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Investors will not see his 10% ownership as a red flag any more than they will see a non participating investor owning 25% of the business as a red flag. In this case, he/she delivered 18 months of value that led to a 1.5mm pre money val.

The most fair option is already mentioned - to maintain your 33% that makes all three of the founders equal as of today, and then allocate a new share allotment to dilute you out over a new specified vesting period.

If you want to show future investors good will, ask to maintain a seat on the board.

If i was an investor, i'd see it as a red flag indeed. I'd think: 'so this guy left the boat being a founder, giving up most of his share, so probably he knows that the company is going to tank and don't want to waste his time anymore, and he definitely knows a lot more about it than i could potentially know being an outside guy'.

Or you might think that he got in over his head and decided to step aside and let the other guys manage the business.

Still a huge red flag.

That rarely happens. In that case the incentive is actually to stay on, let your co-founders drive the value, and pocket the equity/$ for it. Easy money. Takes a rare breed to self-sacrifice for the good of the company.

It's more likely what annovikov said, the one leaving has serious doubts about the strategy but got out-voted.

What is the self-sacrifice in this case? You're trading "working to build a business to earn an equity-stake" for "free-riding on others' work to build said business to make your equity-stake more valuable."

Think of it as two separate companies: Startup A, which you co-founded, and which ended up dissolving, you seeing nothing for your efforts (other than whatever salary you managed to scrape out); and then, Startup B, which you bought a huge number of shares of for the amazing price of $0/share, and now get to smile as those shares appreciate, like any investor. It just so happens that Startup A and Startup B are the same company at different points in their life, but that shouldn't change your views toward the two situations.

This is a different question though.

This would be a red flag whether he accepted 33%, 10% or 5%.

The question is, is the flag "more red" if he has a higher percentage.

It's not just about the signaling, it's about very practical realities that come to light when you need to use that equity. If I were an investor and I saw 33% of shares with a former co-founder I'd walk immediately. If I were an investor that saw 33% of shares with a former co-founder and then 25% gone in an initial $500k raise I would run, not walk.

There's just not enough equity left to incentivize, create an options pool, hire, raise future rounds, etc. It is a Huge red flag, and the likelihood of success decreases dramatically.

I tried to raise once with 28% of the company being gone from our seed round, and it was a major, major concern. If this company ever needed to raise again, they'd be dead in the water. Therefore, the founder ends up with 33% of nothing instead of, say, 5-10% of something, and it's in his or her own best interest to take a smaller piece.

Now 5%? Maybe 10%? That stings, but at least it leaves the company something to work with.

You've done this, and I haven't. But I thought you just diluted every round - so that 28% would end up as 21% if you sold a further 25% of the company.

Yes there's dilution, but ~50% of the company being gone after a couple million dollars raised is not a good thing

I do a bit of angel investing and I would run not walk from any deal with a background like this. When the only people with any deep understanding of the business disagree flashing red sign number 1. When the company has 33% dead weight equity flashing red sign number 2.

> a non participating investor owning 25% of the business

That is absolutely a red flag. If someone owns 25% of the business, they better be working to grow, improve, or otherwise assist the business on a daily basis. If nothing else, out of self-preservation to protect and grow their investment.

If they're a 1% investor, that's a different story.

Curious how you'd evaluate a 25% (or even 10%) owner who is an Angel investor. They provided capital, perhaps some contacts, but is not actively engaged in growing the business?

Are they disaffected? Do they understand the usual trajectory and terms for Silicon Valley-style startups?

If it's 25% and the angel doesn't appear to have angel experience, you can bet that future investors are going to want to interview the angel!

I expect investors to fit in at least one of three buckets:

- understand the industry;

- understand the go to market/sales approach; or

- understand the current stage of the company and what it takes to move to the next.

And within each of those, they should have relationships, information, and strategies that accelerate the company in some way. It's not just a "look at my linked in and tell me who you'd like to meet" but a focused "I know A, B, and C who beat the problems that you're dealing with. let me get them right now and see if they can offer advice" and then a while later "Oh, you need X. I know a guy who does that. I'll get back to you."

What about (very wealthy) friends-and-family round investors, who understand the people involved but nothing else?

Then they shouldn't be anywhere near 25%.

As an investor I'd see one of the founders leaving a red flag, no matter what, maybe not a big one, but I'd certainly ask about it and step away if I don't find the explanation satisfactory.

Investors will see it as an issue because it limits the room on the cap table for future hires. Startup companies take a long time to build so that 10% will make it tough to hire and build a team over 7 years because there is only so much equity to go around. Investors have minimum ownership levels, hiring requires a certain amount of equity so there can be a motivation problem among the remaining team/founders.

Investors will likely push for a recapitalization to reset the cap table and remove the outstanding equity all together.

"Startup companies take a long time to build so that 10% will make it tough to hire and build a team over 7 years because there is only so much equity to go around."

Is it still generally the case that the entirety of the options pool for employees is well under 10% (more like 5%)? If that's the case, I get that it may be limiting for the investors, but hiring & building a team is pretty "cheap" from an options standpoint I believe.

