is always better to have a successful exit.


+1. Most folks here don't understand that 5% equity is easily diluted to 0.005% equity in 6 months. So now you are going to spend $50k suing the company for the $10k they owe you. OP needs to listen to people who have experience (like you) instead of random strangers who think equity = cash


You don't dilute 5% to .005% in 6 months without moves that at best are questionable and at worst are illegal, especially if your shares are diluted and some others are not.


> especially if your shares are diluted and some others are not

How does that work in practice?


By having several different classes of shares, some of them with anti-dilution provisions and some without.


Set up a divesting schedule with regular payments based on the valuation of the company. The longer you're gone the less you have. If you've done work to get the company where it is then it's fair.

I would not take a lump some in most cases.


Assuming the CEO is lowballing to conserve cash, this is a great idea.


Since the company is presumably still private, how would such a regularly scheduled divesting system work?


"lump sum"


Is the CEO lowballing you because your relationship is adversarial?

If so, you will likely need to break through that emotional barrier to get his cooperation in selling the shares to investors. Assuming his cooperation will make it easier.


$xx million valuation doesn't really matter. How much money are they raising? 1 million? 10 millions? I'm asking because the metric (or the thing you'll eat from) is the money raised not the valuation.


Yeah, pretty much this. If they are not raising much, they can't afford to buy you out. Another thing to think about is there are 3rd party websites that will buy your equity. You could also approach investors after the funding round is over.


Absolutely NOT. The least your shares are worth based on the lowest valuation at which they are raising is $500,000. Why take a freaking 80% discount.

Keep your shares and consult with a lawyer who can ensure you are protected further down the line. PLEASE DO THIS.

I will guarantee 100% that the type of people that offer you 20 cents on the dollar (as a founder) are the type of people that will screw you. 100%.


Common shares are very different from the preferred that the VCs are buying. His stock is not automatically worth 500k based on this post.


No. If you opt out this is your last chance to extract value from your investment. Make it count. If you stay in, you have more chances in future to get out, so you have no pressure. But by making yourself a dead weight, everyone else probably wants to see you go. Make them pay for that privilege. Good luck.

Tl;dr - to me, threatening to stick around as dead weight is your leverage. Your actual leverage may be something else. Work it out, use what you have to get what you want.

It might help to understand where this idea came from for me. This idea came from me thinking that, as I'm always rooting for founders on "Shark Tank" / "Makers Tank" ( whatever it's called ), to just take the offer, since they are beginning a journey, and the offer could take them to the next level, and they shall have many more chances to extract value from this down the line, whereas if they don't take it, to me anyway, their success seems less assured, while in your case, contrary to that, I thought of the inverse, where once you make the choice, you don't have any more chances to extract value. It's your last bet at the casino, make it count. So, in a way, I think this strategy I propose has something similar to the "martingale" betting method.


If that is less than 1/3rd what your shares would be worth if you sold them as part of the funding round you're not getting fair value. You have to decide whether you want fair value or not, but ~1/3rd the value of the shares in this funding round (assuming those investors got preferred shares, etc) is the low end.

Investors in the round would probably buy your shares for 1/3rd - 2/3rds of their value and you should consider asking if that's an option and then negotiate from there. The only reason to let the company buyout your shares for a lowball offer is if you left the company after a short period of time without proper vesting and you want to do the right thing for the company's sake. Doesn't sound like that's the case.


The lowest amount of "XX,000,000" is $10MM, which at 5% is $500,000. So yeah, less than 1/3.


We don't know whether that's pre- or post-money (I'm not sure the OP is even clear on the difference). What we need here is the pre-money valuation, which could be quite low.


I don't think we have enough information (or even the professional capacity) to advise you wisely for the best expected return. So many unknowns here; for instance,

> what d'you mean by ex-founder and by what corporate action or process did you come to attribute this title to yourself?

> Why have you held your shares till this time?

> Why are you skeptical of the future of the company? D'you have a personal beef with the hardball CEO or is the company really doomed in your opinion?

> Who approached who (I mean you or your hardball CEO) to leave the company? To be clear, did he notify you of their intention to raise money and ask that you sell off or did you hear that they're about to raise money and then decide that you want out?


First and foremost and to re-iterate what many HNers has already said: you are NOT in any way obligated to sell. That said, it is in your best interest to be pragmatic and get the most out of your equity (financial + emotional).

