Ask HN: Co-founder wants me to leave but won't entertain a buy out offer | Hacker News Reader

Ask HN: Co-founder wants me to leave but won't entertain a buy out offer

399 pointsfortydegrees413 comments

I'm the technical co-founder of a pre-revenue startup. We were 51/49% to them and took a small round of pre-seed funding (~$100k) so our cap table is approx 40% for me and co-founder, 10% option pool and 10% investor. We have very standard shareholder agreements for 4yr reverse vesting with 1yr cliff.

My (non-technical) co-founder spent $10k to create the initial website over a year ago with the idea. I joined about 11 months ago and since then the idea has changed a bit, we've built loads of products, grown from 2k users to 60k users and continuing to grow due to dominating SEO for our niche.

Recently my co-founder said they wanted to work on it themselves. I said I didn't want to leave. They suggested I go down to 3% equity and they continue. I said they would need to buy out my equity at a fair price.

My co-founder doesn't have the money, and the business only has around $40k cash in the bank right now. My co-founder also won't entertain the idea of raising external money to buy me out, or monetizing the site right now.

To me this seems ridiculous as I'm literally just giving away my equity after spending 11 months building the tech and growing the business. Right now if we stuck adsense on the site, we'd generate $5k/mo, and we have inbound sales leads looking to spend upwards of $40k with us. Basically, the business is primed to make money.

They will not entertain the idea of me buying them out for cash.

What are my options here? It's basically being presented to me as "Take the 3% otherwise you'll own 40% of nothing". I don't really want any equity in the company at this point if I'm not involved.

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It sounds like you own 40% of something fairly valuable and now that it's 11 months into your contract other founder who needed your help is getting greedy and trying to push you out before you are owed anything.

You said it yourself, you've grown hugely, you're dominating SEO since you joined, and built loads of products. This is your 'partner' getting greedy after you've done a lot of hard work. It wouldn't have happened without you. Don't undersell yourself.

Your 40% is worth $400k based on that initial funding valuation, right? Assuming it's as successful as you seem to be implying, it is almost certainly worth more now.

Everyone is telling you to roll over but seriously, fuck them. This other toxic guy is the one who should be getting pushed out, not you.

The other investor ultimately has power in this situation, not you or him, so whoever convinces them that they are the person to go with gets the seat and gets to continue with the project.

If he has a good relationship there you're probably fucked, but results matter... and if you can prove you've done great stuff since joining and and have great plans for the future, he can be replaced.

To be clear: this guy has decided to blow up the project so he can get a bigger share, if it all fails now he can only blame himself.

Yeah - I don't see how people can tell them to just give up.

Go scorched earth - what do you have to lose? Know the other guy is hostile and don't trust them to do the right thing. Consider your options outside of that and talk it over with the other investor.

If you're the technical cofounder here you're probably in a stronger position to negotiate.

If you can get the other investor to see what's happening here (your cofounder pushing you out one month before the cliff after you've helped to build things up) you may be able to get them on your side.

As I see it without knowing details:

- Either your contributions are real and your cofounder is a miserable person trying to screw you out of it and risking the company in order to do that.

- Or you haven't done anything substantial and the cofounder wants you out. Even in this case it's still wrong of them to do this one month before vesting (and the way they're approaching it sounds dishonest, they should be direct).

If it's truly the former I think getting the third investor to understand this is key, if the non-technical cofounder is risking the entire business at this stage they're going to be bad going forward - you probably need to get rid of them.

If it's the latter (which seems unlikely since the other cofounder is non-technical) you'll still want to negotiate a reasonable exit, but it may be harder to do so (and you'll probably need a lawyer).

People keep saying this person has nothing to lose, but that's obviously not true. I think comments like these are mostly based on we, as a "technical cofounder" cheering section, want to see happen in the world. What's important about that is that the outcome for this particular person is an externality to us. If the whole company blows up and all equity is worth zero, that's great for the cheering section, even if it's obviously worse for the technical cofounder.

This advice will almost certainly result in no deal and leave all parties worse off.

Instead, I would have an open, honest conversation, listen from a place of empathy and generosity and seek a compromise.

The truth is, unless your cofounder has the right to terminate your employment, then continue working and try to create as much harmony as possible.

Co-founder disputes are awful and usually result in the death of the company. But being aggressive will only speed up the Demise not prevent it, and if the company implodes that equity is worth nothing anyway.

Not clear who actually owns the equity outright. If its the OP, based on what's written and nothing more it sounds like a racket the non-technical founders are running. I personally would identify the laziest path for you to exercise your rights to extinguish the entire venture, ideally with counsel, and then tell the other people what you've decided to do, let them name their price.

If things roll your way, maybe you resurrect the business later buying its assets out of bankruptcy. Either way, think lazy; this looks like a scam for your time; the more you put into it at any price, the worse off you are.

It actually sounds like the co-founder knows what he/she's about, and could potentially restart a competitive offering quickly enough. In which case bringing about the demise of the initial now toxic partnership is also an option.

Whatever the root reason this is now conflict over control. Therefore you need to know your legal contractual options and obligations and his plus whatever poison pills or repercussions for out of contract behavior. Who owns the IP is key. What is that? No need to necessarily write here but to bolster your resolve. Now if the contract allows bad actors without downside risk ... There are no good answers except experience. Watch out for attrition by tying you up on legal fees. But then call BS on him not having buyout proceeds. Finally, maybe you need to press him and not let him set the context. Saying no is but one play his side. You can put him in a box too All this assumes an adversarial process. Good luck to you.

> Your 40% is worth $400k based on that initial funding valuation, right?

One quibble. That is typically not how it works, since his shares are likely common stock and investors get preferred stock. In my experience, the range of value for common stock in private firms varies widely, but it is never one to one with preferred stock (the golden rule being, of course, "who has the money makes the rules").

I have seen values ranging from 10% to 30% of the preferred stock price. Now, of course, I only have a few data points, so ymmv, but founders shouldn't delude themselves that their sweat equity is valued the same as preferred stock.

Where are you getting the idea that the tech co-founder (TCF) owns "40% of something fairly valuable"? It seems the TCF currently owns 0%, and will go to ~10% (25% of 40%) if they don't get laid off/fired in the next month.

It's not clear the other founder actually owns any more than TCF does. What makes you think TCF can be so easily pushed out or that the other founder has significantly more leverage? It isn't clear to me that they have different deals.

Honestly, if non-technical thought he could fire this guy, he probably would have already. That's why TCF is being bullied into resigning.

What is non-technical going to tell the investors when he fires the guy who keeps everything running, built everything, and did all the SEO?

Think of it this way, take the deal and you get 3% of nothing because it'll get driven into the ground.

Don't take the deal and either you keep working on it, and get 40+% of something decent, or you get N% of nothing because other guy drives it into the ground but you got a better buyout.

There's very little downside for TCF in actually sticking to his guns, and it's not like he's going to look like the asshole here.

> I'm the technical co-founder of a pre-revenue startup. We were 51/49% to them and took a small round of pre-seed funding (~$100k) so our cap table is approx 40% for me and co-founder, 10% option pool and 10% investor. We have very standard shareholder agreements for 4yr reverse vesting with 1yr cliff.

Note the “reverse vesting” bit, this caught me out too. This is not the standard employee “you have zero until your 1yr cliff” deal, it’s the opposite in some sense, the founders own their shares unless they leave, in which case they are clawed back, and the clawed back amount goes by the 4yr period.

In this case if the investor has voting rights, neither founder has a controlling share, and the investor is the tiebreaker. So OP can fire the other founder with the investor’s vote.

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.

Do NOT sell. keep 40% of nothing, matter of pride first and for all. Secondly, they are more than likely bluffing. They don't want to put advertising that would generate 5k/mo means they are trying to make things look artificially worse so you leave and keep the rest for themselves.

Don't fall for the 40% of nothing once you are close of making money. They just don't want to share the pie.

If it really were 40 percent of nothing, the other party wouldn't want it so bad ;-)

This. 100% this. No sell, no deal, that’s not in the contract...

Try turning the tables and offering them a buyout.

>the other party wouldn't want it so bad ;-)

Value to a founder does not imply value to the market.

I’ll just add: write down everything. Guy is trying to run a bait and switch on you and there’s a very good chance this ends up in court. Be ready.

OP make sure you do this, it is incredibly important. I was in a similar situation with a real dick of a co-founder who constantly pulled these bait and switch tactics. I would even go so far as to write down behaviors they exhibit and times where they tried to strong arm you in the past. Keep logs of everything, insist on communicating through means by which you can record the conversation. Writing things down may not stop their behavior, but it will seriously help your case should this turn into a legal fight.

I'd say audio-record everything if your state allows one-party consent.

https://www.mwl-law.com/wp-content/uploads/2018/02/RECORDING...

Hmm... a few objective points here:

- If OP keeps 40% and doesn't do work for the company, the company is highly unlikely to succeed. The company needs to be able to dish out equity to future employees and likely investors to succeed, and having 40% locked up in an entity that doesn't do anything for the company is not going to be attractive to those future participants.

- If OP keeps any equity, they should be doing it with the hope that the company succeeds, so that the equity will be worth something. Don't keep equity to spite your co-founder. It's not going to benefit you in any way if that causes the company to fail and your equity ends up being worth $0.

- If OP wants a fully cash deal, it's not realistic if the other co-founder doesn't have a ton of personal cash (most don't). Raising a round to buy out a co-founder at 40% of valuation isn't something ANY investor is going to want to do. That's almost half of an investment thrown in the trash, from their perspective, and they'd probably rather invest in a less complicated competitor.

- It sounds like the human relationship between OP and co-founder is broken and it is not worth pursuing working together, as that alone would likely lead to the failure of the company even if everything else works out.

That said, my thoughts would be:

(a) Stall for a month to get to the cliff so you have slightly more leverage.

(b) Work out a deal where you're not keeping that much equity, but you're keeping an amount such that the company is still bound for success, and that your smaller amount will actually be worth something. Owning 40% of $0 is still $0. Owning maybe 5% of $1 billion is something.

Good analysis. It sounds in principle that for OP there isn't really much options to win big, sometimes that happens in startup land - mentally it is good idea to admit that this project wasn't personally very successful and start thinking about next moves.

Most important here, I think, is to act in polite and professional manner. It is not uncommon in these situations for everyone to lose because things get personal. Just try to find some kind of deal where you are likely to get some value.

Vesting schedule means he has 0% right now, 10% in a month, and then 1/48th of 40% every month thereafter.

The OP said it was a 4yr reverse vesting schedule and that they currently owned 40%.

Agreed. And also: if you give up that 40% then for sure there will be a play to give up the rest.

The founder and investor can fire him and easily dilute him down to 3% without violating any agreement. He’s got zero leverage here unless his agreement had anti dilution protections.

I am not a lawyer, but...

Dilution of the sort you seem to be describing would expose the founder and investor to a minority oppression lawsuit from OP which could result in monetary damages, and/or the forced sale of all or part of the company at a price determined by the court.

You can't just dilute people without there being any consequences, unless the new shares are being sold at a justifiable price and at an arm's length. The attempts made so far by the founder to push out the OP would color any future dilution, making it harder to justify that dilution in court, even if on the surface it appears legitimate.

