Ask HN: Co-founder wants me to leave but won't entertain a buy out offer
My (non-technical) co-founder spent $10k to create the initial website over a year ago with the idea. I joined about 11 months ago and since then the idea has changed a bit, we've built loads of products, grown from 2k users to 60k users and continuing to grow due to dominating SEO for our niche.
Recently my co-founder said they wanted to work on it themselves. I said I didn't want to leave. They suggested I go down to 3% equity and they continue. I said they would need to buy out my equity at a fair price.
My co-founder doesn't have the money, and the business only has around $40k cash in the bank right now. My co-founder also won't entertain the idea of raising external money to buy me out, or monetizing the site right now.
To me this seems ridiculous as I'm literally just giving away my equity after spending 11 months building the tech and growing the business. Right now if we stuck adsense on the site, we'd generate $5k/mo, and we have inbound sales leads looking to spend upwards of $40k with us. Basically, the business is primed to make money.
They will not entertain the idea of me buying them out for cash.
What are my options here? It's basically being presented to me as "Take the 3% otherwise you'll own 40% of nothing". I don't really want any equity in the company at this point if I'm not involved.
434 comments
[ 4.7 ms ] story [ 301 ms ] threadIt's not so much that they'll torch the company. They're just saying they don't have the cash so need to reduce my stake. They will budge on the 3% I'm sure, but I don't value the equity much if I'm not involved.
I'm not too sure what a lawyer would recommend at this point? I also can't really afford one personally - especially as I may be out of work soon haha..
If you don’t value the equity, offer to sell it to the seed investor at a discount.
The trust is fundamentally broken, so it's not really worthwhile to pursue this as collaborators. Unless you're keen to run the business yourself, there isn't much point in fighting this beyond getting your 1st year vesting.
It's honestly not worth your time and energy fighting for something you're not keen to do. And it's definitely cheaper for them to give you 7% more than the 3% offered, and avoid all this hassle and potential legal expense.
If you do want to persist, then you need the investor on your side, as otherwise you can't force the other person out (they'd still keep their 10% but that's the price you pay for that move).
I have to say I find it really odd that someone who's invested $100k is being silent on this, or isn't worried about this situation, especially if the future of the business is now more of a lifestyle business. I fail to see how they'd get a return they'd expect. I'd assume they're actually on the other side, but want to appear neutral.
FWIW if you end up leaving, I'd advise not agreeing to a non-compete or a non-disclosure. It's not about you starting a competitor, but more about them not being able to restrict your future options as they're forcing you out, and they will have to potentially consider the threat of you competing with them at any point in the future.
It's a credit to your efforts that you've built the tech of business that's gotten such good traction and numbers, so you've got learnings and experience that will serve you in good stead in the future.
It's just unfortunate that you ended up with such shitty partners.
Good luck, and I assume quite a few of us will be hoping you bounce back from this, and rooting for you.
3% of nothing is nothing also. i’d go with 40%.
it’s absolutely ridiculous because the other founder isn’t prevented from working alone because you hold 40%. the 2 things aren’t connected. so just agree to sell all your shares in the next raise. then it’s his choice: take on debt now to buy you out (cheap) or pay later (expensive). the latter is likely far, far too expensive so more likely you can only sell half your stake in the next round.
EDIT: it has occured to me that you are only 11 months vested. this is a bait and switch. make their lives hell, even after and if you get to keep 10%. he probably can't fire you so you'll just keep vesting. make it very clear you will make it impossible to fundraise unless he buys you out.
Please explain more what you mean about the valuation being underwater. I don't understand how that is, nor how that is even possible.
as to the use of venture capital, indeed, no investor will ever allow this -- if they have a say. seed stage funding is most often convertible debt, and the investor does not have a say (legally; but you damn well better do what they say anyway). i'm actually quite surprised that a seed investor would be noncommittal on it. however,
1/ that's the other cofounder's problem, not OPs. the way you phrase it is as if the OP is putting the other cofounder out on a limb with an unreasonable request; that is not the situation here.