Let the hardball CEO (imo he/she is doing his/her job) know that you are open to finding a mutually beneficial agreement, but you feel the initial offer is not something that entices you to sell. Ask for the term sheet of the funding round, because you need to know what will happen to your 5% stake to evaluate your options.

I recommend viewing this as a business decision/transaction.

Step 1 is to speak to a lawyer and accountant. Get their take on what your equity is worth, the tax implications, and evaluate the impact of the term sheet on your equity if you have it.

Step 2 is to make a decision. How much equity do you want to sell? All, some? For how much? And what are the numbers behind your decision? How much of a discount are you willing to accept? If you want to sell all your stakes, the lawyer/accountant should be able to give you a valuation.

Step 3 is to negotiate. You can do this through your lawyer if you want to avoid mixing business with personal relationships. Work with the CEO if you can, because if you decide to keep some equity, it is also in your best interest that the company completes the funding round successfully.

Step 4 .. Profit!

Disclaimer: I have absolutely no prior experience with this kind of event whatsoever. :)


Valuation and percentage aside, let me ask you this question -- now that the company is raising another round, where do you think the equity for the new investors is going to come from?

Say the company is trying to take on another 20mil at 100mil valuation, that's 20% of the company that will have to come out from the current shares, i.e. dilute all the current owners of the shares. That means to raise that money right now, the company is going to have to dilute you, but also all other employees and founders and investors. So you will lose ~20% of your shares, in exchange for XX-growth of the paper value of your shares.

Imagine that right now your shares are worth 1 million, but for absolutely no cost to you, those same shares will be worth 20 million tomorrow (minus the 20% that investors end up taking). This is not "exact" math, but it illustrates the point.

You can sit on your shares today, and make a ton of money overnight by doing _nothing_.

If you sell your shares today, for any amount less than what you would get in the above scenario, you're losing money. The hardball-CEO is just going to take your shares, and immediately resell them to new investors at 100X the price.

Unless you absolutely need the 100k today and can't live without it, your best bet is to hold on to the shares and take the gamble on them growing multiples. If the company does great, you win. If the company shuts down, all you lose is x-months worth of salary equivalent. If the company needs to raise more money later, then you can always offer to sell your shares at the later price.


If someone came to you and demanded your house for a small price of $20 dollars, would you yield and sell?

In the same way, the hardball CEO can offer whatever she wants, but in this case the ball is completely in your court. You can ask for 10 million, if you want, or a 100.

An ass-hat CEO could technically issue a billion shares to herself and new investors and completely dilute your value in the company, as a last resort.


Presumably, someone values your 5% higher than that, based on your characterization of the valuation.

People that know better than me: How nuclear an option would it be to ask the investors directly?


The investors will probably only do it if the CEO is on board. Assuming they value relationship with CEO


It also may be explicitly disallowed. I'm in a deadwood position on a company that's still private and the shares have a restriction that they can only be sold to the company or via a deal that the company brokers.

Humorously enough, while I was reading this thread, I got an email from the CFO of that company, who I haven't heard from in a couple of years now. My heart skipped a beat. :) Alas, it was not an heads up about a liquidity event...


Seems curious, though, that a CEO wouldn't want that 5% available to the investors at a reasonable discount. Versus the pittance that's being offered. Makes you wonder what else is afoot.


The CEO wants to raise money for the company, so he definitely prefers any buyers to buy the newly emitted shares.


According to jacquesm upthread, who sounds like he knows what he's talking about, you could well get sued for damaging the company. Looks like the only reasonable option is to work with the CEO.


Every offer deserves a counter offer. But if you can put the 100k to use, that is a good option. That is two seed rounds for companies you believe in :-)


Sure, but if they offer $100K that's just too low to take serious, I'd definitely hold out for a multiple of that and make it clear that any trickery will be dealt with harshly. A 5%-er with a grudge is something no company can afford.


Most companies have a Right of First Refusal (ROFR) doc as part of the financing. If you can find someone in the secondary market to buy your shares, the company, if they want them, has to buy them at that price. Finding such a buyer is difficult but still possible. If it's a hot company, a lot of private wealth management groups are looking to package up stocks like this to their clients.


Take it. A real 100k is much more useful than an imaginary couple of million; they probably can't afford any more; there is still a very strong chance they won't succeed (as you noticed); and even if they do the VC will get their liquidity preference out before the founders see a penny, which they may well not do. Take it and move on.


Critical side note, from a tax perspective: Be very careful with the suggestions to have the stock bought back by the company for a 10% or 20% discount off the price in the round.