What's the point of a vesting schedule and having an orderly way to exit if it would still not be acceptable? I think it's odd that people would have a problem with him owning a stake. Should he not be compensated for the work he has put in? He was awarded shares for his work presumably.

I would say he should stick to 12%. It's derived from an industry standard. VCs who have a problem with this are, pardon my french, greedy assholes.

actually it's "trous de cul gloutons".

actually, it's "trous du cul gloutons" ;)

It doesn't matter whether or not they're greedy assholes (it's probably safe to assume they are). It only matters whether they're willing to invest. So a red flag is a red flag.

There are plenty of places for handwaving and hope in startups already. The ownership status of a departed founder should not be one of them. That should be crystal clear.

Well, what you are essentially saying is that if you need money, VCs can and will make you dance to their tunes. That much has been confirmed by Parker Conrad himself, so I agree. It's not really a red flag since he could have a number of reasons for leaving that are not related to the business. But I guess a VC would use anything as an excuse to control and manipulate things.

This really puts a giant question mark on why anyone would bother with a non-CEO founding role. Startups are hard enough as it is, adding to it the potential of losing all your equity because you had a falling out with the CEO makes it almost not worth the trouble.

Engineers getting into partnerships with domineering business types should definitely watch out for this and evaluate their options. At least when you work for Microsoft and leave after 2 years, they cannot claw back what you earned over that period of time.

> ... adding to it the potential of losing all your equity because you had a falling out with the CEO makes it almost not worth the trouble.

That's why you set up terms up front. If, when they decided on a 33/33/33 split, they also decided on a vesting schedule, they wouldn't have this problem. The OP would get some percentage value based on math, from contract terms they all agreed to when they started.

Exactly. They should have had this worked out from the start, just in case. "Irreconcilable differences" isn't the only thing that can go awry, and a vesting schedule protects everyone.

If you're losing all your equity after over a year of work just because you had a falling-out with co-founders (or investors), you didn't do your homework.

You JUST said, that the terms won't matter, the vesting won't matter if you leave, since it is a red flag. You implied that "doing your homework" may not protect you, since even vested equity of an ex-cofounder might be frowned upon.

So which side are you arguing on?

>I would say he should stick to 12%. It's derived from an industry standard.

What exactly is this standard? Haven't heard it before. (serious question)

the 48 month vesting schedule described above (resulting in approx 12% figure) is a very typical vesting schedule. Industry standard might not be exactly the right term, but it's probably the most common default/boilerplate plan.

edit: from the parent:

A typical vesting agreement would have vested your stock over a 48-month period, so after 18 months you would have vested 33% x 18/48 = 12.375%

If the red flag is related to the founder leaving over a disagreement related to strategy, it sounds like it should be a red flag and be considered by an investor. Even ignoring the cap table issues making it harder to incentivize future employees.

Assuming that they're taking the high road and that the potential investor is well aware that a founder is leaving over a disagreement regarding strategy, which I sure hope they are, the investor is walking in with eyes open and is making a bet that the person leaving is incorrect. That seems to me to be perfectly reasonable.

If you want to be generous (as the person leaving) you can certainly offer to let the investor or co-founders buy you out at the same valuation the investor is getting.

If you want to be extremely generous and a little creative, you can ask for an amount of money that would make you feel you hadn't been cheated in exchange for all of your equity stake. After all, you disagree with their strategy, so perhaps you are skeptical that the equity is worth anything and would rather just get decent back-wages for the work you've done and wash your hands of it.

In that case, perhaps you can just ask for something like $200k for all of it and call it a day. If I disagreed enough with the company direction to leave, I might call that a huge win relative to putting in years more effort and eventually getting nothing at all out of it!

This is a big reason why YC requires founders to have vesting shares with a cliff (even as a solo founder!). Better to have some agreement than not, especially when cofounder disputes ruin many early startups.

Speaking from experience. You guys Need to find an agreement now. Do not keep any part of the company. It will not work in the long term. Things will get messy, and they will slowly build up a truth about you not giving (and never did) anything to the company.

You have to settle on some kind of amount. And then you can be flexible about the payment of the amount - it could be over 36 month or someting.

My experience was it took 3 years with layers, lost friendships - and in the end we enden exactly the same place - same amount and everything. I sold 50% of my stake right away, and should have keep the rest. Big mistake.

My recommendation would be to find an amount - yep - it's hard. But it will only get worse from now.

There is an alternative:

The investors buy up 99.99% of the company for $500k at a $1 premoney, and then give out 75% of the company to current management in order to incentivize them to stay.

I am using extreme numbers here to make the point, but current management almost always gets a carve out.

Interestingly, those numbers are the same order of magnitude cost of a coder for 18 months. That feels right to me, that you'd get ~$100k, and perhaps retain .5%, basically demoting yourself to a (fully vested) second gen hire, and moving on with your life. No investor would see that as "dead weight".