2/ the other cofounder doesn't have to use capital, they can take on debt (convertible or straight debt).
It's an absolutely wonderful tradeoff if the business will be run better and more efficiently with just the one cofounder. A no-brainer really. Not doing it indicates a scam. In both cases, OP should insist on a buyout. So there's really no difficult decision here -- on OP's part anyway.
Of course with the business being "underwater" we are talking about a personal guarantee on straight debt. So again, how much does the other cofounder believe in the business and that his motives are pure?
The other cofounder can sidestep this whole thing with various shenanigans, however that doesn't mean OP should just submit. A year of OPs life is worth it to stick to his guns, even if the outcome is inevitable. It's not as if OP has to invest any effort to see through his position.
As much as you have shareholder agreements etc. none of that matters too much if the business fails and so it's basically about what the two of you can negotiate.
In my case, I've paid off a former business partner much like a loan. You can negotiate all sorts of parameters on this: monthly payments, grace period, cash triggers, funding triggers etc.
Basically you set a valuation for the business (at least as set by the price of the round of the last investor, if not more because of growth) and then he buys your ownership.
Idk what "reverse" vesting is, but if you had normal vesting it sounds like your 49%, after the 1 year cliff, would be worth e.g. 12%. So you can either keep that 12% or if he wants to buy you out he could pay you your 12% vested * last valuation * growth factor.
It sounds like it's not going to work for the two of you to work together, so now it's just about negotiating the details before the conflict kills the company
One issue for me is that I don't have that much faith in them being able to execute on the company vision by themself, e.g. they don't want to monetize right now or do a revenue split for reasons I'm unclear about, which makes the practicality of monthly payments tricky.
Current valuation should be valuation at the time of the investment multiplied by a small growth factor (1.5x perhaps).
Your stake is the amount you would have owned as of the first cliff (and not any sooner), which is 10% after the investment round.
if the company was valued at $1M at investment, then it would be worth maybe $1.5M at time of the 1yr cliff given the growth factor.
Your 10% of that is $150,000. The company should pay you $12,500 per month for 12 months to fully buy you out. And the company should time the payments to reduction in your equity. If they speed up payments, it speeds up the buy out. If they slow it down, it slows down the buy out.
You should also renegotiate any non-compete.
E.g., make sure you have copies of all the source code, and any other intangible assets. After the business tanks and he too is short on cash, buy out all claims he has on those assets, and restart the business?
Also consider including your investor in the planning. He/she might be more willing to help you save the business at your partner's expense, if the alternative is losing their entire investment.
Reading between the lines, I suspect fourtydegrees is young and doesn't have the kind of money to do this.
(I also suspect that lawyers may be out of fourtydegrees' budget.)
The investor so far has also been very neutral and I think will remain so.
Assuming you weren't, it's very strange to force someone out right before their equity vests.
Basically, your lawyer can understand the situation better than an internet message board can. Then, a phone call from your lawyer to your co-founder could help make your co-founder become a lot more reasonable.
If the business-minded folk don't fully value the tech solution I can easily see this happening. This "devil's advocate" hypothetical is not an unheard of occurrence.
If this is the case, (and we don't know the details,) it means that the other founder was acting in bad faith. Hopefully the threat of a lawsuit is enough to solve the situation.
If you can afford it, find a good lawyer.
Otherwise I would expect them to be (i) interested in ensuring the underlying tech was maintainable in future, which if nothing else might result in more reasonable earnout possibilities for you and (ii) concerned that one of the founders apparently wishes to cut others out of the business to turn it into his personal cash cow, particularly if the other founder is the one with monetisation ideas.
It's not guaranteed that the investor is your friend (another possibility is that replacing you and taking the business in a different direction is something they quietly encouraged) but I wouldn't expect them to be 'neutral' on whether the business has a chance of generating them a return or not.