I assume your 5% stake is common stock. The common stock valuation will not be 10% or 20% less than the preferred price in the round. It'll be more like a 75% discount.

What this means is that even if you have long term capital gains on the appreciation of the stock, that tax rate will (at best) only apply to the delta between the common stock valuation at the time of repurchase and the price at which you bought the stock.

The delta between the common stock valuation at repurchase and the price at which the shares are actually repurchased will be treated, for tax purposes, as an employee bonus. So, it will be taxed like employment income.

Just want you to be aware of what you're potentially getting into, from a tax perspective.


What can you buy for $100K? It's not worth thinking IMO. Keep your 5% and find a job if you need $100K cash.


Absolutely brilliant SV comment.


$100k is worth 40 hours a week for two years to the average American. Quite a sizeable chunk of your life.


A house?


Not in San Francisco or the Silicon Valley area. Median home prices are well over $1m. That's not even enough for 20% down on a mortgage.


1/10th of a house in many US cities.


Don't know about you, but I won't get out of bed for any less than $500k


~77 Bitcoins.


That was last month. Now its only ~43. Better move quick OP :P


It has moved so fast this month I keep forgetting it is in the 2,000's now.


43 bitcoins.


You believe that the future of the company is poor.

You are willing to sell.

Scenario #1: Company goes out of business

Lets say you are completely right.

$100K in 2017's dollars > $0 in the future.

Verdict: Sell

Scenario #2: Company struggles/downrounds/etc

Your stock is diluted.

$100K in 2017's dollars > $100K (or less) in 20xx dollars.

Verdict: Sell

Scenario #3: Company is moderately more successful than expected

$100K in 2017's dollars ==(approximately) $150K in 2020 dollars

Verdict: Sell

Scenario #4: You are completely wrong

$100K in 2017's dollars < $1MM in 2020 dollars.

--------------------------

You left the company for a reason. Has any of those reasons changed?

Maybe sell part and keep part to reduce regret possibilities?

Question: What number will you be emotionally o.k. with no matter the result?


Personally, I'd keep the equity. Would $100K really do much for you in the long term?


$100k is life changing money for most people.


Not for most people here, though. Do we really need to keep saying stuff like this every time anyone here mentions money? "$10 is a weeks worth of food for people in Africa, you know". $100k is a lot of money, no question. But it's only about 1-year's salary for a decently paid programmer. It's not enough to quit your job, and it's not even enough to buy a house in most major tech cities. Which is what the OP said "would it really do much for you in the long term?"


I dunno. $100k as a lump sum, here, in cash, now would solve a lot of serious financial problems in my life that $100k over 12 months doesn't even move the needle on. Some problems in life require lump sums. Cash is king.


I dunno too. How rich do you have to be to sniff at $100K? Perhaps you'd have to know something about the US tax situation that I don't. (I'm in the UK, so what do I know.) Maybe you end up with $10K in your pocket afterwards, or something, so it's kind of barely worth it, comparatively speaking.


I'm not saying it's something to sniff at. It's just not completely life changing. Even if you're only making a 60k/year salary, 100k is only ~1.5 years of salary. A lot of money? Yes. But not quit your job money, change your life money.


Even at the highest marginal tax rate, you walk away with about $60k after tax.


And a $60k lump sum would not be refused, either.


Sorry, I didn't mean to imply that it was not a large sum. It's a large sum for me too. But it's not a totally life changing one. You couldn't quit your job if you got 100k.


  Not for most people here, though
I doubt you have any data to back that 'most' up. There are a lot of people reading here and many of them are not like yourself.


It's a lot of money for me. But most people here are software developers, and i'd say most of them are living in Western countries. That means the mean salary here is going to be at least 60k. Which means 100k is only about 1.5 years of salary. Is that a lot of money? Yes. Is it completely life changing? No.


What would the equity do for him? Other than likely go to zero, that is...


5% of 50M = 2.5M 5% of 20M = 1M 5% of 10M = 500k 5% of 1M = 50k

$100k liquid good if their valuation is less than 2M, otherwise it makes fiscal sense to hold onto it (or sell once it hits open market), unless you think that it is not a reasonable investment.

Really, though, if you are not interested in the future of the company, sell it to someone who is working on it. Figure out what it's worth at valuation and take 20-70% of that, if you need some range parameters. And like I said sentence one: $100k liquid good.


