Co founder separation and share buy out after 25% vesting

[tom_throwaway]

Guys This is a throwaway account. I have a situation where we were two founders working since Jul of last year. Due to reasons that are not relevant, we decided to split after 25% vesting period was over for both of us. I agreed to buy his shares. My question is how do we structure this without screwing up all future options? If I show the actual price on paper, the share value changes quite a bit impacting the option value I can give to anyone else in future. To be honest, I do not even know all the implications. Has anyone gone through this and if so can they give any suggestions? We are obviously talking to our lawyer but would like to hear from the folks here.

PS: There is no revenue - we are close to a private release (I know it sounds like we took a long time - but please take that as something not very relevant as I can not go into the details here)

[redtexture]

Any other investors?

Any other options issued?

Any other un-vested participants?

It's the other participants that might make this challenging to be flexible, for future-oriented consequences.

If you become the sole owner, subsequent pricing is a bit more flexible, since you're king of the entity.

But also a price-setting event is "forever", in a historical sense, but that does not mean subsequent pricing events attend to the earlier price event. See also "down rounds" in venture investing.

You may want to explore the topic of IRS section 409A, if you're in the United States. This might have vesting tax consequences for you. Or maybe not. You might choose to disclaim the un-vested stock because of the future taxes (especially if you're sole-owner). Or maybe not.

Also read up on 83b elections. You might be paying tax on your own subsequently vested stock, after a pricing event has occurred.

Sort this out BEFORE your buy-out transaction.

See Fred Wilson, for a hint of the universe:

Employee Equity: Restricted Stock and RSUs

http://www.avc.com/a_vc/2010/11/employee-equity-restricted-s...

and

Fairmark.com - Kaye A. Thomas

http://www.fairmark.com/execcomp/sec83b.htm

Also, again Fred Wilson:

Employee Equity: The Option Strike Price

http://www.avc.com/a_vc/2010/11/employee-equity-the-option-s...

And, ah, what can you do for future options? One potential avenue, in exploring with a knowlegeable accountant + lawyer about merging your start up into another entity which has a new, "clean" and different capital and equity structure, that perhaps you're the sole owner of, that might (or might not) make pricing a whole new and different situation.

And...how about reporting back on what you ultimately did and why?

[tom_throwaway → redtexture]

Thanks a lot. To answer your questions 1. Yes we do have other investors (we raised a very small seed round) 2. Yes - there are options issued 3. Yes some of the issued options are unvested.

No, I wont be the sole owner after the transaction. Thank you for the very helpful links - I would go through them. We do not have the option of merging with another company - but we do have the option of officially changing the name (the current brand name of the company is not the same as the legal name - we were going to change the legal name - but it kept getting postponed for some reason. We are exploring couple other options as well.

[redtexture → tom_throwaway]

It looks like you have the equivalent of a new investor round, with a new valuation for the company, with all of the consequences of that new price/valuation. Already having other investors and option holders makes it a challenge to do any other creative things...compared to being or becoming the sole owner.

This is the standard state of affairs after a new investment round at a higher price. For example, not much different than the experience variance between a pre-series-A round investment employee compared to the new post-Series-A-investment employee experience in relation to options and pricing. Not much to be done about that.

I guess you could have a 100-for-one stock split, post buy-out for present owners and option holders, as a method to getting new lower priced shares for future new employees. A future new employee's likely option fraction of the total company are going to be smaller, post-financing on any new investment/pricing round.

[tom_throwaway → redtexture]

Thank you for the detailed response - very helpful!