Similarly, business people don’t take shit like this seriously until lawyers are involved. They see no evidence of your ability to actually hold them to account and so believe they can just push you around.
Hiring a professional who knows how to actually hold the other side legally accountable, or make them hurt (tens of thousands of bucks in lawyer fees and months down the drain if the case goes to court) shows you mean business.
Otherwise it’s just talk.
A lawyer is also an expert and can give expert advice, both strategic (what should we do?) and tactical (how do we do it?) based on knowledge and experience. Exactly the same way you do in your technical domain. Would you want advice from a non-engineer on how to architect or build something? What database to use? No.
Like developers, lawyers cost money for a reason, and it’s because of the value they can bring.
Don't fall for the 40% of nothing once you are close of making money. They just don't want to share the pie.
https://www.mwl-law.com/wp-content/uploads/2018/02/RECORDING...
> They will not entertain the idea of me buying them out for cash.
Don’t sell, don’t give, don’t walk away. Stand firm. This was a binding agreement they can’t get out of. You have all the power here. You know you have something. They have established a lower bounds on its value. It’s way more than 40% of 400k.
Best of all. Don’t let your customers know it’s founders are going through this. It’s obvious, but make sure you keep your cool and composure. It will pay off in the long run.
For both of them if partner can separate head and ass.
Value to a founder does not imply value to the market.
- If OP keeps 40% and doesn't do work for the company, the company is highly unlikely to succeed. The company needs to be able to dish out equity to future employees and likely investors to succeed, and having 40% locked up in an entity that doesn't do anything for the company is not going to be attractive to those future participants.
- If OP keeps any equity, they should be doing it with the hope that the company succeeds, so that the equity will be worth something. Don't keep equity to spite your co-founder. It's not going to benefit you in any way if that causes the company to fail and your equity ends up being worth $0.
- If OP wants a fully cash deal, it's not realistic if the other co-founder doesn't have a ton of personal cash (most don't). Raising a round to buy out a co-founder at 40% of valuation isn't something ANY investor is going to want to do. That's almost half of an investment thrown in the trash, from their perspective, and they'd probably rather invest in a less complicated competitor.
- It sounds like the human relationship between OP and co-founder is broken and it is not worth pursuing working together, as that alone would likely lead to the failure of the company even if everything else works out.
That said, my thoughts would be:
(a) Stall for a month to get to the cliff so you have slightly more leverage.
(b) Work out a deal where you're not keeping that much equity, but you're keeping an amount such that the company is still bound for success, and that your smaller amount will actually be worth something. Owning 40% of $0 is still $0. Owning maybe 5% of $1 billion is something.
Most important here, I think, is to act in polite and professional manner. It is not uncommon in these situations for everyone to lose because things get personal. Just try to find some kind of deal where you are likely to get some value.
The parent comment of this thread was talking about keeping 40% of nothing.
Dilution of the sort you seem to be describing would expose the founder and investor to a minority oppression lawsuit from OP which could result in monetary damages, and/or the forced sale of all or part of the company at a price determined by the court.
You can't just dilute people without there being any consequences, unless the new shares are being sold at a justifiable price and at an arm's length. The attempts made so far by the founder to push out the OP would color any future dilution, making it harder to justify that dilution in court, even if on the surface it appears legitimate.
If the shares are not sold to a third-party arms-length investor, OP would have to be given the opportunity to participate in the share issuance on a proportional basis. If the founder and investor conspire to issue shares to themselves with the sole purpose of diluting OP, not only would that dilution possibly be reversed in court, but further sanctions could be imposed on the founder and investor as well.
First they have time to just fire him, and without contractual protections she/he’s out before vesting a single share. Most US states are At Will employment, meaning they don’t need a reason. If the CTO wants to contest the firing, where will they get $30K+ to pay a lawyer sue over a nearly worthless business?