You need hard numbers and intelligence available to only you. Once you have the data, talk to people you trust, then make a decision. If you hold 5%, you have rights, rights to information. Obtain the information, then decide.

As far as a rabbit in your hand now versus 10 in the bushes provided the hunt goes well, consider your own situation and what the 100K would mean. Would you be able obtain a better ROI with 100K in your own hand versus say, staying with the company? Are you young young or young at heart?

Good luck!


If your 5% at the new valuation is worth a lot more than $100K, I would say don't do it unless you need the money in the near term.

For example, if XX is 10, 5% of $10 million is $500K.

If you do need the money, maybe you should make a counter offer that is a better deal for you.

And don't forget you have to pay income tax this year if you do sell. If you wait, obviously you also delay the tax.


Offer your shares to the investors putting in to the next funding round, at the same valuation. Just make sure you know those terms - don't commit to them blindly.

If you believe in the company, the consider not selling.

If you do not believe in the company then make sure you get this cash - you might end up the only person to actually make money from the company (this happened to me).


You own 5% of the company that is about to be bought for an amount that makes your stake worth $500k minimum. I was in a similar situation once. My mentor at the time told me, "If you have them by the short hairs, pull." We countered for 10x their offer and settled for half of that.


>Anonymous for obvious reasons.

I have been thinking of Yishan-style CEOs for a while now. I wonder if the ex-founder selected the CEO in this case.


What do you want? What's the lowest you've asked for that was refused?


"some moderate success" ??? "skeptical of the company's future" ???

take the money and run! learn from mistakes. they will burn through the cash and fold, but you will have a headstart.


Ask HN: I don't want to be a founder anymore

https://news.ycombinator.com/item?id=14417758

4 days ago


Ask HN: How to leave a startup when you own a third of it?

https://news.ycombinator.com/item?id=14357379

12 days ago


Do you have a board seat? Are you able to sell your shares as part of the new financing?

In that light, are your existing shares worth more than $100k at the current FMV?


If you are skeptical of the company's future, just take the $100k and move on with life.


What about waiting until the funding round is over, and then sell the shares yourself?


The good point about this strategy is that there will be a per-share valuation that is probably much higher than the previous one.

The bad point is that the OP will then have to do all the hard work on the transaction whereas right now there are willing buyers.


100% correct. Is there any reason to think there will be a secondary market for these shares? Going through a sizeable VC funding round does not imply the existence of a secondary market.


Ask for more.


CEO refuses. How do I apply leverage?


Get the last 409A valuation. That's the price the shares should trade at and in fact will create problems for the company if they do not.

If the CEO offered the last 409A valuation as a price, then there's little you can do if you're inclined to take an offer because the 409A is the "fair market value" of the common stock. Usually the 409A is a huge discount, like 60-80% less at the stage you've implied the company is at, under the preferred price.


Also, missing in this discussion is that the board likely has to ratify any change in ownership and the board (led by the CEO) has tremendous ability to just say no and/or dictate who and at what price can buy. All this discussion of the what the fair value of the shares might be to outside investors is somewhat irrelevant in that situation.


Yes but it can actually cause problems if the board approves a lower price than the 409a valuation. He has some leverage in that respect, especially if his sale of shares can be worked into the funding round.


Consult a lawyer who specialises in startup financing.

Most people here have no idea what they're talking about.


If you are skeptical of the company's future, and the CEO is not to be trusted (and it is clear he is trying to take advantage of you), then ask yourself if you had 100k, would you invest it in this company? If the answer is no, then maybe you should take the buyout. On the other hand, how well do you live with regrets - if for example you were wrong and the CEO does not run the company into the round? If you really think the company will fail, then 100k is better than nothing.

How will the investors feel if they know that you would sell 5% of the company for $100k? Maybe this is your leverage: the investors will know the price of the buyout and since the investors know that you are very familiar with the company, then they will invest less. Therefore, the CEO should offer you a fair price for your shares.


Ask him how he came up with that price, see if he is able to make sense of it mathematically somehow, intuition is often wrong on pricing. Explain that a company with less owners (and thus less conflict of interest) is more valuable and less risky. Also a peaceful board is more valuable than a board backstabbing each other. If the CEO doesn't value these things then I am sure other investors will value it. You should be clear that he is stealing your cut of the value from risk reduction. Also, think if the CEO somehow has more information than you do. If he has more information and is buying, you should consider keeping the stock until relevant valuation info is shared.

Of course this could be wrong too, depends on the non-money terms the other investor got.


