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This is the situation that shares were intended to solve. They're not perfect, they're not ideal, but they do at least provide a way of thinking about the problem. This is simplistic and intended to give you a point of view from which to reason about it. It's not the end of the story.

Let's suppose there are 100 shares, and you each own 25 of them. You can't think in terms of the effort you've put in so far. That's sunk money/time and you need not to think about it at all. You need to think about the value of the company/idea/project as it is now.

And that's right now, not in two years time. You don't know what it will be worth in two years time. Given that you've lost your enthusiasm, in your heart of hearts you must think it's not going to be worth much in the future. If you honestly, truly believed it was worth pursuing then you'd take a day or two off to recharge, and then get stuck in again.

But you want to hedge against the million-to-one chance that this will all take off without you. So value your expectation of the company's worth.

With 50% chance, you think it's worth nothing.

With 30% chance you think in two years it will pay the bills, but only just. Company worth - $100k

With 15% chance it will be a really good, on-going business. Company worth - $400k

With 4% chance it will soar and be worth $1m.

With 1% chance it will really take off and be worth $7m.

Is that how you see it? Change the figures to match.

That makes the expected value ofthe company:

    0.5*0 + 0.3*100k + 0.15*400k + 0.04*1000k + 0.01*7000
  = 0 + 30k + 60k + 40k + 70k
  = 200k

So your share at the moment, based on this belief, is currently worth $50k. Each share is worth $2k, and you have 25.

Tell me - would you sell me your holding for $50k? If you snapped my hand off, then that valuation is too big. Are you really sure you wouldn't sell it to me for $50k?

Honestly?

So you need to adjust those figures down. Honestly, how much would you take for your 25%?

Now you want to walk away and leave your colleagues to take all the risk. The point is, they will continue to put time, effort and money into the venture. As they do so, they should be compensated, but you shouldn't. So they need to put in X and receive newly minted shares in return. Yes, your holding gets diluted, but the value of the company should be going up. The value of your holding doesn't change, so long as they're getting linear returns for their further investment.

Suppose they all put in an additional $10k. The company will then be worth $230k. They should each receive 5 newly minted shares, so there are 115 shares issued. You now hold a smaller percentage of a larger valued company. You have done nothing, and the value of your share holding reflects that.

Suppose they all put in another 6 months of work. How much is that worth? Based on what's happened so far it's a quarter of the time spent so far, so they should each get an additional 6 shares.

And so on.

Their proportion of the pot is increasing because they are continuing to put more in.

Now here's the kicker. You can trade your shares with them. If your valuation of the company is greater than theirs, you can put money in, getting shares in return based on the mutually agreed valuation (splitting the difference). On the other hand, if you think the company is going down but they don't, you can offer to sell back you shares.

So here's the question again - what would it take for me to buy the 25% from you and have you walk away completely?

I would definitely bite at the chance to pull $50k so I think you're right - that valuation would be too high.

I could walk away for $10k. That puts the company valuation at $40k. Before we brought on the last 2 owners, we talked about creating a separate agreement between me and the original founder where he pays me $9k back over time if the company makes money. So I think the $40k valuation is a good place to start.

Sorry, but why are you adding the probabilities? They are not mutually exclusive.

If there is a 1% chance that the company hits $7M, it's value is $70k -- that's it. It would have achieved all the other milestones you mention.

That's only true if the other 99% of the time the company goes to the wall.

Take 100 companies and look at where they are in two years. 50 have gone to the wall, 40 end up worth $100k, and 10 end up worth $1m. The 100, in total, they are worth

  40*100k + 10*1,000k = 4,000k + 10,000k = 14,000k

The average value of the companies at the start is then 140k.

Now choose one of the companies. You don't know which it's going to be, but the expected value of the company you've chosen is 140k. The calculation I gave is the expected value, just as the "expectation" is computed in elementary probability. In the long run, you'll make 140k per company.

To compute the expected value, you find all the possibilities, compute the probability and value, multiply them, and add up the answer over all cases.

    expected_value = 0
    for case in possible_cases:

        prob = case.probability
        value = case.value
        expected_value += prob*value

or

    sum( [ case.probability * case.value for case in possible_outcome ] )

========

ADDED IN EDIT: If you seriously don't understand, and this doesn't help you, email me and we can work out where our understandings diverge, and pin down the calculation.