If the shares are not sold to a third-party arms-length investor, OP would have to be given the opportunity to participate in the share issuance on a proportional basis. If the founder and investor conspire to issue shares to themselves with the sole purpose of diluting OP, not only would that dilution possibly be reversed in court, but further sanctions could be imposed on the founder and investor as well.

What if the other party switches activity over a new company in the meantime?

Since you have a 1-year cliff and have only been there 11 months, sounds like as of today you have 0% equity. So the immediate question may be whether your co-founder can fire you.

In 1 month, you've vested 25% of your grant, or 10% of the company. So I would try to get to that mark to strengthen your negotiating position. Any references to 40% are red herrings at this point.

Unless there's a specific buyback clause in your stakeholder agreement, they're under no obligation to buy you out at any time. (They may have the right to do so. That's not uncommon.)

Of course, you're under no obligation to resign, either. So this is a negotiation.

So the way I see it, you have a few options:

1. You take your 10% and leave. You "don't want any equity", but better something you don't want than nothing.

2. You agree to a buyback, potentially at a discount to FMV. If you don't know what FMV is, it's hard to negotiate one way or another. It's v. likely not $1M. Sounds like this is a no-go.

2B. You agree to a non-cash buyback, e.g., in IP. You spent 11 months building the tech: what if you took that with you?

3. You flip the script and buy your co-founder out.

In any case, your relationship is over. You might walk away with nothing.

10% might be a good target from another perspective -- the investor put in 100k to get to 10% -- is that about how much "sweat-equity" that the OP has put in? Alternatively, just pretend the vesting was happening monthly.. how much is that 9.16%? The surviving founder does need enough incentive to continue. The OP should make sure it is hard equity of the same class as the investor's shares, where there are tax liability distributions and other preferences. If the OP is before the vesting cliff and your co-founder is fixated 4%, then perhaps think about the balance as unpaid sweat equity, disbursed as deferred compensation at a reasonable interest rate, as a percentage of revenue, to be paid off before co-founder raises their owner draw? Critically, the OP should assume best intents and look for win-win situations. Finally, seek competent legal advice!

I think people should be careful with the "seek legal advice" thing. Obviously, you need to talk to a lawyer. But:

(a) You need a lawyer who deals with this kind of stuff regularly and has a realistic and well-informed view of what the outcomes are going to be. Most lawyers aren't like this.

(b) Legal gets expensive very fast, especially as it transitions from advice to negotiation and document review. At this scale of opportunity (the way the company is described), I'd stick to get getting advice!

(c) Past the "can I be fired" question, which I agree is urgent (and probably predictable), a lot of the negotiation here isn't going to be about the law so much as it's going to be about what both sides are willing to accept. If you have friends who have been in founder disputes like this, their input is going to be just as valuable as the lawyer's.

> the investor put in 100k to get to 10% -- is that about how much "sweat-equity" that the OP has put in

Another way to look at it: their sweat equity is more like $1 million e.g. $100k “time” invested with a risk of success of 1 in 10 means you need to get $1 million out to be “even” (ignoring Kelly Criterion).

Obviously there is some Bayesian that goes on now that there is more information, but it seems like it has a better chance of success than when it started, which makes numbers more difficult to calculate than complete failure ($0).

Can I give you some advice that really sucks?

Walk away. It's not fair, but starting a company isn't like getting a job. It's a relationship and a risk that doesn't always work out. Sometimes you find more money and success than you could ever dream of, and other times you waste 11 months.

Here's my thought process. You and your cofounder aren't going to be able to work together after this. The company has no money and no value, so you're trying to get your portion of something that doesn't exist. Them raising money to pay you just kills their chance at ever being successful... plus, who would give a company money just to pay someone out? Same goes for accelerating vesting on the 40%... there's no way they can build a company when someone not involved owns a huge stake.

You could spend time and money trying to right this injustice. And yeah, it is an injustice. But the worst thing you can do is tie your identity to this. There's not much upside to fighting it; all you'll do is spend more time, money and energy you could be using to start something new.

I've had this happen to me before, so I completely understand what it's like. You feel helpless and shitty and like you wasted a ton of time. Rather, do your best to put it behind you, and focus on what benefits you got out of it.

Did you learn about a new space that will make you extra valuable to another company? Even just having a founder mentality will raise your value to a startup. Did you learn things you would do differently? You can start another company, and do it better this time.

I know it sucks. But I'm 99% confident you won't get anything out of this, so it's best to just walk away. It's cheesy, but "success is the best revenge." Your relationship with this company failed, but you haven't. Don't tie your personal journey to this one company.

Good luck, and my emails in my profile if you want to talk!

(Also, a few years ago I wrote about going through it: https://medium.com/@gkoberger/five-years-time-6a6ae1157a66)

I am not a founder but this does not seem like sound advice. In a month, that 3% pittance becomes 10%. Also, it does not seem that the company has no value at all, if it is primed to make money. The extrinsic value on the 40% is worth negotiating over and not giving it up and walking away. Nobody should do that unless there is gross misconduct or negligence involved.

I’m spitballing here but maybe a middle ground is to convert some percentage of shares to equivalent to the seed investor shares. Assume, for the sake of argument, he was at one year and due 10%. Convert those share to the same terms as the seed investors.

No cash upfront, equity is somewhat preserved and the rest becomes a source of potentially passive income.

Note. He has to leave. The situation is now untenable.

Unless his agreement has anti-dilution, or a favorable termination clause, the Technical founder owns nothing. The investor & founder can fire him/her, then dilute their vested shares to 3%, 1%, or even less.

Meanwhile, at most the company can generate $5K a month in revenues. That’s not a business, that’s a part time job with a partner you cannot trust.

Potential worth != real money in the bank.

Also, seen from the other side: They made a contract offering 40% in four years (conditionally) - most importantly only relevant when the company/idea survive that long and are thus profitable/worth something. Why should they suddenly pay this (or a meaningful fraction?) out after one year? Or give an "outsider" 40%, which will most certainly be difficult to explain to future investors?

I disagree - keep the 40%, this will at least force them to come to you with why they want you to leave.

The obvious answers are

- they are a jerk to work with and they won't admit it - you are a jerk to work with and they won't tell you - something else

If it's something else and there is real money at stake both of you should be able to work something out.

Otherwise it's one of the first two - which is much harder to deal with

What "40%"? The entire point of the vesting agreement, bog standard in every competently run startup, is that he doesn't have 40%. In fact, if he's leaving less than a year in and his partner has the contractual authority to sever his employment, what he actually has is zero.

Just to clarify, this person doesn't have 40%. They currently have 0%, and their agreement states they only get 40% if they work there for 4 years.

Also, I don't know for sure, but I imagine they know the reason (even if they don't agree with it).

They don't have 40%, they have 0% and will get to 10% in 1 month. Then have to accrue 1% for the next 36 months after that.

Wasting 3 years is not worth the time. The Op should eject and focus on building something else or the same thing with a new co-founder.

I understood "walk away" meant walking away without any kind of papers signed. That would mean, that if the other stakeholders want something from OP they have to approach him and make a clear offer.

And I think that is also the best option. Just mentally evaluate the ROI of this project to zero, and try to focus on something else now. With startups you got to get used to the fact that failures and misinvestments happen.

Maybe it's just because I'm an outsider, but startup finance is complete nonsense to me.

>Same goes for giving you the 40%... there's no way they can build a company when someone not involved owns a huge stake.

This actually happened to one of my professors, which represents the opposite end of the absurdity. He started the company with a friend. The company pivoted to a completely different direction and the friend left because it was outside his expertise. My professor wanted to "do the right thing" and preserve their friendship, so he let the friend keep all the equity. In the end, the friend ended up getting millions of dollars despite producing 0 value to the company.

There has to be some middle ground here, like offering options to the company to buy back OP's shares at the current valuation plus interest. If company still can't afford a buyback a few years later, then they didn't grow the company enough to deserve to own those shares anyways.

I don't think it's really a solvable problem. There's a very wide range of hard-to-predict outcomes, from total failure to massive wealth, with a lot of just-bumping-along-for-years scenarios. The value of money varies drastically over time. The people involved are generally novices. Labor and skill contributions are impossible to predict in advance. Social conventions and ties add more layers of difficulty. What everybody is doing is essentially buying lottery tickets. And any serious dispute resolution can be more expensive than makes sense early on.

So what the industry has mostly converged on is a pretty basic, simple-to-understand solution that has a small enough number of dials that people can work it. It covers the main outcomes reasonably well if people are not too terrible. And if people are terrible, well, no mechanism is really enough.

Yeah, that is the option. They buy his equity for what it's worth. Currently that's not much, but apparently still more than they can afford.

The professor probably had other options, but decided that this is the route to go. And once the decision is done, there is no turning back.

In the early phase of a startup it quite often happens that equity is given on very relaxed way on good terms. For example someone can work only short time in the company and still get nice piece of equity, just because other founders are lazy or careless.

A lot related to startups is "play stupid games, win stupid prizes". Sometimes you can get lot of equity & money if you just happen to be in the right place at the right time. Other times you end up working a lot and get nothing.

Shares are not connected to the work done. Why would they? It's an investment. That friend got rewarded for making right choices and meeting right people

To me as an outsider too, it seems one middle path is to pay people doing the work in equity thus gradually diluting away people who left. In the beginning, the guy who left owns a large piece of a small pie, as time goes they will own smaller and smaller piece of a larger and larger pie.

I know you mean well, but this could not possibly be good advice because there isn’t enough information in that post for even a lawyer to give good advice. You don’t know what’s In his contract. Maybe his cofounder can’t fire him. Maybe He could but that would trigger the vesting. Maybe he could put it to the board and fire his cofounder.

Maybe his cofounders threat that it’s 3% or nothing is bluffing. It doesn’t really make sense for his cofounder, because that guy maybe is in the same situation if OPs contract is favorable. Maybe It’s 40% or nothing for him.

The only acceptable advice here is to go talk to a lawyer. That’s it. Internet advice about things like this is always bad even when it is meant well

I agree we don't know the whole story. But this is the version of the story that puts the OP in the best light, and still, my overall impression is it just seems like it's not worth it.

What's the best case scenario they could get out of it? Maybe 6% equity, or maybe a $10k severance. But going after a company with no revenue and only $40k in the bank doesn't really seem like the best use of anyone's time, energy or money.

There's minimal available short-term value, and litigation/fighting will sharply blunt any potential long-term value.

>Internet advice about things like this is always bad even when it is meant well

Even if it's telling you to get a lawyer?

Agree with this, 3% of something is better than 40% of nothing. I was a technical co-founder was that left a startup early on, and because we didn't have a vesting agreement from the very beginning, I was entitled to my 40%, even when I left the company. While it was to my advantage, I didn't want my co-founder to give up when I left, so I gave most of it up. For my next startup, I'll make sure to have a goals-based vesting agreement from the very beginning i.e. co-founder gets x% on first sale, x% on first raise

I don't have any confidence that the other founder would ever honor the 3% arrangement in any form given their past behavior.

I agree. They can fight this and drain energy but they will only get what they deserve up to this point. Which might be worth fighting for but if you believe that that you can do better, I would walk away - no agreement/liability to the company and if they are passionate about the idea rebuild it with a stronger team quicker.

The difference this time is they is more knowledge, clearer path and knowledge of what a competitor is doing. Consider it draft 2..if that's a direction you want to go.

