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Ask HN: How to deal with co-founder betrayal

52 points by diamondage ↗ HN
I designed and built a product and put together a kick ass engineering team of 4 people. My business partners handle sales and put the majority of the cash in, leaving me with stake of around 30%. Four weeks away from signing a multimillion contract, my co-founders issued a cash call, claiming I am subject to a compulsory share transfer clause. They give the company a premoney valuation of zero, and as a defaulting shareholder I should get 50‰ of fair value... Aka here's "140k leave now, and you have no choice about it". I managed to convince a lawyer to help, and she's willing to do it without charge - after going through the shareholders agreement it's pretty clear that their argument doesn't hold up. But... How to handle this situation? Especially going forward with regard to audits etc. as I no longer trust these guys at all

26 comments

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wmf
Either you (possibly backed by new investors) buy them out or they buy you out.
edmundsauto
Get what you can and get out. If you care about bringing the full product to market, accept that you might need to take less to avoid any clauses limiting your future work.

Depending on the maturity of the company, there are a few different bits of value. Some you can take with you - your product vision - and now build in a linear path towards what brings value. Some things (IP) you won't be able to. But the real value in a company is the existing customers and PMF - if the company is still relatively young, the value you have moving forward is significant.

So just build yourself back up and move on. Try not to hold hate in your heart, it will only set you back. Take care of your mental health, be kind to yourself, and figure out what you would be doing next without worrying about what they're doing - that is for your attorney to handle.

toomuchtodo
Solid advice. Can probably take the engineering team with too if they can get funding on top of whatever cash comp they’re able to walk away with. Partners showed who they are, believe them the first time and don’t throw good effort after spent. Build your own.
diamondage
Not sure about the team. There's a clause somewhere in the shareholders agreement about that.
toomuchtodo
Ask your attorney how far you can bend whatever that clause says. If they don’t want to continue to work with your partners, they can always leave for greener pastures.
edmundsauto
Don't worry about the team unless they have specific niche knowledge and experience. You built the team once, you can probably do it again. Poaching employees is dangerous territory for a soured relationship.

By all means keep an eye on the talent, and if they leave on their own to join you, don't ignore them. But do not encourage or induce them to leave.

pinewurst
There’s poaching and there’s apprising the team of the situation. I’d hardly want to stay in an company where this sort of thing was happening…
spuz
This is great advice. Perhaps not very satisfying in the short term but definitely the right thing to do in the long term.
diamondage
Thanks @edmundsauto!
edmundsauto
No worries. I lost 40+ combined years of friendships when my startup exited in an aquihire. It took me 4-5 years to get past what I felt was a betrayal, but once I did my career growth skyrocketed because I learned from it.

to be fair to my 3 partners, they saw things differently. Who knows who was right in my situation. In yours, it sounds like there are clear villains but I think the advice is still sound.

mannyv
Well at least they tried to screw your up front instead of stealing all the money like my business guy did. Motherfucker. And he was a ranger too.
factsarelolz
> And he was a ranger too.

So you trusted someone that eats crayons?

llanowarelves
There's a guaranteed way to split his assets in half.

Is he married?

devoutsalsa
Have you heard about divorce Barbie? She comes with all of Ken’s stuff.
mradek
99 range?

In all seriousness these kinds of stories are why I’m focused on going slow and learning a ton and doing things solo. A lot of my favorite artists are solo musicians and while they’re not super popular at least they’re lifestyle musicians.

dustingetz
you guys need to work it out, if you have vested equity they need your cooperation here, though the $140k today might be worth more than the equity risk adjusted. you can negotiate the cash, or negotiate for a % of the contract if it closes etc
wruza
When I hear stories like this, it’s always puzzling why shareholder agreements are such minefields. Is it realistic to sign an agreement without this “compulsory transfer on call” bs at all? I mean, probably these clauses are there to protect everyone, but not in this case it seems.
diamondage
Actually, the share agreement is a little vague, but fine in this instance - there is a clause that says there is no obligation for shareholders to participate in the cash call. Problem is how to refute it, and work together (if at all) going forwards.
anmol
Good comments overall. One insight here is to put yourself in their shoes to understand how to negotiate the best outcome. Most people don't rationalize themselves as mean or psychotic - there is probably some rationalizing behind the decision. E.g. diamondage is not a great engineer and we need to clean up the cap table before we increase the valuation because we can hire someone amazing.

To be clear, I'm not saying that's right or true. But assuming that's their position, does it change anything about your negotiation strategy?

diamondage
Yeah this is the not-easy but emotionally intelligent thing to do. I think I can trace it back to a fight with the lead developer who then skipped me and talked directly to them. There is a chance I can resolve the situation at the root if I can talk directly with them about this situation, particularly as since then, said engineer has not met his promised targets (six months overdue on an initial claim of 1 month). But this is only speculation.
c_o_n_v_e_x
As a side question, how did you find your cofounders? Were they previous colleagues?
diamondage
They weren't previous colleagues. They were willing to put in cash and leave me some rights on the v1 codebase in another vertical and I jumped at the option.
psyklic
Sorry to hear that; I had a similar betrayal happen. My business partner and I had everything in writing, so I also was able to get a lawyer on contingency. From my experience, the legal route can take a long time and prolong your stress. If it turns out the company and your co-founders don't have much capital, then your lawyer (even if well-intentioned) might lose interest.

FWIW, we had not yet found product-market fit and my business partner apparently was not able to replace me adequately. So, the company completely lost velocity for over a year, essentially the death knell for a startup.

ankaAr
Go out from that relation, with or without the money.

Six years ago I finished the year with depression because a betrayal from my associate when we started our dream company.

Really, try to learn something and if not, try to remember that not all people are like them.

It took me 6 years to be able to face again people that worked with us because that betrayal feeling.

Run Away Now

talvi
When I got kicked out by my cofounder, I kept my shares instead of taking the payout. But we still hadn’t made product market fit and if I had taken the money I would have ended up making the most off of the startup.

The two questions to ask yourself are: 1. What’s the chance this startup fails? Most startups fail, even those with big contracts. 2. Is this the last idea you’ll have? If yes fight hard to stay involved. If no, have the lawyer negotiate a sale for more than 140k and use that plus all the lessons learned to do a new idea better.