So first of all - you kind of want it all ways. You think its going to fail but you want a piece of the action "just in case".

First step - pick one.

If you think its going to fail and your partners are just wasting their time. Sign it all over them. Assign them the IP and walk away.

If on the other hand you think that while your involvement has come to an end - that they still have a chance then sit down with them. Get it setup in a form where you can have equity and agree what share of that equity you will have - but it sounds from the agreement you already have you have 25%. Sign over the IP to this entity (they won't be able to sell it or do anything if you don't do this - and you want to give them a fighting chance). If you still want to be an advisor or they do - then that is your choice. The net result of all this is that you will be a shareholder with your investment being the work that you did.

A Note on amount of equity: You have put two years work in at the riskiest part of the game (at the very start when everything is unknown). They might want to argue you down a bit because it's still very high risk - and that would probably be fair - but I would say that's their call if they want to go down that road. Ask yourself if they would have any chance going forward without those 2 years work.

I think you also need a valuation for the company so that as they continue to put money in (and assuming you will not) you know how much you should get diluted by.

Yes. Sorry was assuming all that.

You do need to become an investible entity which involves a valuation , cap tables and all that nonsense.

We needed to do this early on as well - because we had some early people who we paid in stock and not all of which worked out for one reason or another. Its a pain at first but to be honest it also brings a bit of rigor and discipline to the company as well.

Any care to explain or post a link to an explanation of what a cap table is?

I'm seriously wondering what is up with the voting the last couple of weeks. This is a genuine question, asking for an explanation of a term that I don't know. Why would anyone vote this down? Is there a 'basic knowledge' rule I violated here?

(sorry about asking about downvotes for the second time in two days - I'm just wondering what changes I need to make to my posting to not annoy people so that they don't have to vote me down).

Well I didn't find it annoying.

So basically the cap table is a spreadsheet of who has what percentages of equity (and numbers of shares) in the company and then for any given dilution event (typically investment) shows how your percentages will change - and being a spreadsheet obviously you can play with the values to understand how things change.

So it lets you model how investment alters your share holding. It lets incoming investors understand the share structure of the company (and who holds power etc) and ours has a couple of columns of what we might earn at given exit values - this is kind of incentivising but its also useful once you start talking about preference shares and multipliers. It is also a useful tool when negotiating on an investment because you can see what the implications are - for example say an investor was asking for 2% more - you might be able to see that it hardly makes any difference and isn't worth arguing about - or it might be absolutely critical.

Investors seem to want to see this as well.

Thank you.

No one is sure about sticking it out with this company and I doubt any of the owners would want to put the time and money into becoming an investible entity. Without becoming an investible entity, I have no guarantee that I will receive anything - other than the written contract we sign, right?

Indeed.

If you can't even get it into an investible entity then i'd just walk away. Sure there is a slight risk what sounds like a miracle will happen but it doesn't sound like the others have the enegy to do this. You don't get to make a successful company without comitment.

Chalk it up to experience.

If you think it's going to fail, just call it a day and walk away, signing everything over to them. 25% of nothing, is nothing so it's not like you'll loose anything.

If you don't think it's going to fail, take a week off, get your shit together and get back in the game.

I think with enough determination the current owners could pivot into something that makes money. They would be building on top of the branding, website and traffic that I put time into building.

Maybe it's not a question of if it will fail or not, it's a question of how long and how many pivots until the company becomes profitable?

I just don't want to stick around for the pivots. It would be nice to get something in return if the company eventually becomes successful. Am I being too unreasonable in wanting something if - and only if - the company starts making money if what I helped build enabled the team to get to that point?

Figure out what you want for your stake, ask the other party(s) to do the same.

Whoever offers the highest valuation for their own shares gets to buy the other party out at that same valuation.

Simple.

Keep in mind that if you have 25% of the stock now, it's very unlikely you'll get 25% of any purchase, if there is one. The buyer will direct most of the deal toward earn-out for employees they want to retain, and try to minimize money that goes to shareholders. It's also easy to dilute minority shareholders over time, e.g., by giving currently employed founders big option packages. Generally speaking, common shares owned by a founder no longer active in the company are seldom worth anything, unless the company is a major success.

