The right way to have handled this would have been to have founder vesting with your co-founder, so that if he checked out (as he seems to have) leaving you to do all the work, you would have stopped the clock on his getting additional stock.
In the absence of that, however, he should still be amenable to a negotiated price, perhaps leaving some upside in play for him. Similarly, your investor should be interested in setting up a favorable dynamic whereby you have enough stock to be incentivized to continue to help the company succeed.
A typical way to do this if the co-founder is unwilling to sell all or part of his stake outright is for the new investor to dilute everyone, and then "re-up" the key players (ie you). You will need voting control of the company you can effect this.
Next time start with vesting (which a lot of people are mentioning) so that the other founders continue to earn shares and dilute the departed co-founder's stake over time. Ideally, founder ownership in the company is compensation in lieu of (or in addition to a meager) salary.
The founders who stay on board might try to dilute the departed co-founder's stake to nothing. Mark Zuckerberg did this to Eduardo Saverin. As a minority shareholder, you have to pay attention to the evolving cap table.
Say he does sign the vesting agreement. Things are going well, but you've taken on more investment, and those investors insist you drop the cofounder hours before his vesting begins, even though he's been a good contributor.
It's a cheap way to enhance their equity position, and now that the company's survived to infancy, the cofounder's large looming equity stake is a liability.
This doesn't always happen, but it does happen sometimes.
Consider a shotgun clause instead of, or in addition to, vesting (strictly for founders).
Also consider voting structures that disproportionately favor founders, so that he can't get voted off the island even if he's not financially vested. I don't know your situation exactly but this sounds like a struggle of control rather than wealth.
Disclosure, I have no specialized knowledge or experience.
I wonder if he's already worked a deal with the investor? If he's offering the investor half of your stake to push you out (for example), you might be able to turn the tables and offer the investor 3/4 of his stake (or all of it) to push him out. This depends on your ability to have a frank conversation with the investor and their faith that you can continue to drive the company. If that's the case it also means the investor is probably toxic which doesn't bode well for the future relationship but it might at least prevent your co-founder from getting away with this.
I think the parent's advice wasn't to screw over the company, but just to approach it from the legal standpoint first. It sounds like his co-founders don't believe he's entitled to his 1/3 share, even though he is. So start from a position of strength (which he already legally has), and then work down from there:
"Hey you two, the fact of the matter is that I own 1/3 of the company outright. We didn't start off with a vesting schedule or anything else that would change that. Dwelling on that isn't helpful. I may be leaving, but I do want this company to succeed; my owning 1/3 of something that fails doesn't help me or anybody. I get that 1/3 of the company belonging to a non-participating founder will look bad to investors. However, I've put in just as much work as you two have up to this point, so I'm not just going to walk away empty-handed."
At this point it's just about good faith negotiation:
"I'm willing to let you guys buy me out of all or part of my stake. What do you think is a fair offer?"
All that being said, it is a shame that there was no vesting schedule set up in the beginning, so it might make sense for the OP and co-founders to essentially retroactively make one up, and, if they can all agree to it, all be subject to it. The OP will be giving up some of his shares, and the other two cofounders will feel an incentive to stay and work hard to ensure they vest as well.
I think the op mentioned that the investor wants a majority stake. Otherwise, I agree assuming that you know your co-founder well enough that s/he dose not collude with the investor to oust you.
The hazy picture I get is that you are a hustler and surrounded yourself with (as you say) risk averse employees. You made one of those employees a "co-founder" to lock him in? But he doesn't have your hustle mindset. Maybe never will.
The simple, but not easy, option is to take back the shares and let him go. Trying to harangue him to stay is only going to make things even messier down the track.
So the right thing by your investors and employees - keep running the business. Perhaps one of the remaining employees could step up to be the team leader - but only as an employee.
By definition a co-founder should be on equal terms with the other co-founder. As co-founders you share the product/service vision and have compatible attitudes to risk, finances, etc. You just cannot promote an employee to co-founder.
A hypothetical situation: A cofounder has not put in much effort not doing much work other than showing up in meetings. But he is not "quitting", meaning he is hanging onto the shares he already owned and is going to own (vest) in the future. So you, the other founder, is effectively working for him. How do you handle this situation?
I would like to disagree a bit. Resolving disagreements between co-founders I tricky.
I would request OP to assume good intent and ask the following question.
> What are you giving me in return of my 40% of the stock ? Why is that a fair price ?
I do not know, but it is perfectly possible that the other person might have a good answer. If you have already made up your plan you guys can agree on some kind of plan where you divest your stock over a period in one way to another.
I have a suspicion that the other co-founder probably does not want OP around for whatever reason. But OP can help him by simply taking a break while keeping the stock.
Well of course he is going to put in less effort than you, because he only has 1/4 of the shares that you do.
Next time when you permanently give shares upfront (no vesting period) be very sure what you are getting into and even consider formalizing the nature of the relationship and the level of expectation in exchange for those shares in writing (very least in email)
I think the best you can do is have a constructive but frank discusaion with the co-founder.
Asking him if he would be willing to come to arrangement to part ways but reconsider (at least part) of his shareholding since he will no longer be participating and you will need to replace him.
You could also try to get at the bottom of his lack of motivation (though is motivation is missing its not something that you can give to someone else)-
Rather try to figure out of this is a temporary slump, or a long term "new normal".
Also find out if something has changed in his life circumstances making it harder or less ideal to make time for the startup.
