> Maybe there's some reason why warrant owner matters.
It's a well understood fact by anyone in the startup world that it does matter, because future investors or acquirers care deeply about the structure of your cap table. Furthermore, the article gives an explicit example of this:
> She had lined up a grant from a bank to help fund her offer, but it ultimately told her no because it was too risky for them to be involved with an unknown warrant holder on her cap table.
There is a world of difference between being an investor of a startup and having your money/property with a company. The former is an owner and the latter is a customer. Also, I find it odd that the top two comments are the same "over his head" and "fair punishment".
Your argument is the one that has degenerated into name-calling. Mine hasn't.
Founders routinely ignore the advice of board members. In fact it's almost a meme in the startup community for founders to politely listen to, and then ignore, their VC's advice. This is no different.
> I've also had a "useless" "co-founder" try and hold onto equity that didn't vest, after he left and contributed little.
What I am about write is blasphemy in this community, but needs to be said.
Contributions to a startup are not quantifiable. There are truism that float around the startup community like, "Ideas are worthless, execution is everything." these are helpful motivation tools but they create a black and white world, in a universe that is multi-dimensional.
When someone has an idea and someone else executes and the guy with the idea wants his "fair share" or in less extreme cases, like leaving before shares vest, there is this belief that one side is entitled to all equity and the other side didn't contribute anything.
In truth, the other side sees things differently, and that doesn't make one side right and the other wrong. It is never that black and white and general ideas like, "execution is everything" are great as general ideas but don't translate to every situation and each case needs to be evaluated independently.
If someone contributed to a startup and the other side has a different opinion about the value of that contribution. This is what the courts are for. Their job is to help decide, in this specific instance the value of that contribution was and how it relates to the nature of the agreement made between the parties.
Truism are not legal arguments and it's a mistake to assume that situations about contribution levels can be settled with them. Both sides believe they are in the right and are being wronged by the other party.
There are two ways to proceed from there. You can dig your heels in the ground on your position and try to pay to make the problem go away...Or you can accept that the other side also has a leg to stand on... try to understand their position and come to terms that leaves no one happy, but everyone satisified. Thats what compromise is about.
I think the startup community and this post is evidence of it believes that what they know is above the law.
This is a simple case of a dispute about money. Pretending it is about good guys and bad guys is being dishonest to yourself and others.
> So how about a third option: They are just trying to cut out dead weight from the company.
"They?" -> is the non-founder _employee_, with much less stake in company's future than the said founder.
"Dead weight?" -> is the founder who put his life savings in the venture, and is obviously desirable till the next round of funding.
A more reasonable "don't-conflict-ignorance-with-malice" would be that CTO has technical acumen but not business, and is judging the OP harshly on the technical merit.
> If the investor can't stomach this challenge and wants his money back, all good - his money wasn't worth the hassle of having an investor with a low risk tolerance. But perhaps he's someone who either believes in you or your idea, and would want you to persevere and get this thing off the ground, not jump ship at the first sign of difficulty.
That's not entirely fair. If the investor had been told there was a team in place, and relied on this in making an investment decision, a co-founder leaving is a material event that the OP has an ethical if not legal duty to disclose. This is especially true since none of the money has apparently been spent.
> due diligence on anyone you might go into business with.
> importance of operating agreements and vesting cliffs
I'd argue it's more important to work with someone you've worked with in the past and know you can trust and will work hard. The operating agreements and due diligence are there for the worst case scenario, but from your story it seems pretty clear they were questionable co-founders to start with.
I take this as one of the two central themes of this article:
"...points to a persistent flaw in Silicon Valley financing: the willingness to give start-up founders unassailable control of their companies, to the point that investors have no recourse if things go blooey."
That's not a flaw, it's a fundamental part of how it is meant to work.
The investors generally don't want to invest in companies run by a committee of investors... or else they would certainly do just that. Not to mention the larger investors could self-fund their own companies, if that's what they wanted to do, and retain all control. They are investing in the ideas, talent, and execution of the founders and other principal executives. It would be pointless to turn around and take control away from them.
(I think the other main theme of this article is that Domo is a mess... which is probably true. I only know what I read in the article, but it seems they have real revenue? It would have to more than double to match their rate of spending, but that can happen if they really provide value. It's hard to have confidence, though, in a CEO who is funneling money out of the company to his family and himself. Just the willingness to put that kind of cloud over the company, is a red flag.)
We all know that the idea without an execution is not worth much. It's easier to halt everything by saying the idea sucks rather than saying that he doesn't believe in the founder.
>>seeing who else is investing
Social proof is a huge factor and touches many aspects of every day life. And at the end of the day, investors are humans.
>"Sweat equity, most likely, for which they were rewarded with an ownership stake"
Sweat equity doesn't occur in a vacuum; something is created from that effort. If they wrote code and that code earns money, they are entitled to a portion of those earnings. That's inarguable.
It is my understanding that the original "idea" (I have trouble calling it a company) didn't take hold. If nothing is created and the company never amounts to anything...what are you getting an "ownership stake" in?
Had Zuckerberg and a friend opened a candy store on the Harvard campus in 2002, and it had failed, that friend is not entitled to anything Zuck does with Facebook because he put in labour on the candy store. Now, if Zuck was operating Facebook under the same legal entity as the candy store in which his partner had equity, said partner might have a claim, though it would be hard to establish if the partner produced no work for the new idea. That said, if this is analogous to the situation in the article, what on earth are these guys doing getting bogged down with convoluted equity agreements when they should be working on the product?
I'll repeat: if the other co-founders provided something tangible --be it an idea, code, money, whatever-- to the new project, they deserve "their share". If they can't point to something tangible, they deserve nothing.