This comment and the parent comment are absolutely right, but they are not decisions I would have ever thought of myself. Kudos to both of you!

> Them raising money to pay you just kills their chance at ever being successful

> there's no way they can build a company when someone not involved owns a huge stake.

So what? That sounds like their problem, not his.

> But I'm 99% confident you won't get anything out of this, so it's best to just walk away.

Possibly. But is that is the case, why not just keep the 40%? He's got nothing to loose. So in that case, there is no need to give in to someone else being unreasonable.

From a purely legal perspective, this is incorrect.

He's on a vesting schedule, and currently has 0% (his cofounder also has 0% currently, assuming they started at the sam time). They both entered this agreement to only get ~40% if they work there for 4 years (and at that point, they'll likely have to revest).

Vesting schedules were created for this exact situation.

Disagree. Normally I would agree, but this is such an outrageous situation that the OP should just dig in and tell the other side to GFT. Let's not set precedent that a-hole co-founders get to cut out their technical co-founders after almost a year for zero compensation without a fight.

Well, we don't know the other side of the story.

But knowing what we know, what's the best case scenario for the OP? Even if he's 100% right and the cofounder is the worst human being on the planet, what's ultimately the best outcome they'll get out of a startup with $0 revenue, maybe a potential $60k ARR with ads (but maybe not), and has $40k in the bank?

I get the impression this is all happening because things are going badly, not because things are really about to take off.

My point is that it may really really suck, but I just don't see a path, even if everything goes perfectly, where the net gain is worth it.

Got to agree, this advice sucks.

i agree. you are not left with a lot of options. walk away. having been in somewhat similar position, i can tell you that it's not worth it. good luck.

having said that, you can walk away. and still piss on their cake.

but this a toxic partner. you cannot work with them. that's for certain. you will have to walk away.

Best revenge would be to shut down the effing website and watch the other one go up in flames as non tech guy won't know how to switch it on. JK

This is very unsound and simp like advice. He has built it. If anyone walks away it is the other guy and not him

A lot goes into starting a company, not just tech. We don’t know who contributed what and how much. And I say this as a technical founder.

I think the idea that they will not be able to work with the co-founder again really depends on the type of person that co-founder is. If the co-founder is just doing this as a strategic move, expecting things are going to become quite valuable soon and considering the 10% cliff it may be that if their strategy does not work they will not have any problem continuing the partnership - although if that is the case I would (when things became profitable/ much improved) negotiate for some kind of exit because obviously the co-founder is not trustworthy.

if you can emotionally check out but legally remain, thats ideal. you are mostly likely getting pushed out, so recognize that you are in a 100% adversarial relationship and separate yourself from any kind of personal emotional investment. a completely detached self interested approach is totally warranted given the circumstances, and would significantly increase the probability that you will be compensated more fairly.

IMO. No serious investor will give money to a company where someone who owns 40% of the equity is no longer involved and/or left on bad terms. Having him around but not active is going to limit how the business raises money in the future.

You know, I like your position here dude. Keeping out of discussion the money (everyone of us work to pay bills) I think sometimes to give up maintaining a high profile is better. Anyway, the personal situation of the founders is unknown to me and dont want to talk too fast. But i get your point here.

I agree to the point that the company is probably done at this point, but of the off chance that it succeeds I'd get the 10% and then walk. if he raises another round etc. then that's a bargaining chip to get something (probably would amount to 0 but better to have it)

Rolling over because it's the easiest path is not a good option. That type of attitude will be apparent to people around you and you will likely get taken advantage of.

Wish I had downvote powers to downvote this because it's horrible advice.

You literally have nothing to lose by just waiting for the equity to vest and keeping your 40%. Fuck the co-founder. Fuck 3%.

Worst case you end up with 40% of nothing. Walking away you end up with 0% of nothing. If you don't stand up for your equity no one will. And if you let him get away with this, down the line he'll do the same shit to someone else. Stop this guy now in his tracks, don't let him swindle you and everyone else.

Don't be an idiot.

Your theory of the case here being that this company has managed to find a set of contracts that establishes 4/1 vesting and enabled a seed funder to invest $100k, but somehow didn't designate any officers of the company or any authority to terminate members of the company.

It could happen! They might reasonably spend $400-$500 figuring that out.

Exactly this. You don't let bad actors walk all over you.

I'm sorry but this is a ridiculous advice.

It's the plot of a movie that nobody on this thread wants to watch, but that doesn't make it bad advice.

I would burn the entire thing to the ground and piss on its smoldering ashes before I would allow someone to take advantage of 11 months of my work just because he thinks he can make more money for himself if he positions himself as a solo founder.

the sad part is that they are right. I was in a similar situation and there really is nothing you can do. They don't own the majority share of the company to make the decision.

It's honestly a terrible situation

Why do you say that?

on a side note: what is the amount of karma required to be able to downvote on HN?

I'd say first things first. You have 11 months and a one year cliff. Find a way to stall for a month and your position gets much stronger. This is a great environment to find a way to stall. Tell your co-founder to write up a proposal so that you can have a lawyer look at it. That's easy to turn into a month of stalling.

The reason this is happening right now is because the other founder is well aware of that cliff and losing 10% going forward.

Sure. This is essentially calling that bluff in a reasonable way.

Stand your ground. A judge will not look favorably on a "partner" that is trying to remove you a month before your cliff expires. Especially since you have driven massive growth.

As a new startup, I'd assume that the technical co-founder is doing a lot of maintenance and automation to keep everything running smoothly. Why not let something break, and then they'd have a stronger negotiation position?

I can't imagine (but would be very impressed with tech co-founder) if a year old system could run without any maintenance for a month. Seems also unlikely that tech co-founder could be replaced fast enough to continue reliable service seamlessly. I don't think non-tech co-founder realizes that if tech disappears, it will kill the baby.

Hey. As a former lawyer, I'm going to echo the many comments in this thread to consult a lawyer. If you find a good one with relevant experience, it should only take a few hours at most to properly understand the exact situation you are in and know your options. Your rights could vary drastically based on the specifics of the company and the employment/equity agreements you entered into, in addition to where you and the other founder are, and where the business was incorporated or registered. If there aren't formal agreements to this, but you have emails or other documentation that's short of a formal contract, that can also be relevant. Regardless, the co-founder and the investor owe you, an equity holder, a fiduciary duty. The threat to tank the business if you don't surrender most of your equity is a pretty cut-and-dry breach of that fiduciary duty, and you are fully within your rights to demand relief, which could be monetary, but could also be equitable, such as requiring your co-founder to relinquish control of the company, or to transfer ownership of the company's source code, domains, and IP to you. Whether any of this relief would be practically available to you would require expert legal advice and would depend highly on the specifics of your situation.

To others in this thread, if you're looking to join a startup as a technical co-founder like this, 'We have very standard shareholder agreements for 4yr reverse vesting with 1yr cliff.' is not standard in the same way it is for other early employees. In this situation, your equity should be in real shares from the get-go, not options that vest over time. You should also have a partnership agreement or similar document that outlines how board-level decisions are made, and for a business with a few mostly-equal owners, such decisions should typically require consensus of the owners, even if one person controlls 51+% of the equity. This is the most reliable way to protect your interest in the business, and this is what true co-founder status looks like. If the O.P. had asked for this before signing on, my guess is that the co-founder would have balked, and the O.P. would have known from the get-go what the dynamics would be, and could have walked or insisted on a higher salary to reflect the fact that he's being treated like an employee not a business partner.

I strongly agree. Find a lawyer, find a lawyer, find a lawyer. To the OP, if you're in California, I'm happy to recommend mine. Adam Slote of Slote Links and Boreman, slotelaw.com. 20 years back somebody was trying to screw me over; he charged me $500 for a solid "don't fuck around or you'll regret it" letter. They paid up instantly. Since then he's been great a dealing with my startup stuff both as an employee and as a cofounder. And much of his work is in litigation, so if you do end up suing, he's the right person for it.

I also agree that the 1-year cliff is absolutely not standard for founders. Last time I did it, I had a 4-year reverse vest with no cliff at all.

> your equity should be in real shares from the get-go, not options that vest over time

The OP said reverse vesting. Doesn't that mean he does own all his shares now? The company just has the right to buy them back if he leaves (and the cliff is when the percentage they can buy back starts decreasing from 100%).

> If the O.P. had asked for this before signing on, my guess is that the co-founder would have balked,

disagree. If the OP didn't already have this standard type of cofounder arrangement, the other guy wouldn't be asking him to leave. He'd be telling him.

> 4yr reverse vesting with 1yr cliff.' is not standard in the same way it is for other early employees

yes but -- have spoken to founders raising large rounds pre-revenue who do have this deal. Their stock is the same as employee stock.

If you're willing to buy out his share, I would approach the investor, explain the current dead lock, and get his support to force your partner to do a BMBY (Buy Me Buy You), where you offer him a price per his shares, which he either accepts or have to pay the same sum to you and buy your part.

I think this works if fourtydegrees has some bucks in the bank.

Reading between the lines, I suspect fourtydegrees is young and doesn't have the kind of money to do this.

(I also suspect that lawyers may be out of fourtydegrees' budget.)

Suppose I did have some bucks in the bank and did get a lawyer - how would they help? So far my co-founder has been pretty unreasonable with regards to compromising and/or negotiaton.

The investor so far has also been very neutral and I think will remain so.

I can't imagine my co-founder accepting this as they don't have the cash to buy my shares, so they would be forced to sell?

Well that's the situation the co-founder is creating by making these unreasonable demands...

Agreed with this. Retain your own counsel and do this.

This is commonly referred to as a shotgun clause.

First of all, in a case like there where you have founders at odds so early on, your company is basically on life support and probably dead already.

You have very little to lose by digging in and waiting for your co-founder to fold. If your co-founder has done this at this point of the business where the stakes are so low, they will absolutely try to screw you out of the 3% through other nefarious means.

It sucks that a single founder can tank a promising startup, but that's how it goes (unless you've already got a shotgun clause or equivalent in your shareholder agreements).

I'm going to go against the grain here and say that you shouldn't make decisions based on what random people on the internet say. By all means read all the replies but the best course of action is to seek professional counsel and guidance from an attorney.

You may or may not have to go through a legal battle to get your share.

You should document everything as soon as you can, text messages and emails. The more paper trails you have, the better. Don't agree to anything verbally or sign anything.

Finally, don't make hasty decisions on an impulse. It would be best to be cautious and consider all possibilities.

This is the correct guidance.

Nobody here is informed enough on the details to provide strategic advice.

I had something very similar happen to me, and am happy to share my learnings on managing health and emotions through this process.

You must get a lawyer now. Below us my thoughts given several decades experience As founder-

You have a strong position here, since you built the products. Don’t walk away. The ultimatum is counting in you being non-confrontational and wanting to cave.

This cofounder has betrayed your trust at this point, so some sort of exit is needed. Non-technical is a lot easier to hire- you can get marketing or whatever expertise he has easily.

He should be the one leaving. Maybe offer to buy him out at current equity value paid over 20 years at %6 interest, secured only by company stock.

If he forces the issue he will destroy the company in the ensuing lawsuit. So this is a mutually assured destruction situation.

What is the ownership of the software? Did you retain rights to it? If you are forced out can you recreate the company quickly using the software you already created?

Get a lawyer, now. You need an advocate who is ready to play ball and who can be the “bad guy” for you.