If he/she is able to vest their first year before getting fired, but they then dilute the CTO further, where is the CTO going to get $30K+ to pay their lawyer sue over 10% of a nearly worthless business?
Even a lifestyle business requires more than just 'coding'. That person at least is likely to have an unpleasant awakening. I just hope it doesn't hurt either of you too much
You were the technical lead. More than anyone, you built it. Don't let these suits steal it from you or bluff you. So often business types take advantage of financially unsophisticated technical people.
If before then depending on your employment agreement and other docs there could be a scenario where you are fired/let go and get 0% shares.
Your last round valuation was $1,000,000 post so that price would be $141,000 or so for your 14% stake, can include some triggers on when that occurs that doesn't impede the business (ie $xm raised, $y profits).
If not then your ownership of the company is basically 10% on good leaver terms and that is the floor you should accept.
To illustrate assuming 100 total shares
Now: 40.8: him 39.2: you 10: option 10: seed investor
Goes to new cap table of: 40.8 him (57.6% ownership) 10 you (14% ownership) 10 option (14%) 10 seed investor (14%)
You're not going to get bought out now although you could say that your stake is purchaseable in the future at the last round valuation, which is very reasonable and keeps the cap table clear, probably $140,000 per the above with some sort of trigger for that (eg $xm raised, $y profits)
You probably can't work together anymore now, but you both seem to think the business can be profitable, so if you decide to leave you should be compensated for what you built.
Don't rush the decision. You've worked for 11 months, you can take 2 weeks to talk about it and think things over.
You didn't say why your co-founder wants to fire you. I suggest digging deeper into those reasons before you haggle on your exit terms.
Assuming you weren't negligent: I would try to point out that pushing you out one month before your equity vests is bad faith on your co-founder's side. Offer to leave voluntarily after your one-year cliff. Otherwise, if your co-founder just wants you gone now, request that you keep your 1-year equity and some severance.
Furthermore: Sometimes it's cheaper to just close the company and use the "lessons learned" to restart a very similar company... And that very similar company won't owe you anything.
[Edit: Deleted some text that, after reading the discussion, isn't relevant.]
That requires having the bucks in the bank to pay for a lawyer. If fourtydegrees is young with a thin wallet, I don't think lawyers were involved.
Maybe it's just my style, but that's a lot for me to shell out on "day one" of working with someone. I prefer to trust the people I work with.
But, in a situation like this I'd happily spend that kind of money to get something straightened out.
Legally, you are entitled even though the market is no longer the same as which you were brought to help in. Professionally you have put in lots of un-tallied TLC. Socially, there seems to be no effort for an amicable resolution.
On the business side it doesn’t make much sense for you to continue with the company if this is not your area of expertise. So you should taper off the position of founder and become a silent investor. Do not budge on percentage. It is your right.
If the other person does not accept this, then the option is to dissolve the company. Keep all assets as is. And license to new entity for royalty or one time debt.
If you want to continue with the company, negotiate a position that is optimized for what you can do. And remain shareholder. And board member.
Either way, assess the true value of the company in terms of current potential revenue, future growth, and future risks. Use that as as premise for negotiation. And set aside a BATNA. A best alternative to negotiated agreement.
Don’t focus on the torch and burn scenario even if the other person insists is a possible outcome.
(All this comes from someone who doesn’t know a single thing about this other than how businesses merge, split, and dissolve.)
He's not. He's 11 months into a 12 month cliff.
You have very little to lose by digging in and waiting for your co-founder to fold. If your co-founder has done this at this point of the business where the stakes are so low, they will absolutely try to screw you out of the 3% through other nefarious means.
It sucks that a single founder can tank a promising startup, but that's how it goes (unless you've already got a shotgun clause or equivalent in your shareholder agreements).
Set a specific valuation target, at which point the note will pay in cash equivalent to a certain percent of the company's equity. That defers the issue of liquidity until if/when the company gets sufficient funding. But it gets you out of the equity today, particularly with regards to voting shares. Which is probably what your co-founder cares about the most.