> Work with people you like and trust, and focus on
> building a product, not on what your "stake" is.
Sounds great, until there's money involved, and people have different opinions about what their holding should be. Shares and equity is the proper way of keeping up front and above board everyone's understanding of who owns what.
> We have laws in this country to prevent people
> from getting screwed.
Take it to court and only the lawyers win.
> It was only through the honesty of these other
> co-founders that they were able to steer away from
> real trouble.
No, it was working with people they like and trust, as you advocate, and having formal agreements about who owned what, that enabled them to understand the position and negotiate openly and cleanly.
> Those co-founders could have given up nothing
> had they so chosen.
Correct. Imagine, then, how much messier it would have been had those co-founders claimed that they owned 30% each.
>>I think startup politics generally reflects the power structure surrounding it; whether that be founders or investors that hold a relatively big stake in an organization, or the society surrounding it.
Its not about who holds power or has a bigger stake. Its just that people need to stick to the promises made and pay up as agreed. Beyond that its your usual economics.
Just because investors have put in the money its no reason for them or a senior executive who just joined the company and realized cheating developers on equity can help him earn another millions during the IPO, gets a chance to redefine what meritocracy according to him is. And its no reason, to suddenly consider all developer contribution useless without any merit to deserve stocks and that only some one with a Business designation next to their names are the only ones to deserve stock.
> Co-founders are supposed to have confidence in the business they built - if they don't, why should other investors?
But what's in it for the co-founder? Usually it's that they have lots of power over the company, e.g. being a CEO, and have more freedom than someone who still has to prove that they deserve that power. Jeff Bezos for example "only" owns 100 billion USD but controls a 800 billion USD company, with the freedom and power of a cofounder. After a certain amount of money, say 10 million, you can fulfill most of your dreams. And there are plenty of people who have that amount. But few can say they are in control of a 0.8 trillion dollar company.
As the other comments point out, Travis was kicked out though so he lost his power. So it's only understandable that he diversifies his portfolio.
Respectfully, I disagree to some extent on this point. It's always a good idea never to attack others. And ideally, you hope you'll never come under attack yourself. But if you do, you don't want it to take you by surprise.
Consider this quote from the article:
"'I think it’s easy for people to jump to the side of the founder against the big bad investor,' Mr. Blumberg said. 'But we’re all grownups and you sign the papers you sign.'"
This may come across as cold-blooded, but let's be honest, there's a grain of truth to it. Startups are every bit as political as BigCo, and in some cases, even moreso. Whenever we see these stories -- and maybe it's just the popular mythological portrayal of them -- we see them as heartbreaking tales of betrayal and shattered friendships. But perhaps they're better described as tales of political savvy vs. naivete -- of ruthlessness vs. innocence. The business world often rewards the former, and rarely graces the latter. Nice guys usually finish last.
It may be sad. It may not be right. It may not be the way we want things to be. And maybe there is a "better way" to be discovered. But, no matter the case, people can't afford to place unconditional trust in each other. When big money and influential outsiders enter into an equation, people's incentives change dramatically. Eyes should be kept open to that fact. Even if we don't assume people will, by necessity, turn on us at some point, we shouldn't rule it out. It's not that people are assholes; it's that the upper echelons of business are cutthroat, and people usually respond according to their economic incentives. As the co-founder of a small, early-stage company, you don't need to concern yourself with these things. But the second you've got a VP stripe, or especially the letter "C-" in your acronym, you've got a target on your back. You need to be mindful of it.
This doesn't excuse the nature of the game, but it does offer fair warning to any who'd play it. Keep stock of everyone else's hand. Know what cards they've got. Know how they may, or may not, be able to play them. Know what they stand to gain or lose by doing so, and the magnitude of that gain or loss.
There's no great excuse for being a dick, but there's equally litttle excuse for being a Polyanna. I would never advocate that we all actively seek to screw each other over. Rather, I'd suggest we keep our guard up -- especially around times of big organizational shift (new funding rounds, board changes, big new hires, etc.).
> I don't think it needs any justification, really
From a founder's perspective sure, you can do what's best for you.
That's not what this article is about. This article is highlighting that there's a tendency in SV for founders to cash out early, and secretly. And along with that, there's a tendency to paint a narrative that the founders haven't sold a share. It's hard to see that as anything other than deceptive.
It's one thing to join a startup that you know may not succeed in the long run. It's another to join a startup that has a founder whose been secretly cashing out along the way.
Justification does seem necessary in that second scenario, at least from a morality perspective.
"Their investors know that founders are integral to the company, and they want the founders to succeed."
You are always replaceable..even if you think you aren't. I know so many founders that gave up majority control and were kicked out of their own company and replaced by a VC-picked person.
A friend of mine hired the guy that ended up booting him out of the company 6 months later. The guy he hired removed all of his powers and then claimed that he couldn't manage the project any longer (after all of his powers were taken away of course).
To get his severance, he had to sign a piece of paper filled with complete lies about his performance.
People in business aren't nice and you need to do everything in your power to protect yourself.
This seems like a needlessly hard-line stance to me. It's not reasonable to think that "belief in one's company" is the only thing that will decide the success or failure of a startup, and wanting to hedge against the scenario where you pour your heart and soul into something for years, only to see it not pay off in the end, is very understandable.
> Maybe there's some reason why warrant owner matters.
It's a well understood fact by anyone in the startup world that it does matter, because future investors or acquirers care deeply about the structure of your cap table. Furthermore, the article gives an explicit example of this:
> She had lined up a grant from a bank to help fund her offer, but it ultimately told her no because it was too risky for them to be involved with an unknown warrant holder on her cap table.
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