Your cofounder will likely try to spin it, try to portray any resistance from you as evidence of bad faith, etc. Don’t let him.

It's too late for this idea in this situation, but it might be of interest to others thinking about getting into a partnership. Because most partnerships eventually go south, there is something known as the "Shotgun Clause". (I don't know who named it this, but this is what I've always known it as.) If your partner wants you out and comes to you with a lowball offer, you can invoke the Shotgun Clause, which gives you the right to buy him/her out at exactly the same terms, and THEY HAVE to accept. It's the risk they take by making an offer. It's designed to get them to make a "fair" offer, or one that they would accept.

Get a lawyer or at least someone who deals (talks) with them, asap, you are in a war.

Important question: If they gave notice today would the notice period "help" with staying longer than 1 year and hence, not falling into the 1 year cliff?

All further advice depends on above question, so once we know the answer we can give proper advice.

Can't emphasize this enough. This is a year of your life.

Find someone with a fiduciary duty to you who has seen this before.

A year isn't such a long time, in the grand scheme of things.

This company sounds pretty doomed, regardless of the outcome of this conflict. Take lessons learned, cut and run.

Sorry to hear you're going through this. I went through something similar and it wasn't fun.

As much as you have shareholder agreements etc. none of that matters too much if the business fails and so it's basically about what the two of you can negotiate.

In my case, I've paid off a former business partner much like a loan. You can negotiate all sorts of parameters on this: monthly payments, grace period, cash triggers, funding triggers etc.

Basically you set a valuation for the business (at least as set by the price of the round of the last investor, if not more because of growth) and then he buys your ownership.

Idk what "reverse" vesting is, but if you had normal vesting it sounds like your 49%, after the 1 year cliff, would be worth e.g. 12%. So you can either keep that 12% or if he wants to buy you out he could pay you your 12% vested * last valuation * growth factor.

It sounds like it's not going to work for the two of you to work together, so now it's just about negotiating the details before the conflict kills the company

This seems like the most realistic and likely answer. My co-founder hasn't really been budging so far and I feel like they don't fully understand the situation. They think that because it was their idea that they are entitled to a lot more than me.

One issue for me is that I don't have that much faith in them being able to execute on the company vision by themself, e.g. they don't want to monetize right now or do a revenue split for reasons I'm unclear about, which makes the practicality of monthly payments tricky.

Take it from me, a negotiated buy-out is the way to go. I had to buy out a former partner and negotiated a payment over 12 months. It worked out for everyone.

Current valuation should be valuation at the time of the investment multiplied by a small growth factor (1.5x perhaps).

Your stake is the amount you would have owned as of the first cliff (and not any sooner), which is 10% after the investment round.

if the company was valued at $1M at investment, then it would be worth maybe $1.5M at time of the 1yr cliff given the growth factor.

Your 10% of that is $150,000. The company should pay you $12,500 per month for 12 months to fully buy you out. And the company should time the payments to reduction in your equity. If they speed up payments, it speeds up the buy out. If they slow it down, it slows down the buy out.

You should also renegotiate any non-compete.

Have them pay you with a loan and then start a competitor.

It's important to see if you are before or after the cliff.

If before then depending on your employment agreement and other docs there could be a scenario where you are fired/let go and get 0% shares.

Your last round valuation was $1,000,000 post so that price would be $141,000 or so for your 14% stake, can include some triggers on when that occurs that doesn't impede the business (ie $xm raised, $y profits).

If not then your ownership of the company is basically 10% on good leaver terms and that is the floor you should accept.

To illustrate assuming 100 total shares

Now: 40.8: him 39.2: you 10: option 10: seed investor

Goes to new cap table of: 40.8 him (57.6% ownership) 10 you (14% ownership) 10 option (14%) 10 seed investor (14%)

You're not going to get bought out now although you could say that your stake is purchaseable in the future at the last round valuation, which is very reasonable and keeps the cap table clear, probably $140,000 per the above with some sort of trigger for that (eg $xm raised, $y profits)

he is a cofounder not an employee

That may not matter here, depending on how the company is structured. If his partner has the right to sever him from the company, for ex. by dint of his share advantage, and he hasn't cliffed, he'll get 0.

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?

What keeps the OP from saying they'd rather work alone on it and the other cofounder leave instead, then see what the co-founder want to leave. If they come with some amazing demands, the same demands can be used by the OP to leave.

It sounds like you and the investor together control more than 1/2 the shares. Is the investor a friend of your cofounder or more neutral?

If they're a neutral party, it might make sense to get them involved, or at least threaten to get them involved. You and your investor could potentially vote out your other cofounder, and knowing that might make your cofounder change their tune.

On the flip side, if the investor is a friend of your cofounder, be aware that they have a lot of leverage here and could vote you out.

There’s a good chance that the seed investment was made via a SAFE, which means the investor doesn’t yet own shares, just convertible debt.

Lots of advice but none seems to have a basis in law and how this will play out in reality.

You have an employment contract and rights. Your co-founder cannot fire you without cause (in most legal systems). Continue working and fulfilling your duties. Document everything and all conversions with dates and times.

It's unlikely you can be forcibly removed as your co-operation will be required to ensure the product continues to operate. If you are forced out you'll have to present evidence to a court or employment tribunal so proceed with this in mind.

You should start off with negotiating for your full 40% share, but accept 20%. Reverse vesting a non-issue if you are unlawfully terminated.

However I suspect there is more going on here as very unusual to see this kind of dispute (smoke) without cause (fire).

I don’t know if you can still delete this, but this is way too specific and way too many people read HN for your co-founder to not see this.

I would email dang at hn@ycombinator.com to see if they can at least delete the body of this post.

Please seek legal advice and the personal advice of contact you can trust that has angel investment experience if you have one.

What difference would it make if the co-founder seen it? Maybe they would see sense...

that's the point lol

puts a variety of other perspectives in public

worry about yourself

The problem with your ask is that early stage capital is for growing the business, not liquidating founders, and investors are not interested in giving anyone cash to liquidate a founder. Additionally, your valuation is currently underwater and even that is assuming a functional founding team.

It's not OP's ask!

Please explain more what you mean about the valuation being underwater. I don't understand how that is, nor how that is even possible.

The investment was at a $1 million valuation and the company currently has 40k cash + allegedly, the possibility of 60k/year from ads. Unless there is significant growth potential, the net present value of the company is much less than $1 million.

Find two people to advise you, an attorney and someone with founder or angel experience. Gather up copies of all employment agreements etc + directly related correspondence for them to review. Don't sign anything, don't discuss this issue more with your cofounder until you get advice. Also don't read too much into anonymous internet commenters who don't know the details of your situation. You can be fired but you have some leverage because this kind of dispute is a red flag for any prospective investor. Feel free to e-mail me.

My advice: wait 1 month and then leave with 10%.

As people mentioned, you don’t want to stay because the relationship is broken. It’s not worth your time.

In terms of getting fired before 1 month is over, get an employment lawyer and talk this over with him. Most likely, you will have a case if they fire you just to save 7%.

Get the lawyer first, before responding to your cofounder.

If you think this business is going places, that will change my advice.

In this case, get a lawyer and negotiate a higher % or assurance that you will stay at the company and continue to get vested. Maybe you will get more than 10%?

Remember, investors/executive team will dilute you by issuing extra shares to the people who stay.

Everything is a negotiation. But you’ll probably need an employer to push for that. Firing you just before your cliff is obviously not a particularly defensible action.

More importantly, your last statement (“I don't really want any equity in the company at this point if I'm not involved.”) suggests you don’t want the most obvious settlement: you retain your equity plus some acceleration (since you aren’t leaving on your own terms, it’s standard to request more than your currently “vested” amount).

You can’t likely “force” them to pay you for those shares above the price you paid, unless you have another buyer willing to do so.

Like others here, I’d suggest you involve your investors and almost certainly a lawyer (assuming you think that would even be worth it).

I can’t tell if you want to take over the company (you buy them out), you want them to buy you out, or you want to walk away. Do you have a clear preference?

I’ve been through this. Twice.

Once it got hostile. Allocate some money to hire a lawyer. Have your lawyer send him an email as a first step with your buy out terms. This would be skipping a step I went through which was the disagreement where we realized we weren’t good for each other in business anymore.

Let your partner sit on that a while. He has no leg to stand on, and if folds and competes with an identical business you can sue him on grounds against his Fiduciary Duties to the current business.

Maybe also google “Fiduciary Duties”.

Stories like this make me wonder if there's a form of pre-business counseling much like premarital counseling where you discuss with your cofounder expectations going into the business and talk about worst-case scenarios like this and how each party would handle it at the time of the counseling (considering people change over time).

I thought that's what involving a lawyer in these kinds of negotiations is supposed to do?

That requires having the bucks in the bank to pay for a lawyer. If fourtydegrees is young with a thin wallet, I don't think lawyers were involved.

So you have every leverage in this scenario.

> if he fires you that's wrongful termination(there's no performance issue until right before cliff). you can sue in that scenario

> I'm guessing you have a board seat too. he doesn't have 51% voting rights so he probably needs the investors to side with him to oust you for which he needs a legitimate reason. (title of CEO doesn't really matter all that matters is the voting rights you're not an employee).

> if there's a law suit and dispute between founders no investor will touch the company with a 10 foot pole, so if he goes for a fight he loses everything.

> there's no reason to go down to 3% when you own 10% next month. and people think of 10 idea everyday all that matters is execution and if you wrote the code and gave around a year of your life that's worth around 100k for an entry level engineer so I'd say you put in more than the 10k he put in.

> finally you have the code and you can tweak it and make it open-source there's no IP laws protecting code so at that point he owns nothing.

> honestly the company is done, the investor is neutral cause he's already written the company off and I would say this is the point of no return no matter which side this goes the chances of running the company are rather slim.

> the reason he doesn't want to monetize it is because he was probably planning on doing this to you, it'll be much harder to do it if the company is making money if you get out he'll monetize it the next day

I'd stick to my guns and tell them if they don't buy you out then the company is dead. The only scenarios are - 1. he buys you out. 2. lets your equity remain ( he probably can't fire you ). 3. company goes down

Lots of really bad advice on this thread. Something to keep in mind is that people venting about how unfair this is and how you shouldn't give an inch as a matter of principle are writing that to gratify their own emotions more than they are honestly trying to help you in this situation.

You need to talk to a lawyer, strictly to figure out, given the structure of the company, what your partner has the authority to do. It sounds like they have an edge in ownership and are likely set up as the firm's CEO, in which case it's very likely that they can sever you from the company.

You can probably get a cost-effective answer to that question, especially if you're willing to accept the most straightforward answer (ie, if you're just using the lawyer as a sanity check, and not tasking them with pursuing weird theories of why you'd be impossible to fire). You probably cannot get cost-effective answers to the rest of your questions from a lawyer; be prepared to sink 5 figures into legal, speculatively, to pursue anything past that. On the firing, figure high hundreds of dollars. On the equity negotiation, figure $10,000.

At 11 months in to a 12 month cliff, you are going to get 0 if you're terminated. Maybe you can slow roll past the cliff?

Even if the paperwork is locked down on their side, your partner is likely going to offer you that 3% just to avoid the drama; your argument may be doomed legally, but you can easily inflict 5 figures of legal expense on them. So there's a negotiation here. It may be that as soon as you start to sound reasonable --- not asking to assume control of the company yourself, not expecting to walk away with all your shares vested --- they quickly become amenable to improvements in the deal, just to get this over with.