Could a situation where I get a cash payout, say $20k from the company to sell a certain %, and then the convertible debt to sell more in the future work?
I'd sit down and work out what are the cash flow forecasts and milestones. Contextualize what's a reasonable rate of return for implicitly funding the company by foregoing an immediate cash buyout. If/when the company achieves certain profitability milestones, then the note will pay back in installments.
Each successful milestone draws down the principal, each missed milestone increases the principal. If profitability isn't sustainably achieved, the note converts back into common equity. If/when there's a major funding event, the note converts to common equity or cash equivalent of the common equity valuation.
Essentially you're planning for three scenarios. 1) The business becomes profitable without further funding. You're paid off over time from the profits. 2) The business goes the fundraising route. You're paid off at the liquidity event. 3) The business succeeds at neither route. Your share of the equity reverts back to you, so you receive your fair share of the scraps.
Whereas it sounds like you have a solid plan to grow the business and generate revenue. As @jedberg says, this makes your interests aligned with the (neutral) investor, and the other founder at odds with the investor.
a) You and your cofounder can't work together
b) One must leave
The investor and one founder can push out the other founder. Who do you think the investor thinks should leave if you reread your quote above?
I’m confused. If they don’t want the pressure of running a startup, why isn’t the co-founder leaving, instead of trying to force you out and remain in charge?
Who brought in the investor? Who has that relationship? If you're friendly with them, you could ask for advice or feedback. Do you have business mentors near you who can help you navigate this?
In 1 month, you've vested 25% of your grant, or 10% of the company. So I would try to get to that mark to strengthen your negotiating position. Any references to 40% are red herrings at this point.
Unless there's a specific buyback clause in your stakeholder agreement, they're under no obligation to buy you out at any time. (They may have the right to do so. That's not uncommon.)
Of course, you're under no obligation to resign, either. So this is a negotiation.
So the way I see it, you have a few options:
1. You take your 10% and leave. You "don't want any equity", but better something you don't want than nothing.
2. You agree to a buyback, potentially at a discount to FMV. If you don't know what FMV is, it's hard to negotiate one way or another. It's v. likely not $1M. Sounds like this is a no-go.
2B. You agree to a non-cash buyback, e.g., in IP. You spent 11 months building the tech: what if you took that with you?
3. You flip the script and buy your co-founder out.
In any case, your relationship is over. You might walk away with nothing.
(a) You need a lawyer who deals with this kind of stuff regularly and has a realistic and well-informed view of what the outcomes are going to be. Most lawyers aren't like this.
(b) Legal gets expensive very fast, especially as it transitions from advice to negotiation and document review. At this scale of opportunity (the way the company is described), I'd stick to get getting advice!
(c) Past the "can I be fired" question, which I agree is urgent (and probably predictable), a lot of the negotiation here isn't going to be about the law so much as it's going to be about what both sides are willing to accept. If you have friends who have been in founder disputes like this, their input is going to be just as valuable as the lawyer's.
Agree also that lawyer-billing-on-the-clock gets expensive fast. But unless poster already has a go-to trusted counsel – which seems not to be the case – the mere act of "shopping around" can get 15m-1h of unbilled pre-engagement discussion from a bunch of lawyers. Essentially, poster could type up a 1-2 page brief, in more confidential detail than the post here, and have dozens of short conversations with lawyers (some of which would read the brief 1st) about key issues, tactics, & potential outcomes. The contrasts between what lawyers say, & what they ask about, will be as informative as any one conversation.
Another way to look at it: their sweat equity is more like $1 million e.g. $100k “time” invested with a risk of success of 1 in 10 means you need to get $1 million out to be “even” (ignoring Kelly Criterion).
Obviously there is some Bayesian that goes on now that there is more information, but it seems like it has a better chance of success than when it started, which makes numbers more difficult to calculate than complete failure ($0).