CTO / cofounder exit deal after 1.5y at 600k revenue without SHA
I co-founded a deeptech company in France 1.5 years ago with another founder. We both invested €30k initially. My co-founder, who has a business background and is CEO, owns 51% of the shares and has 2/3 of the voting rights, while I own 49% of the shares and hold 1/3 of the voting rights. I have a PhD in AI and serve as the CTO. We pay ourselves modest wages and currently employ three full-time staff, all of whom I recruited and manage.
The company generated €600k in revenue over the first 18 months through tenders and research services. There’s also potential for a €1.3m grant to be awarded in Q2 this year. Even though the company is doing well, I’ve decided to exit the company end of March for personal reasons: A breakdown in cofounder relationship, I can’t commit to relocating to France (I’m commuting from abroad), and I’m not happy with the recent pivot to the defence sector.
We don’t have significant IP yet because I spent most of my time writing proposals that generated revenue and developing prototypes for sectors that ultimately turned out not to have a substantial market for our tech.
My co-founder has offered to buy out 48% of my shares for €60k, allowing me to retain 1%. We don’t have a shareholders agreement so he could in theory dilute me by issuing new shares using company or investor money, although I could contest that in court. I'd rather move on though as I'm already looking for new roles where I currently live. I'm not interested in building a competitor.
Lawyers I talked to told me different things, one that worked a lot with startups told me that it's a good deal, another one specialised in shareholder litigation told me I could squeeze the company dry.
Does this seem like a fair offer to you? What do I need to keep in mind in order not to lose my remaining equity after exit?
73 comments
[ 2.8 ms ] story [ 145 ms ] threadHe'd need to raise capital at some point, new investors could buy your shares at a higher value.
I'd try to negotiate at the very least and keep like 5% instead of 1%
What's the current EBITDA?
Without seeing the books it’s hard to say but from this description there doesn’t appear to be any equity in the company at all.
Any calculations that use stuff like DCF are basically nonsense that ends up being negotions about the multipliers.
Of course, you can structure a deal to include discounts, but you have to be careful with that too.
A new investor in one year might scoop in and say "Well, last time your shares were valued at price x, why would I pay substantially more?".
They might become the next OpenAI (AI-guided hand grenades! Fancy!), or they might fold in a month or two. It's a gamble as soon as you step out of the picture.
Ask yourself this: how much time are you willing to spend on wrapping this up if you are leaving for personal reasons?
€60k seems pretty low for half of a company making €600k/y and is about to get a €1.3M grant. I'd ask for the following:
1. €150k for the buyout 2. Some percentage of the incoming grant, since your work clearly contributed to its approval 3. Clear termination of any claims to your IP/copyright
It's not the best deal that they're offering but it's not a ripoff. Try to salvage whatever good faith you two have left, get everything in writing. I think you can both come out of this satisfied.
The €1.3M grant has not landed and you can't use that. Even if that lands, it's still not ARR.
That being said that fact that there is no shareholder agreement might work in you favour here, since you can walk away and keep your 49% shares. Usually there are provisions that would prevent large stakes if an individual leaves the company early (vesting schedule/cliff).
I am not a lawyer, but I've been in a similar situation recently.
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We were 50/50 partners; I was technical, he was business + provided the financing. In 18 months we built valuable IP, but it wasn't ready for external use. Our relationship broke down over financial conflict and diverging visions for the future. He is secure financially and could afford to take a longer term view, whereas I needed to validate product market fit quickly and start generating revenue.
Our conflict boiled down to our different circumstances and the way that we could each afford to approach the business. I still liked working with him, despite that.
I realised that I didn't have much leverage from the business and financial perspective, but I knew that I was the most capable person to continue to develop the product, and that he valued working with me and my time highly. The only leverage I had was the option to continue to develop and grow the product.
I offered to sell my equity to him, and transition into a consulting role. In the process, I tripled my annual salary, reduced my working days, cut travel, and eliminated the stress associated with needing the product to succeed yesterday. I also received a modest payout for the value of my equity. Our personal relationship immediately improved.
It took a while to work out the details, especially since we were both apprehensive due to the breakdown in communication, but now we are both very happy.
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Your business is already structured in a way that gives you little leverage (49/51 ownership and reduced voting rights). But you are obviously valuable to the organisation due to your demonstrated capability to bring in grants and tenders.
You are at your cofounder's mercy in terms of what they're willing to pay for your equity, since they are the only buyer.
If you just walk away, you minimise your leverage.
So I'd encourage you to dig deeper into the nature of your conflict. Can you decompose the conflict into parts and understand them separately? Is there a world where you slowly transition out of the organisation? This might result in a fairer payout than the simple value of your equity.
For example, if you were willing to commit to working remotely on the project for 6 or 12 months, even at reduced hours, you could significantly improve your value over that time by commanding a higher consultancy rate. Your cofounder justifies this by paying you for your time (which they value), rather than your equity (which they can lowball). You justify this by strategising that it's a mature way to extract the most value from your equity and committed time, and view it as an amortised payment for your equity.
If you have little to no SaaS revenue and it's a software business, you should think about that too. Consulting revenue and grants are almost meaningless in the context of SaaS from an investor perspective.
Personally I would push for more cash comp and give up all equity. If the company is worth anything your former cofounder can finance your buy-out.
Having said that, I would go with trying to improve the numbers - eg 5% of company as your remaining share ( that makes it still probably fine in investors pov ), or more money, depending on which you want.