While you think this through, remember that it is also very early in the life of this company to have a departed founder with a huge equity stake. A lot of reasonable people in that situation would just wind down the company and restart it; why plow forward while encumbered the way they are now? You're (justifiably) thinking about the 11 months you just spent, but if the company has legs, those 11 months are not much compared to the person/years that are going to be invested down the road.

Nobody is going to raise money to liquidate your position in the company.

Nobody is going to court. Lawsuits that actually get litigated take years and cost more money than anybody in this story have.

It also doesn't seem realistic to expect investors at this stage of the company to buy out your partner. How would that even work? You'd end up working for the investor. Probably nobody wants that outcome, including the investor, but also: with the low revenue you're talking about, your investors are unlikely to waste their time.

I've been a party to some similar situations and my advice is just to keep things simple. A good mental model of the legal services you have available here is a complicated divorce: only the lawyers win, and they know it. Your time is worth a lot, and dragging this out will eat a lot of your productive time. You suggest downthread that you're not all that interested in the equity and think your partner is going to fly the company into terrain. I think you answered your own question with that. You can fight a little bit, especially if it makes you feel better, but it sounds like you'd be kind of crazy to fight a lot.

Yeah, I have to kind of echo this.

I've run into things like this in the past, and the legal stuff is expensive, depressing, and draining. It really weighs down on you. I'm confident making the claim that anyone in the thread screaming for blood has never dealt with this kind of thing before. It's not like you pay $500 and a week later your settlement is ready. No, it's in the tens of thousands, and it drags on. And on. And on. And on.

So, yes, please hire a lawyer and make sure they are well-versed in SV-type investment/startup bullshit. Have them review your contract and tell you where you stand. This will likely cost under $1000 and you won't spend two years fighting for a slice of a pie that has a 98% chance of being worthless.

This kind of stuff is horrible and can make you feel powerless, but it's important to know when to walk away. Not every hill is worth dying on.

Is it possible to play the long game? I.e., before your partner tanks the business, lay the groundwork for you alone to rebuild it from the ashes.

E.g., make sure you have copies of all the source code, and any other intangible assets. After the business tanks and he too is short on cash, buy out all claims he has on those assets, and restart the business?

Also consider including your investor in the planning. He/she might be more willing to help you save the business at your partner's expense, if the alternative is losing their entire investment.

I will say something immoral to many: Leave him, walk out, and build a business in the same niche with contacts and know-how you already have.

There’s one advantage of this: You can start from scratch, build it faster, and better without starting with a baggage. And, have fun doing it. I’ve done this, and couldn’t be happier.

Business I left is nonexistent anymore.

Very unlikely to work. His contract will have a non-compete and as a founder probably enforceable

I worked with someone for about a year without making any money. We had to part ways without anything to show for it. I can empathize.

You didn't say why your co-founder wants to fire you. I suggest digging deeper into those reasons before you haggle on your exit terms.

Assuming you weren't negligent: I would try to point out that pushing you out one month before your equity vests is bad faith on your co-founder's side. Offer to leave voluntarily after your one-year cliff. Otherwise, if your co-founder just wants you gone now, request that you keep your 1-year equity and some severance.

Furthermore: Sometimes it's cheaper to just close the company and use the "lessons learned" to restart a very similar company... And that very similar company won't owe you anything.

[Edit: Deleted some text that, after reading the discussion, isn't relevant.]

> We were 51/49% to them and took a small round of pre-seed funding (~$100k) so our cap table is approx 40% for me and co-founder, 10% option pool and 10% investor. We have very standard shareholder agreements for 4yr reverse vesting with 1yr cliff.

Could anyone tell me what this means in plain English (preferably, ELI5)? I have no idea what term sheets look like in detail but I would really like to learn.

It's a breakdown of the ownership of the company

  Op - 40%
  Co-Founder - 40%
  Option Pool - 10%
  Angel Investor - 10%

- The option pool for new hires means that if you're one of the first employees, your equity will come from that option pool. You may get 1% as an early engineer or 3% as an early executive for example.

- The investor owning 10% of the company means that they think the company is worth $1,000,000 right now. ($100,000 x 10)

- The 4yr vesting with 1 year cliff means the Op gets 1/48th ownership of the company every month over the course of 4 years. BUT BUT BUT they only get the first 1/4 (12/48th) until they have been at the company for at least 1 year. If the Op leave before 1 year, they get nothing.

The company's ownership is divided in shares, also called equity. A cap(italization) table details the distribution of equity. In this example, 40.8% (= 51% * 80%) for founder 1, 39.2% (= 49% * 80%) for founder 2 (assuming it's OP), 10% for investor and 10% for something called options that may be granted in the future to new employees that allows them to buy shares of the company at a low price. 4-year reverse vesting with 1-year cliff means that if one of the founders leaves before 1 year of signing the contract, they are forced to sell at no profit (still, not $0) the entirety of their shares to the other shareholders. After 1 year of staying at the company, they may keep 1/4 of their shares and are forced to sell only the rest. Following that 1 year mark, they earn the right every month at the company to keep ~0.833% (= 40% / 48 as there are 48 months in 4 years) of their shares and forced to sell the rest. At the 4 year mark of staying, they are no longer forced to sell any of the initial set of shares. It does not apply to any future grants for which new conditions or new schedules may apply.

IIUC:

OP is set to own roughly 40% in 4yrs -- 10% at the end of the 1st year (i.e the "cliff"), and the rest of the 30% across the remaining 3 years (probably more often than once a year). the "reverse vesting" means that everytime OP vests, OP's cofounder has the right to buy off the newly vested shares. this means that OP would get money but lose ownership if their cofounder chose to bought off the shares.

OP has been working 11 months so far and is approaching the 1 year cliff (so set to own 10%), so now their cofounder wants OP to leave the company and take only 3% ownership, and is threatening to leave and abandon the company risking any value at all. Presumably, cofounder also has the right to fire OP though OP hasn't stated anything about this.

What does your founder agreement state? When I founded a startup we discussed how an exit would happen (for either party) and documented it.

That's the controlling factor here, and of course HN has no insight into those docs. Depending on what legal jurisdiction you are in, you might have some other rights/obligations.

Either way, please consult a lawyer who has helped clients through this kind of situation before. Preferably a local one.

After doing so, you may want to reach out to the investor and make sure that your co-founder isn't controlling the narrative with them. Again, the lawyer probably has some advice on this approach.

For readers - This is a lesson in having an actual shareholder agreement. Incorporating isn't enough, outline how situations like this go down before hand. Get a lawyer, pay the fee, you will be thankful later.

I would propose structuring the buyout in the form of convertible debt instead of a cash buyout. You give up your equity today, but the LLC gives your a convertible note to cover your valuation conditional on some future funding event.

Set a specific valuation target, at which point the note will pay in cash equivalent to a certain percent of the company's equity. That defers the issue of liquidity until if/when the company gets sufficient funding. But it gets you out of the equity today, particularly with regards to voting shares. Which is probably what your co-founder cares about the most.

This makes a lot of sense. An issue I have with this is that one reason my co-founder wants to split is that they don't really want the pressure of running a startup, and so are unlikely to go on to raise additional money.

Could a situation where I get a cash payout, say $20k from the company to sell a certain %, and then the convertible debt to sell more in the future work?

If the co-founder doesn't think there will be a need for any new funding, then that would imply that he expects the company to be cash-flow positive in the near-term.

I'd sit down and work out what are the cash flow forecasts and milestones. Contextualize what's a reasonable rate of return for implicitly funding the company by foregoing an immediate cash buyout. If/when the company achieves certain profitability milestones, then the note will pay back in installments.

Each successful milestone draws down the principal, each missed milestone increases the principal. If profitability isn't sustainably achieved, the note converts back into common equity. If/when there's a major funding event, the note converts to common equity or cash equivalent of the common equity valuation.

Essentially you're planning for three scenarios. 1) The business becomes profitable without further funding. You're paid off over time from the profits. 2) The business goes the fundraising route. You're paid off at the liquidity event. 3) The business succeeds at neither route. Your share of the equity reverts back to you, so you receive your fair share of the scraps.

"An issue I have with this is that one reason my co-founder wants to split is that they don't really want the pressure of running a startup"

Whereas it sounds like you have a solid plan to grow the business and generate revenue. As @jedberg says, this makes your interests aligned with the (neutral) investor, and the other founder at odds with the investor.

a) You and your cofounder can't work together

b) One must leave

The investor and one founder can push out the other founder. Who do you think the investor thinks should leave if you reread your quote above?

> An issue I have with this is that one reason my co-founder wants to split is that they don't really want the pressure of running a startup.

I’m confused. If they don’t want the pressure of running a startup, why isn’t the co-founder leaving, instead of trying to force you out and remain in charge?

Why should you say anything except "no"?

You own that equity even if you are not employed there.

Hang onto it ..... there's no reason you should be bullied out of it.

I've seen this situation come up a number of times. It's just bullying.... there's no legal reason for you to give up your stake.

Go watch "The Social Network" movie.

Find a lawyer/negotiator with experience in this area you can talk to directly, high-bandwidth. They'll echo many of the themes here, but be able to get (& give) more depth/detail.

This is a negotiation that's already started. Any communication about what they are or aren't interested in is a negotiating stance, or opening offer, which may be very far from what's possible if you properly understand your position/needs.

Too bad there wasn't a 'shotgun clause' from the beginning. (Then, even if you didn't have cash-on-hand, you could seek other financing/investment to win a fair/orderly divorce process. There are many investors who specialize in SaaS businesses.) Still, insisting on a bilateral agreement that whoever is able to pay more gets to buy the other out might be a reasonable negotiating goal for you, depending on other factors.

Your vesting cliff is very important. After the 1 year, there's zero justification for not delivering a full quarter of your shares (~10% of total equity). So I'd see retaining 10% equity (or at the very least 11/12th prorated if you do them the favor of leaving ASAP) as the absolute baseline you should consider.

It's unclear if your use of 'they is for gender-neutrality or indicates your co-founder & investor share this desire to get you out. But if the investor is neutral, or swayable, or cares about their reputation for treating technical cofounders, they may be all-important to a fair & amicable resolution.

That the co-founder would try this indicates some combination of real difficulties in the working relationship, differences in your perceived values of each other going forward, and/or a willingness to play hardball in grabbing more of a success in contravention of earlier agreements. To the extent it's that last factor, there are other ways you can still be edged-out, via dilution/re-orgs/etc, later on even if you resolved the current negotiation amicably. That's not a reason to run or give up, but something to keep in mind: a seemingly attractive result that's not ironclad could be further reneged. So you might give a little more, with the right protections, so that the result is more aligned/sustainable/enforceable in the future.

Good luck!

Also: if company has 'standard' vesting documents & has taken outside funding, is the lawyer who set those up still a trusted neutral resource for both founders? Even in their role as "company's lawyer", they could talk to you both about how the existing agreements affect the resignation, firing, or mutually-agreed exit of a founder, and discuss ideas that help the company survive & thrive past that event.

Though, to actually negotiate (& legally execute) a durable exit agreement, you'd likely want a separate lawyer on your side. (And, given the values implied by the outside investor's price-paid, & your estimation of future revenues, spending a few $thousand here could save $tens-of-thousands or more later.)