On the other hand, given that the company hasn't really succeeded so far, it's not clear that your efforts to date are worth all that much. If the company goes forward, the real value creation is still in its future. So you're not really being screwed over, you're getting fair value for what you've done. The tough part is recognizing that even though you've put in a lot of effort, and invested a lot of emotion, the results so far just aren't worth that much. You sort of recognize that by walking away. But now you want a share of what the other founders create in the future, which isn't fair. You only deserve a piece of what's been created so far, and by your own description, it doesn't sound like that is very much. You can't have it both ways.

Great points about the buy-out and non-active founders shares.

I'm not trying to ask for a piece of what they create in the future. If the company makes money, I'd like to get paid back for the platform that I helped build which enabled them to get to the point where they are making money. Do I deserve to ask for that?

You mention burned out. Could you not take a break away for bit? You also mentioned you spent a considerable amount of time building the base, thus I'm assuming you have put in more time and effort than the others. Why not try and take a week or a month away (either doing something else or vacation) and see if you feel any different? You will get a chance to think and solidify your decision to leave.

Could you maybe change roles in the company? Do something that brings back the energy you once had towards it?

However, by the tone in your first 2 sentences it might be too late. It sounds like you have already made the decision to leave and do not believe in the company at all. In which case, the others might not even want you there anymore anyway and I can't blame them.

It's more than just being burned out. I don't believe the owners are good co-founders. This was my first venture into entrepreneurship. I think there's local value in the brand and potential for it to transform into something profitable. I think it would take another 6-12 months to find something profitable before everyone gives up on it. My problem is I don't want to wait that long.

Here's a simple fair way, if you can get everyone to agree.

Forget about the sole proprietorship. Pretend you all vested your stock over a traditional 4/1 vesting schedule. Go back and figure out what you've already vested - keep that and move on. (so if you've put in 2 years, you get 12.5% of the common).

The company should pay for this legal work, because it's something that should have been done a long time ago. Getting this right is in the company's interest as much, if not more than, your own.

I would just say finalize the equity. Give what is owed to the rest or your partners. Stay on as board of director role, or advisor. Theres no reason for you to just give up completely .. why not just work on a new project you have on the side to avoid burn out. A lot of times for us developers we think more features will bring more customers.. but I think its up to your partners to go out and sell the crap out of the product, and you should be given some relax time.

I'm already working on many other projects outside the scope of this company. Everyone is putting money into the company to keep it going right now. They don't think it's fair - and rightfully so - that they keep paying while I stop paying and reap the future benefits if any.

Are you suggesting I step back and be just an advisor still? Also, if I did step back and they decide to take out a loan in the company's name, wouldn't I be responsible for a portion of that loan even if I didn't know about it?

Why don't you agree on a dilution scheme where the more money they put in, the less of it you own?

For example you could agree that everyone gets X shares of stock. Agree on how the company is currently valued, and how it will be revalued going forward, and allow money to be put in by purchasing additional stock. (You could also reward effort put into the company going forward with even more stock.)

If all shares are equal, your ownership interest will naturally diminish over time.

Whatever you agree to, get a lawyer to make it official.

Ask them to assess when they think the startup will be profitable, considering everything invested to date, then reproportion your equity accordingly. So if each of you have 25%, the consensus is 2 years to profitability, and you spent 2 years there already, then you should agree to reduce your share to 12.5%, splitting the other 12.5% between the remaining 3 founders. You can also offer to play an advisory role for a bit more.

This seems like the right split. Also the founders would have the capacity to issue more shares - so if it takes longer than 4 years then they can issue stocks to whoever sticks around after that.

The most important factor is what stage the company is at. Since the company is doing very badly and will likely fail you deserve very little credit if it doesn't. You do deserve something though. I'd say around 5% would be fair. That assumes you will act in good faith to hand over any IP assignments necessary, etc.

If I were one of the remaining founders I would offer you the following scheme: 1) Make evaluation of the company asap(say 0.5mln). 2) Define your share as fixed amount (say 125K), as you leave and don't put any more efforts for company to survive, contrary to other founders. Your shares and IP goes to company. 3) In case company gets funded/profitable, you'll get your 125K+inflation. If not - not. That would be fair, IMO.

Ask HN: Leaving a startup that I co-own - How should I be compensated?