Putin won't be as nice to you when he takes over France. Trust me on this.
As others have said you don't want to squeeze it too hard because you'd either jeopardize the future of the company or he could just close up shop, abandon the shares and reopen a new business, especially if there are no other current stakeholders to worry about.
1% IMHO is too small, especially considering you hired and ran good staff for 1.5 years, which is a critical time, and are already revenue-generating. At least push for 2 or 3. I doubt the other founder will accept anything higher than 3, but business types routinely undervalue the technical folks that actually build the money machine. ;)
This is the problem with cofounding, though... It's like owning a home vs. renting... it's far easier to move if you're just renting... Best of luck to you
I was most recently director of engineering at a startup for a year (as first employee, not cofounder), hired 3 good people who are still there, then stretched myself too thin with a toddler at home and we had to part ways (this was hard). Might be fun to have a chat if you're interested.
peter@marreck.com
;)
I would recommend to compute the worth of your equity not based on a startup valuation but on how much money would you have made if you would have been a consultant.
Indeed, the hard work on the startup has not been achieved yet. It takes a lot of times, energy and lucks to go through all stages.
The best scenario for you (in terms of satisfaction and experiences) remains that the company succeed.
We understand you are Québécois, but how old is the company?
They're not contradictory. The deal you've been offered is good and fair. However, you could take an adversarial position and squeeze your co-founder for a lot more if you're willing to sacrifice the company's wellbeing for your exit, e.g: you brought on the team and manage them, you could leverage that influence to poison them against your co-founder, the threat of you doing that would likely push up the buyout offer.
Take the 60k, push up the 1% to 5% (as that isn't going to adversely impact the company) and move on.
Agree. But don’t push up the percentage too much. Deadweight equity is toxic for a startup that has to rely on that for future funding.
The key to negotiation is being able to walk away. Start signalling that you’re willing to leave the company while holding on to the 49% and voting shares. That’s bad for him.
You could stand firm on 5% + 60k by telling him that’s your final offer, or you could present an alternative, e.g: you want your 30k cash back and you want equity, start at 10% equity but you’ll “give up” each 1% for 15k. If he wants you to walk away with 1% equity then he pays you 15k * 9 for the other 9%. If he’s already expecting to give you 60k, he’ll probably work out 30k + 2% = 60k and start thinking my maybe it’s a good deal, then he can negotiate himself down to whatever percentage he wants you to have. Change 15k with whatever number works for you.
That said, if walking away with the 60k is crucial and he’s a good negotiator then you probably can’t “win” and should just take the 60k + 1%.
I was 50/50 shareholder, voting rights and co-director in a bootstrapped startup with no shareholder agreement. I worked as the CTO building the product for 4 years and hired a team of 4 other developers. My co-founder hired a full time salesperson who eventually left when he couldn't make quota. I was 21 when we started the business, he was 31, and over those 4 years I just grew up to realise he wasn't a good CEO.
After multiple failed attempts to raise money I eventually called one of the investors to ask for honest feedback why he didn't invest, he told me the vast majority of his failed deals happen when co-founders fall out and predicted that would happen with us too. I decided 3 months after that email to leave the business.
I started a new company with a similar product but focussed on large/enterprise in that market, while the previous company was focussed more on small clients. I kept my shareholding but resigned as a director. The co-founder went nuclear and decided to dilute me out of the business by issuing new shares and buying them. If I had bought them I would have just been giving him the money which he'd just pay himself as a bonus and then repeat, so I just had to watch my shareholding go down to 25%. All legal avenues I went down just confirmed that the cost of litigation would cost more than whatever I'd get out of it.
The year before i left my Grandad died and left me $15k and at the time I decided to forego my salary for 8 months to help the company's cash flow situation. So I eventually offered a settlement where I would sell out of the company for $15k and be done with it.
Forward to now, my new company, still bootstrapped, is over $10M ARR and profitable with 113 employees growing at 60% a year. I have over 51% of the shareholding and over 60% of voting shares. I still write code every day and behave more of an engineer now than I ever did in the previous company.
My advice to you is to take the money and leave, start something new and just start building. You have already realised the biggest value of that company; lessons about what to look for in a future co-founder, how to run a company and build a product. Leave everything else behind, move on and I promise you'll look back at this moment in 4 years time as being the best decision you ever made.
Good luck!
Agree with that, I now know what to look for if I started a new venture. Thanks a lot for sharing your story!
Man this is inspiring - No expectations or anything but Id love to learn more about this journey!
How does that work? Wouldn't that dilute his share as well? And wouldn't the valuation increase accordingly, making your share keep its value intact?
Slighty longer answer: dead weight founder equity on the books will kill the company unless it's already achieved some level of success and you're into a more dividend phase (doesn't sound like it) or it's young but doesn't need to ever take outside money . From your perspective it may "feel" good to keep some of your baby but you don't want that, as the company will fail/wildy succeed and you'll be really upset, or (more probable) land somewhere on the spectrum from mildly successful to zombie and you won't care about it.
I think you can probably get a bigger buy-out, but have no details. You don't typically value a young company on one-time, past revenues but on projected or recurring sales. A grant might impact goodwill in the future, but a potential grant wouldn't have much impact in my view. These deals around very early stage companies are not going to pay out like a typical startup (wild valuations on theoretical future growth) but on assets and free cash flow. You should push for a buyout in line with that, while recognizing you are not driving and if your CEO thinks it is unreasonable they can stall, fight or torpedo the company before paying you out.