I'm trying to understand how your non-technical founder plans to continue supporting the product as they "work on it themselves". Is the intent to simply replace you with cheaper labor who won't expect equity? Have the investors asked for you to be replaced by someone of their choosing? This feels like a key point to the decision making, IE: knowing what the future leadership of the company will actually be and whether there really is a future here or best to walk away.

Why do so many people on this thread not understand how a one-year cliff works?

The OP already has 40% of nothing. He has to earn that 40% over 4 years but if he leaves within the first year he gets nothing. All he has within the first 12 months is the promise of potentially 40% of something if he sticks around for 4 years.

But honestly, as the lawyer in this thread said, this was a crummy deal from the get go. FOUNDERS (rather than employees) should get Founder shares, which are immediately vested. There can be conditions for "claw back" which allow the company to buy back / vest back shares for an early departure, but founders shouldn't have to "earn in" their share into a company that they start. After all, they started it. It's an odd idea indeed if all the founders have a 1-yr cliff because then in the first year no one technically owns anything!

When they say "otherwise you'll own 40% of nothing", it's not even clear what they mean. Do they imply that they will dissolve the company and form a new one without you leaving you to hold an empty shell company?

At best you can argue for your 1 yr cliff value, which is 10%. You're not in the position to negotiate between 40% or 3%. You can only negotiate between 3% and 10% because there's no way you're going to earn the 40% over 4 years.

This reminds me of the person who bought my old house. It has issues. Those were factored into the price. But he kept trying to talk me down further because he had a story in his head of what this house was going to mean for his life and it wasn't turning out to be a deal that was too good to be true (note: banks reject loans for houses that are too good to be true).

On the last back and forth round I offered to meet below the middle and it turned out he wanted me to meet him 3/4 of the way. When you consider the overall price of a house and how many % that is, it seems like a smallish thing to disagree over. But if your equity in the house is low, the house hasn't appreciated much, or both, a few percent could be a good deal of your profit margin, especially if you count in taxes and repairs like a sober investor, instead of the typical magical thinking about houses as investments.

Between us and my realtor we finally convinced ourselves that his dreams were not our problem. I'm not going to sacrifice my future so someone else can go live their best life - particularly when the goal is for them to live that life without me in it. If you're not my child that option isn't even on the table. You selfish, selfish bastard.

(We called his bluff, he bought the house anyway.)

Tell them to shove it. Something tells me your 40% is worth a hell of a lot more, otherwise they wouldn't be trying to screw you out of it. Lawyer up.

It sounds like op currently has 0%, so I'm not sure this is a winning strategy.

they could just be deluded.

I've been in tough founder situations. What I'd like to add to this conversation is: leaving is the right choice, find a way out, don't stay.

How long do you think the company will survive without you? Act accordingly.

The ceo is trying to get someone in at a lower cost to take-over your work. Do you think it will work before the site crashes or a hard bug arises?

Inform the investor and take the money out, be honest to him. He will not like this.

He will wait to invest again ( or inform other investors), untill the CEO has proven he can do it, which he probably won't.

Ask the cofounder to take on a loan if that's possible ( perhaps less than the equity), he thinks you are disposable.

Get out and don't help out. Have the same contract with you as you do now, but take 10% of his equity, if you think it's going to fail.

Don't fix anything untill he signed, don't create a bug before you leave.

It's a normal thinking pattern of narcissists and it ressembles "the expert beginners" POV.

There are more opportunities, don't try to spend a lot of time on it anymore.

Ps. This will probably go to court, if it's worth it.

It feels like there is something not being said. Your cofounder just randomly woke up and said you should resign? Nothing triggered it, no prior conflict, no warning? Seems odd to me.

You got nothing to lose all on your own (except time wasting with this person), but if that's worst enough. You have two options

1. 40 % of Nothing, other part gets the same deal. 2. You get 40 % of whatever this business is worth for. The other party gets the same.

You lose together or gain together. That's a fair game in a Startup as founders.

Don't accept anything else, if you do they just managed to bulldoze you out of your equity.

Stand for fair deal.

Don't get bullied by these negative tactics.

Remember "Two broccoli or Four broccoli" from your mother. - Call the bluff and fake dichotomy of choices. I would say - No Broccoli.

Meantime, keep everything documented and be professional - do not let them have any choice to get you out.

I was curious, so I tried googling for "Two broccoli or Four broccoli" because I actually hadn't heard of it before. I didn't get any hits.

Now I'm really curious! Can you explain?

Negotiate for converting your equity into debt that needs to be paid off at certain events. Easiest way to get the most money out of him. Lawyers can help you set that up in a contract, you just have to negotiate on the value of the debt.

This is pretty interesting to read through. I'm aware of a thing called "ERISA" , where (I think) there's law forbidding termination before vesting (retirement funds though).

Are there any similar legal protections in place to prevent termination based _solely_ on equity vesting?

And to all the comments here saying to just walk away and keep your peace; ie - just take it as a learning lesson. Which learning lesson is that exactly? Sounds to me like this is a pretty typical situation we engineers can get ourselves into. What other protections (learning lessons) could they have done to mitigate what's happening here?

Don't work for randos.

Did they really pose it to you that way of take the 3% or they'll torch the company? Was it just a bluff because they'll own nothing too? I would talk to a lawyer and possibly the seed investor, but the lawyer first.

The seed investor is remaining neutral.

It's not so much that they'll torch the company. They're just saying they don't have the cash so need to reduce my stake. They will budge on the 3% I'm sure, but I don't value the equity much if I'm not involved.

I'm not too sure what a lawyer would recommend at this point? I also can't really afford one personally - especially as I may be out of work soon haha..

If you're not valuing the equity if you're not involved, then honestly you need to look at this from an opportunity cost perspective.

The trust is fundamentally broken, so it's not really worthwhile to pursue this as collaborators. Unless you're keen to run the business yourself, there isn't much point in fighting this beyond getting your 1st year vesting.

It's honestly not worth your time and energy fighting for something you're not keen to do. And it's definitely cheaper for them to give you 7% more than the 3% offered, and avoid all this hassle and potential legal expense.

If you do want to persist, then you need the investor on your side, as otherwise you can't force the other person out (they'd still keep their 10% but that's the price you pay for that move).

I have to say I find it really odd that someone who's invested $100k is being silent on this, or isn't worried about this situation, especially if the future of the business is now more of a lifestyle business. I fail to see how they'd get a return they'd expect. I'd assume they're actually on the other side, but want to appear neutral.

FWIW if you end up leaving, I'd advise not agreeing to a non-compete or a non-disclosure. It's not about you starting a competitor, but more about them not being able to restrict your future options as they're forcing you out, and they will have to potentially consider the threat of you competing with them at any point in the future.

It's a credit to your efforts that you've built the tech of business that's gotten such good traction and numbers, so you've got learnings and experience that will serve you in good stead in the future.

It's just unfortunate that you ended up with such shitty partners.

Good luck, and I assume quite a few of us will be hoping you bounce back from this, and rooting for you.

I don’t understand how “the need for cash” and “reducing your stake” are connected. If they need cash, they can raise another round and everyone gets diluted like normal.

If you don’t value the equity, offer to sell it to the seed investor at a discount.

You need a lawyer, not internet advice.

Don't give up a cent.

A stable 5k/month cashflow is worth maybe 1.5 million dollars flat. Ignoring the phenomenally unethical effort to part ways with you one month before the cliff, you rightfully own about 9.16% of that-- or on the order of 137k. You could argue that up and down based on risk and operating cost vs the potential to increase it, but I think that would be a fair starting place for the present realized value that I'd hope to negotiate from.

Have you talked with your investor? They may be more sensitive to the consequences of their reputation being damaged due to ripping you off than your cofounder is...

I'm not a lawyer and don't know what I am talking about, but even if the other co-founder fired them, couldn't they file a wrongful termination suit since them being fired at this point would clearly not be due to performance, but due to the co-founder wanting to fuck them out of their shares?

I may be vindictive but I would not walk away, and would rather see the whole venture tank than get blackmailed into giving away a year of my work for free.

To be clear, I wouldn't do anything illegal that would be dumb. But I wouldn't roll over just because a bully tried to bully me out of my cut.

Talk to a lawyer.

^^^ agree.

^ This

A meta-comment here: Beware the advice you might glean here. Often, surveying HN for the consensus provides a signal; more often, skimming the cream of the commentary provides a better signal. Here, a lot will be misleading, particularly to the kind of founder who would otherwise be inclined to seek some direction from HN commentary.

Here's my best try as an antidote:

Remember that as a technical founder, unlike almost any other kind of knowledge-worker, you have a non-zero chance of generating $1 B in equity value for yourself in every new company you start. But for a company to do so, it will require getting enormously lucky and getting you strapped in for years of extremely intense work along with your team (and likely, investors & board). You should never bail because of mere problems with product-market fit or current sales traction, because those things can change dramatically and swiftly. You should always bail if your faith in, and interest in working with, the people around you goes to zero. When you do bail, go graciously and negotiate some kind of spiff on the way out, but don't belabor it. Your mental energy is far, far better spent preparing for the next big thing, and you are getting the better end of the bargain, for you have now denuded yourself of the albatross of a team you won't succeed with.

Growth from 2k to 60k is an important tipping point.

There should be a buyout at this point. Valuation based on income result in 5k * 12 * 15 * 40% = 360k, which should be a fair price. valuation based on funding would be around 400k, which would be similar.

You can have that written down as a contract, not necessarily direct cash payment, but cash payable, and have your co-founder to sign as guarantor, which would not be a bad price for him, and not a bad price for you too. Deduct the 3% if you want.

PE of 15 is unrealistic; 2 to 3 for an unproven business at that scale is what you would likely receive when pursuing a sale.

Not experienced in this by any means at all, but I still am interested in what are the legal, social, and professional responsibilities here.

Legally, you are entitled even though the market is no longer the same as which you were brought to help in. Professionally you have put in lots of un-tallied TLC. Socially, there seems to be no effort for an amicable resolution.

On the business side it doesn’t make much sense for you to continue with the company if this is not your area of expertise. So you should taper off the position of founder and become a silent investor. Do not budge on percentage. It is your right.

If the other person does not accept this, then the option is to dissolve the company. Keep all assets as is. And license to new entity for royalty or one time debt.

If you want to continue with the company, negotiate a position that is optimized for what you can do. And remain shareholder. And board member.

Either way, assess the true value of the company in terms of current potential revenue, future growth, and future risks. Use that as as premise for negotiation. And set aside a BATNA. A best alternative to negotiated agreement.

Don’t focus on the torch and burn scenario even if the other person insists is a possible outcome.

(All this comes from someone who doesn’t know a single thing about this other than how businesses merge, split, and dissolve.)

> Legally, you are entitled

He's not. He's 11 months into a 12 month cliff.

If they dont have cash, tell him to issue you a convertible promisory note for $X amount that you think is fair. If the Company does well then they can pay you out or you can convert your stock into shares for cheap. If the company goes under, then you all lose. Lawyers can draft these for cheap, just make sure you put a timeline in there and make it one sided so you can convert at any time with anti-dilution provisions.

Visit a lawyer, this is the point in legal agreements. There is a thing called court that, no one wants to go to courts its time consuming and expensive.

