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Comment by nealbozeman | Hacker News Reader

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.

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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'.

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

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

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.

Still a huge red flag.

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.

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%.

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.

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.

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