Once you have the facts, then at least you guys have a basis for an honest discussion.
The co-founder did contribute and owns part of the company. Unclear how much exactly but unless he gives up his share (for free, or you pay him out) there will always be a good case to be made he owns part of future profits as well. There's no easy way to force a solution. I'd even argue without both agreeing how many shares each founders have it's 50:50. And with 50:50 one founder can completely block any decision. I've heard of companies that had to go bankrupt as one founder blocked everything.
In my opinion legal treats won't work, and you should be prepared for months of uncertainty. I'd try to clarify ownership, e.g. "You prefer not to contribute, I suggest you keep 20% of shares in exchange for x USD". The lower both numbers are the better for you of course.
Better to have a clean break. If appropriate the shares can be bought out so that the "co-founder" does receive some compensation for the vested value. Let him leave and do his next thing.
Go get any reasonable SV lawyer to have him sign back his stock to the company and then cancel the shares. You can make him an advisor and give him a grant to recognize him for his early efforts.
You will need all the equity you can as you build your company and being nice now giving a big chunk to a non-participating founder will make you bitter later.
If you don't think it will, then let him keep his ~25% vested. He'll be diluted, just like you and everyone else as you raise more.
If you've been on Hacker News long enough, it should have been pounded into your head by now that idea means jack squat in the long run. I've been in this situation now a few times to know now that a vesting agreement is key. Do you have that?
Having cofounders is a touchy subject and any problems arising between you two now is pretty much a guarantee that it will destroy the company in the future. If everything has already been signed and there are no vesting agreements in place, the only way to do this is to buy out your co-founder to avoid any future legal issues. Or you could dilute your co-founder as you bring on outside investment (e.g. Facebook). Either way, there will be some emotion involved. I would shoot for buying out your co-founder in some way, perhaps with a loan of some sort. It's the cleanest and most quickfire solution, especially with you so invested in it. Of course, this is highly dependent on the assumption that you are passionate about what the company is doing and that there is still a great opportunity here.
Props to you though on choosing to deal with the situation now rather than later. Good luck!
Just because your co-founder just now feels like "working on it alone" doesn't give him/her the right to force you out, specially if he or she doesn't have any leverage (as you say, the investor is remaining neutral). So what is preventing you from just saying "no, thanks, I'll keep my 40% and keep working on this". What would he/she do, then?
First of all, I'm assuming that you've already discussed the issue with him? found out why he isn't pulling his weight, etc. You may be able to fix the issue without letting him go.
This is the reason for vesting ownership shares, so that the people earn their shares over time, rather than all being divided up at the beginning.
I had a similar issue with a friend I brought on as co-founder. Thankfully he was 'stolen' away by another company, so that resolved the issue of his involvement, and I very candidly brought up the issue of ownership ,as he was around for such a short period of time, and we hadn't reached enough milestones to match the value of the amount he would have owned via the vested ownership.
We worked out a smaller percentage which we both thought was more fair based on what he had accomplished in his short time.
If this guys head/heart were and are in the right place, he'll want to work with you on what is best for the company. If not, then you may have to get some legal advise.
But I would first talk to him about the issues, and see if the team can resolve it.
It all depends on what's on paper and what's been agreed to thus far.
Assuming nothing's on paper, here's what I would do: Set up a corporation (yes, get that lawyer), allocate something to the cofounder (even 50%), but make the total number of shares small, and keep voting rights enough to dilute out the cofounder by issuing additional shares no matter how they vote. Add in for yourself and other hangers-on additional equity based on time worked from this point forward, with industry-standard vesting.
You can also fold in an acquisition: Start new company, all the old company's assets are valued at X and you proportionally issue Y nonvoting shares in the new company to all the old shareholders (where Y is a small percentage of the total). Cofounder must either sign off or be outvoted at old company, or else you're stuck.
Crackpots always think that their work begins and ends before a product gets traction (even many prodigious successful businesspeople lean this way until they learn by succeeding) when the truth of the matter is that the work is much more back-loaded than it seems.
If you hired a general contractor to build a house, and he left it 50% done, lots of times you'd have to pay more to get it completed than if you'd never hired him at all. This is the wicket your cofounder has left you in by leaving when things are just getting interesting.
This is what I, taking into account my personal situation of course, would do:
- Make it clear to the co-founder that the business will be between much more likely and 100% likely to shut down if they maintain this complaint. While this seems like it's showing them the power they have, it's much more important to show them how fragile the value of any shares they have are.
- Make an offer between the original offer and 100% vesting. Make it cash heavy if you can, possibly contingent on funding. Make this offer exploding - they need to decide within 1 week and if they don't, you will pull everything except what you feel legally required to put on the table (the vested stock only, no benefits, no severance) and fight this.
This will drag on and kill your company if you let it, and settling could work. If settling doesn't work, you're in a new position, but you need to get this in a position where it will be resolved or not resolved quickly. Then you will know what you're dealing with more clearly, but you are not left with the binary choice you think you are.
In the absence of that, however, he should still be amenable to a negotiated price, perhaps leaving some upside in play for him. Similarly, your investor should be interested in setting up a favorable dynamic whereby you have enough stock to be incentivized to continue to help the company succeed.
A typical way to do this if the co-founder is unwilling to sell all or part of his stake outright is for the new investor to dilute everyone, and then "re-up" the key players (ie you). You will need voting control of the company you can effect this.
reply