Also talk to the investor, I'm sure they would rather not see their 100k be worth nothing because of a founder breakup.

Don't take any bad offers, you don't have to sell.

On the other hand if you are the one that is worth firing and you know this, do the honourable thing.

You have some options:

1. Hire the best lawyer you can afford. This is easier said than done because there are relatively few lawyers who are qualified to do this kind of work. The ones who are qualified will be very expensive and unless I’m missing some key details, I don’t think you have much chance of coming out of litigation with a profit. You might come out with a W, but I don’t think it will be worth the cost.

2. Assume that this startup is fucked, leave and keep a good relationship with the seed investor.

3. Assume that this startup is fucked, stall for a month until you actually own stock and then you have some leverage. BUT, depending on where you live, you may/might/likely will incur a tax liability on those shares. If you already assume that the startup is fucked, talk with an accountant to figure out what this strategy will do to your 2020 taxes owing.

4. Assume that the startup is fucked and name the company/your cofounder. It would be damned nice to avoid this toxic piece of shit in the future.

Outside of those options, I don’t see any other good choices.

Your co-founder wants to profit from 11 months of your life and leave you in the gutter. 11 months is about 2% of your entire adult working life.

Don't give in to anything. The guy is a crook.

He should have proposed the paltry 3% before you dedicated 11 months of your life on the business.

At the very least he should offer to pay you a market salary for the 11 months you worked. He could take out a loan to pay you.

I hope this works out for you! I am not sure how I could contribute much insight without quite a bit more detail, this strikes me as "Should I hire a lawyer?" to which I'd say "yes."

Without knowing how your partner is inclined to act or respond to negotiations, or what your negotiation strategy is and how likely it'll be effective in this dynamic it's all a giant question mark.

Essentially it's like asking a website "How do I win a fistfight?" except unlike actual fistfights, there's an entire profession and industry dedicated to people that can (hopefully) act effectively as your proxy.

If you're genuinely dead-set on not getting a lawyer, then you've got a fistfight scenario on your hands. If that's what you're looking for, make sure that you've taken stock of your capabilities and those of your adversary and form a strategy accordingly. This answer is basically as vague as the question though.

Hold out. Keep working and keep proof you are working and do what is required to keep your stake. Don't give them anything that could be used to justify firing you or the upper hand in any legal battle. Keep any evidence of them violating the contract. Try to get the upper hand in any negotiations. You'll get a better deal at the very least

Sorry you had this happen to you. I had something similar just when the startup looked like it was going to take off the other co-founders tried to shake me down for my shares, threaded me with complete theft of my shares if I didn't accept some insulting, contract breaking amount. The company went on to do unsuccessful ICO scam and things worked out well for me getting out

Alternative view, ask if they will consider a unrestricted licence to the IP in lieu of payment rather than any ownership.

Ask for a fair buyout in the form of an IOU. They can pay it when they have more cash or default when they fold. You've locked them in to sticking with the work that you have done by dint of the SEO juice. If they want to reap the benefits of that, they have to compensate you commensurate to what was agreed.

Debts are usually paid before equity in bankruptcy, maybe even in an acquisition.

but, seriously, get a lawyer.

Your co-founder likely has no ability to just kick you out. What do the documents you signed say? Is there an operating agreement?

Who brought in the investor? Who has that relationship? If you're friendly with them, you could ask for advice or feedback. Do you have business mentors near you who can help you navigate this?

This quote might put things in perspective:

"The only rules that really matter are these: what a man can do and what a man can’t do. For instance, you can accept that your father was a pirate and a good man or you can’t. But pirate is in your blood, boy, so you’ll have to square with that some day. And me, for example, I can let you drown, but I can’t bring this ship into Tortuga all by me onesies, savvy? So, can you sail under the command of a pirate, or can you not?" (Jack Sparrow)

So, the question is what these other guys can do vs what you can do. You probably want to keep track of any correspondence regarding this matter in case legal action becomes an option. I hope no sane board will think that facing legal action is worth any cofounder's "wants" and "likes".

keep 40% of nothing. do not capitulate. you have the upper hand here, and an honorable position.

3% of nothing is nothing also. i’d go with 40%.

it’s absolutely ridiculous because the other founder isn’t prevented from working alone because you hold 40%. the 2 things aren’t connected. so just agree to sell all your shares in the next raise. then it’s his choice: take on debt now to buy you out (cheap) or pay later (expensive). the latter is likely far, far too expensive so more likely you can only sell half your stake in the next round.

EDIT: it has occured to me that you are only 11 months vested. this is a bait and switch. make their lives hell, even after and if you get to keep 10%. he probably can't fire you so you'll just keep vesting. make it very clear you will make it impossible to fundraise unless he buys you out.

Bad news: If the CEO wants you out, by default, you should leave. It won't work to stay wrt high-pressure collaboration & trust, and is a warning sign against continued growth. Worse, they are likely about to fire you over the equity + performance, and unless you have single-trigger, you get 0 equity. Even if you keep equity after you leave, 40% equity is too much 'dead weight' for professional investors to not pressure them to wipe you out after you leave.

Question is how replaceable are you. (Sadly, most people are.) If the plan is a funding round, they'll need you or a new technical cofounder (they may be replacing you anyway?), they'll need equity to represent that. good news there is they want someone proven or harder to raise. The founder may also be wanting to keep > 50% after funding dilution.

I'd stretch it out 1mo till you got your cliff, so you get your 5% or whatever vested locked in. Then I'd try to figure out why the reln is broken, and if you truly want to stay / can fix it. Negotiation wise, I'd assume you are leaving, and maybe they are playing hardball. Asking for a buyout doesn't work as they are cash poor, and keeping too much equity doesnt bc they can just fire you. they may also decide to wipe you out after you leave by issuing more stock to remove dead weight on cap table.

Maybe: Offer to stay on until you help get a good replacement at 90% efficacy, and keep vesting at high rate, then leave. Say you are good for partial buyouts during the next rounds.

if you have single trigger, you have way more leverage. if a success 10yrs / 1000 employees / $1B from now and you leave now, you'd have contributed little of the ultimate work, and your equity & departure more of a hindrance during fundraising, so leave it w even 5-10% now is fairish.

edit: I would discuss w a startup lawyer. if you break the reln now w money still in trust of the untrustworthy ceo, like equity to sell at next rounds, you may want extra protections on it, like conversion dates to something more liquid.

People are downvoting this, and I'm guessing because they interpret it as saying it's fine that the technical co-founder is being forced down + out like this, or that they don't "deserve" their shot at vesting that 40%. Not my intent - it's immoral, and probably, illegal. Pulling this 1mo before the cliff is especially evil.

The difficulty is the CEO has a lot of flexibility in equivalent legal actions like firing the co-founder, issuing 10X more shares, and diluting the 40% to 4%. Even if the technical co-founder does successfully walk away with 40% today and things go well, investors in funding rounds years from now will still pressure them to do so ("why is 40% of the company shares dead weight? That should go to new employees!"). The situation stinks, as does the negotiation position.

A lot of people saying you own 40% of this startup so you need to fight for it are giving you bad advice. Based on what you said, you don't own anything yet because you haven't vested any shares.

If you are a Corporation, and your corporation is setup in a standard way with your partner as the CEO, he can fire you. They only thing you can do is go to your board of directors and plead your case. The board has the ability to fire the CEO, so they can force him to retain you.

If you are an LLC, then you don't really have a cap table and there is a good chance there is no vesting. You have something else. You need to read your operating agreement. It will define who has the real ownership and how the buy out process works.

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.

Set up a meeting with the investor Andy UT partner and say you want to be as transparent as possible. Explain the situation and suggest to the investor that you and the Cofounder need to find a way of working together, otherwise one of you is going to have to leave with 40% of the company. This is a great example of where vesting for founders sorts all of this out clearly and makes it more difficult to get greedy. Of course this makes some assumptions about the legal agreements you have with the company. Do these agreements allow cofounders to be sacked usually, because I’m sure as hell writing into any I sign that I can’t be!

Just don't sell then. What they gonna do, they are bound contractually.

If they try something fishy like getting toxic, abusive, etc and still doesn't want to buy out, I'd just blow the server on them, which, along with the entire code base, had no working backups uNfOrTuNaTeLy, then spin up a company two months down the line under a shell company that is registered via lawyers and doesn't have your name on the public papers.

This is a delicate and nuanced matter that's hard to know the right answer without all the details. I've gone through this 4 times, and also recently talked to 20 people who went through it, specifically about this topic. Feel free to email me and we can have a call and talk you through the options (paul.biggar@gmail.com)

First thought: You don't have 40%, you have at most (11 months / 48 months vesting) * 40% = 9%. But, at 11 months you haven't hit your cliff, so you actually have 0%. That is, if they can fire you. It sounds like they're the CEO so they probably can, but if not the board can.

"Take the 3% otherwise you'll own 40% of nothing"

I would call the bluff. It doesn't look like you have many options to exit with a cash settlement unless you're allowed to sell your own equity. I wouldn't take 3%, 15% minimum.

Have you talked to your investors? They might be able to provide some guidance. It's possible that they know nothing or they are responsible for the move, so you need to figure out where they stand. I would personally be looking to kick the CEO out with support from the investors. See how the CEO behaves when the shoe is on the other foot.

I'd say take the 3% and continue. Current price has little or no value anyway. If you take 3% and just chill for 2 years you get a higher price per share. Don't let the emotions run over you right now

Negotiate up to 6%, get feedback, stay polite, then on to the next venture. If they're acting this way, I don't think the co-founder is worth the massive risk you'd be wasting another few months.

Definitely do not sell / give away that shareholding. It may well become 40$ of nothing, but it could also become 3% of nothing or almost-nothing, and the co-founder will have been paying himself a return when the company gets revenue.

I suspect there may be other personal/personality issues here and he may well like the idea of hacking alone on this, now that it appears to be viable. However, he has an agreement with you, and you made commitment, put in effort too. That's why you have a shareholding.

Do not just give that up, unless he makes it worth your while 'now'.

Speak with the other investor, negotiate a buyout or negotiate exit terms and equity. I'm guessing you'd own 10% if you left after one year and left the rest unvested. You may need to risk a small chance of owning 40% of nothing to get this fair settlement. It's worth it.

The worst thing you can do is stay. Any compromises you make for the greater good in hopes of getting past this and putting it behind you are likely to come back to bite you 9 out of 10 times. Cofounder conflict doesn't go away so easily.

Don't agree to anything. That is all you have to do. When the company tries to raise money later, they will be asked about any other people who have an interest. At that point your company will need to address your issues and they will have money/incentive to do it. You don't need to be mean spirited, just say "Okay, I have my 40% and let me know if in the future you want to buy me out." And be fair.

Don't walk away, don't sign anything that isn't fair to you, don't be mad, just be patient.

Sorry, that sucks.

Every situation is unique and I'm sure there's more to this, so I wouldn't seek or accept legal advice from HN (including me).

DM if you want a referral to a veteran silicon valley executive compensation attorney. That's the pro move, it's less expensive than you might think and results in a lot more long term happiness for all parties involved.

(I'm a veteran engineer myself and between myself and friends, lots of experience in these sorts of matters)

Talk to (1) a lawyer, and (2) the $100K investor. Because when capitalized that loan will quite probably tip the scales as long as they agree with you to a > 50% stake in the company.