Who started the conversation? If the CEO did, you can sit back and tell him, "it's not enough." Rinse and repeat, and don't respond to "well how much should I be offering?" entreaties from their side. "It's not enough." Practice it in a mirror.


What leverage do you have?


Maybe by suggesting that you would contact the investors directly to purchase your shares at a slightly discounted rate?


If you know who the investors are you can contact them directly.


How old is your company?


You could say that if the CEO doesn't improve the offer, you're going to write directly to the board / new investors.

I'm not saying you should do this. Nor am I suggesting it's a good tactic. But it may provide leverage if you need some.


No reason to do this - you have the shares and the CEO wants to buy you out. Remember - the CEO wants to buy you out for a reason, and I guarantee you the investors want you bought out. Don't underestimate how much leverage "them wanting you bought out" is. It may even be a stipulation of the funding round.


Do the investors even know about the conversation?

People paying good money for shares will jump at the chance to buy them cheaper.

A CEO closing an investment round may have very different incentives, like not frightening the horses.

[edit, clarity]


It would be a bad sign if the investors weren't asking who the ex-employee with 5% of the cap table was!


Sure, but the investors would probably want to buy you out ALSO.

Equity is a market. The CEO is offering a price. Maybe the investors are willing to offer a higher price.


[flagged]


There's no dichotomy there. The basis of all voluntary transactions is a difference in the value each party expects.


My advice: Talk to the board/investors.

The CEO is offering you a price. Other investors will probably be willing to offer you a better price.

I mean, why wouldn't they? They've paid good money to get the shares that they bought. Why wouldn't they want to buy other shares at a cheaper price?


Don't sell. If they are about to raise, then this is the perfect time to sell your shares to investors in the secondary market.

If you offer your stake at any discount, they are irrational if they don't take it. Don't worry if you are bound to a non transfer-ability clause. Getting around that is always possible with a bit of lawyering.

Also get someone else to handle the transaction on your behalf. You don't sound like the best negotiator. No offense intended.


For most practical purposes, there is no such thing as a "secondary market" for private company shares for "moderately successful" companies like these. The shares themselves will be subject to a shareholders agreement, the boilerplate for which prohibits their unauthorized sale.


Hire an attorney (or several) for a couple of hours to read through your agreements.

The shareholders agreement, even if 'boilerplate', may only give the company the right of first refusal on the sale of shares. Even if unauthorized sales are completely disallowed, if you find an interested buyer there are still ways to craft a legal agreement where you for all practical purposes have 'sold' the shares.

But if the company isn't very successful, there may not be any investor interest, which would make the legal details pretty irrelevant.

I'd recommend getting an attorney to read over your agreements, and also try and gauge investor interest by listing your shares on one of the secondary market marketplaces.


The type of agreement I'm alluding to transfers the beneficial value of the shares, voting rights, dividends, acquisition proceeds, etc. It's synonymous with selling the shares, when you are prohibited from doing so.

Mark Zuckerberg was on the buy side of a few of these type of deals. That's a "moderately successful" company.


> Don't worry if you are bound to a non transfer-ability clause. Getting around that is always possible with a bit of lawyering.

Please expand on this.


[EDIT] I suggest looking at your situation from this perspective: $100,000 is a lot of money and can last you and your family over a year in certain places.


Those are all good reasons to negotiate a larger settlement.


This is bad advice.


My advice was to have perspective that things could be worse. To have that perspective is never bad advice. ;)


Although having perspective is important, nothing the original poster says implies he/she lacks perspective. Your advice is off topic, and implies he/she should take the $100k without giving reasons as to why or why not beyond a description of your own personal situation. That's why it's bad advice.


Sure, but they could also be better, maybe significantly so. Where does that leave us?


I don't really get the downvotes to the parent comment. All he's saying is "100k now might worth more than 5 million in 5 years"


It's hard to imagine a scenario where that is true, except maybe if you needed the money for lifesaving surgery for yourself or a family member, or some other equally dire circumstance. Even if you had to be homeless for 5 years it would be worth it to wait.


If you're looking for someone to work through marketing ideas happy to help. Email in profile.


[dead]


There are better ways to express and show your support for people in such situations.


You might try Upwork for freelance work. Start charging low for small projects to guarantee some immediate income. Create a reputation in the site to charge more while continuously creating your own network so you can soon enough get out from Upwork and start earning fair money from freelance projects you find for yourself. Good luck!


My comment makes no sense at all anymore now that the parent edited his comment




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