What do your corporate agreement and bylaws say? They may be in violation of your stated roles/responsibilities, or in breach of fiduciary duty.

Get a lawyer right away. Keep records of everything.

If he owns > 50% he can dilute you to whatever he wants. But, if he owns less than 50%, then he'd need to get voting control to do it. Is that possible? Do you own enough to prevent it? If so, I'd just tell him you're not interested.

If he controls the Board, then he can do pretty much anything. He can create more shares and give them to himself (that would possibly create tax issues, so he might not want to do that).

Also, I'm curious how the stock is valued. Do you know that?

Genuine question: Have you considered buying out your co-founder instead? You seem to have a general undestanding of the figures you can make through advertisement. I'd suggest doing more research on that, maybe meeting with a consulting/advisor CFO who could help you make a case for it. Then you could go for a loan to buy your co-founder out, or meet with the investors to have him removed/replaced with someone who's gonna put the business first.

Is it possible the investor is in cahoots with your cofounder? If so, then you may not have a strong position. Are you sure your cofounder is not screwing you over at the investor's behest? If it's not something that's (technically) complicated, your cofounder may be thinking of hiring in help to replace whatever value you are providing (i.e., you are fungible, he's not).

some advice i got years ago that has proven its value time and time again... when dealing with ____heads, you gotta be a ____head too.

if your co-founder wants to take something from you without compensation, do not go lightly.

for no other reason, IMO, than to teach the other party a lesson. if he does this to you it will embolden him to do it to others. greedy people need to be stopped in their tracks.

What about the third option which is you building 100% of a competitor who knows how everything works and can compete effectively?

Almost all the advise here is bad. Without legal review of what you signed how can anyone know what your negotiating position is?

"Lawyer up" feels like the best direct advice we could give. The other comments are good information to have, but OP's co-founder is clearly executing a comprehensive strategy, and OP doesn't seem knowledgable enough to avoid falling for it on their own.

Hire an expert to help you navigate this, or you'll probably regret it.

Have you read your partnership agreement? Are there duties assigned to each partner? If so, let him play his “40% of nothing card” right into breach of contract then sue for ownership of his shares and then hire someone to do what he refused to do. But probably, speak to a lawyer. You do need to respond to this offer in writing, even if rejecting it.

If you have more available capital than your co-founder, can you put enough financial pressure on them (e.g. ask someone to collect their credits and loans) and/or on the company (e.g. seek out investments and expense opportunities to spend money on urgently) to buy them out in a few weeks or months?

You need to ask for lots of advice but ultimately you need to make your own mind up about the situation.

This is a hot potato, everyone is going to have an opinion. So for this reason you need to make your mind up.

Source: this thread - there's some very strong opinions here. Get some 121 advice instead, this thread is just guidance only.

Definitely first talk to a lawyer, and take each comment in this thread (including mine :)) with a grain of salt.

A lot of us have zero idea about your situation and we are speaking from the gut. That said, fuck that cofounder, I would rather burn it to the ground than let him get his way and regret it for the rest of my life.

If you are at your cliff you might want to buy time saying you will take a bad deal but need to run it past lawyers or whatever to make it past the cliff. Then you can have a change of heart after they can't take it by force.

Also this goes to show why you should not take a cliff if you see yourself as a founder.

Tell him that you would sue if you are forced into any decision. You have built this with your sweat and blood. Do not give up. If anyone has to leave, he should. Go to investors and tell them you would sue if forced into this kind of blackmail. And no empty threats. Please lawyer up

One idea would be to buy out the investor. I read in one of the comments that you do have some cash to spend. If you can work out a reasonable deal with the investor you would no longer have a neutral party doing nothing, you'd own 50%, and be able to set the terms.

Just propose something you can largely feel comfortable with, but also gives the other founder strong incentive to continue, and won’t hurt future raises.

If necessary add hooks into revenue and a framework for a future buy out.

But def don’t waste time around someone who doesn’t want to work with you.

Do not sell. He’s trying to push you out since it’s primed to blow up. If it becomes 40%of nothing let me know and I’ll build it with you. I’m a full stack entrepreneur who can sell and build. The only real threat that I’ve seen brought up is if he can fire you.

Why does your partner not want to continue working with you? Are your views on how to continue opposite? I understand how you see this as unfair but it also doesn’t make sense if he/she builds the product alone and owe you 40% for 12 months of work

My assumption is that the co-founder would need the investors to vote to fire you? As in, he can't do so himself? So is his threat that he will leave if you don't leave?

If he leaves, can you run it yourself and do you want to do that? My guess is that you would have to bring in someone to do whatever the co-founder was doing.

Your equity ownership is worth something if you have 60k users. You have a subset of them paying something already it sounds like. This is a great thing, if you enjoy it and believe in it. If that is correct, then if your partner has a problem, and you think he is replaceable, then you don't seem to have to do anything related to his demands.

I think this is also a good lesson in needing to have a really good relationship with the investors as well. If it is correct that they are the swing vote on decisions, you want them to appreciate you, know you well and understand the value you add.

I'm not a lawyer, but depending on where you live it might take more than 1 month for them to actually succeed at firing your. For instance if you live in The Netherlands it would take months to arrange that if you don't agree.

You need to talk to a lawyer, not a bunch of internet randos. Ignore literally everything else you read here. The lawyer is going to need to see your contract with the company and look at applicable case law to advise you here.

Hard to give advise as you don’t specify which lawsapplies. Could California, US, or any country were the $ is the currency. Could even be based in US but other countries laws apply I have had that kind of mess in the past

This is a fight you don't want to back away from or you will likely regret it for the rest of your life.

But don't fight, let the investor see the other guy as a "fighter" while you stay focused on the company fundamentals.

Can you wait for another month, get your 10% and part ways with that business? That seems a fair and reasonable compensation for 1 year of work. I'd insist on a contract that would protect your share from dilution.

Slow play to your cliff. Then offer to accept your current vested equity, and let them negotiate you down a small discount on that. Like you will own 10% of the company, be OK with going down to 8% or whatever.

Keep 40% of nothing, and tell him to fuck off for trying to strong arm you

This is a bait and switch. Talk to a lawyer. Wow, just absolutely scummy.

Is there a legal framework that allows company to convert OP's shares into debt to OP and essentially by the debt for $0? The debt would only have to be paid if certain conditions are met.

It sounds like he’s trying to push you out before it blows up. Don’t sell. If you end up with 40% of nothing hit me up. I’m a full stack entrepreneur who can build and sell.

Could you privately find a potential buyer for your 40%? Then tease that info and magically they may prefer to buy you out and suddenly find a way to do so...

Everyone here is saying hire a lawyer. If OP actually has to go into litigation, It seems the cost of a good lawyer > value of the company.

You can often do an initial consultation with a lawyer for free. They can let you know what general options you have if any and then if you need them to execute on any of the options you pay them. They can give you an idea of the costs up front.

I've done this before in regards to a startup project I was working on with 2 others and the information was very useful and totally free.

Lawyers are very useful before and often prevent litigation.

If you insist on keeping your share and they shut the company down, I suppose they also wouldn’t be able to stop you from copying the idea?

Are you the CEO? And does your vesting agreement have any provision for accelerated vesting if your employment is terminated without cause?

Sounds like you are in a good position. This is not legal advice so go seek your own licensed legal counsel.

If they don’t pay you the equity then they would not own your tech. Any revenue/profit they derive would be unjust enrichment.

Not to say that I’d even leave them with working tech. I’d disable everything I built today until we had a more equitable agreement.

No chance I’d let them profit from this tech alone anymore. At best I’d offer them a license to use it.

Then go start your own company with it and be the majority owner.

No need for the bad business partner.

This is not sound advice nor is it mentally sober. But this is what i came to conclude.

I once had a partner where we had a good business. After some years he fucked me.

What matter to me is personal values and virtue, and even though he took a shortcut, i am going to catch him one day and make him understand tht history will catch up and he will be sorry he ever fucked me.

I am not in a hurry. The longer time goes by, the more i am looking forward to the encounter.

Money is not just money. It's also about being cool and having a good heart.

Fuck em

> What are my options here?

Maybe you should be asking, what are their options? They can't force you to give away something you own.

This is a terrible situation because you're probably working with a really terrible founder.

Even if you end up holding on to the 40%, it's likely they'll try to screw you hard in the future so be wary of that.

If it's possible in the very, very nicest of indirect terms make sure they know they can get sued for these kind of shenanigans and it will ruin the company.

Long term though, it's hard to say, because they'll aggressively want to take everything.

Also: get a lawyer. (I should have said that first)

Don't give anything away, worth case - you've lost 11 month. People have been working for nothing longer than that.

IANAL or a founder but it seems to me the #1 thing to do is hire a good lawyer and listen to their advice.

You can keep holding the stock and every couple of months demand a dividend payout from the company revenue.

Stay on and fight. If anyone has to walk away it is the other guy. Believe me. Lawyer up and fight it out

Can you sell your stake to another outside investor, and let that investor deal with the co-founder?

Maybe you could make a buyout proposal in the form of a promissory note at a price you deem fair?

Equity is property. The company must pay you to buy back the shares you have vested.

You own 40% of the company, tell him to sod off it's as much yours as it is his

Maybe start a competing business with the same idea and take 100% of the equity.

You don’t have to do anything. What you own is what you own.

Sell nothing. Do you want to leave? It doesn’t seem like you want to leave.

@fortydegrees, if you would make $5k/mo with Adsense, then you can make $10-40k/mo if you worked with my company instead.

I'm not sure if that helps your leverage with equity negotiations or raising external money, but it will definitely help your bank accounts.

My link's in profile.

Sounds like you need legal advice from an experienced business lawyer.

Use your time to find his weakness and leverage your way out of this.

I have gone through something very similar, feel free to email me.

Can you expand on why they want you out and what happens if you stay?

We've spoken a fair bit and they don't have anything specific to say. It's mainly that they don't like or want the stress of working on a startup, and want to run it more as a lifestyle business.

They are trying to kick you out a month before you vest! These guys are not acting in good faith. Do not trust them. Wait a month and vest. Then quit.

You were the technical lead. More than anyone, you built it. Don't let these suits steal it from you or bluff you. So often business types take advantage of financially unsophisticated technical people.

If they want to run it as a lifestyle business, that might be some leverage with your investor. Lifestyle businesses are great, but they do not return the same as high-growth venture businesses.

That's tough. I think they will need to realise that the commitment to having seed funding and a co-founder are not the same as a lifestyle business - especially when they do not have funds of their own to fall back on and revenue is not presently hitting the numbers that would be needed.

Even a lifestyle business requires more than just 'coding'. That person at least is likely to have an unpleasant awakening. I just hope it doesn't hurt either of you too much

lol! too late for that! he took seed money.

They are bluffing. Keep negotiating until you get what you want.

This is sick. Wishing you good luck and even better lawyer.

Walk away and start a new company that does the same thing.

"Work on it yourself; I'm keeping my equity".

If the other person is smart they will:

Get your shares for free or cheap

Start over and own the entire thing

I'm just a country-bumkin managing to build and secure software, but uh...someone wants to push me around without having the money to do so? Let 'em, my kind are stubborn anyway.

Then again, maybe I just enjoy fire a bit much.

Why does your co-founder want you to leave?

They're not enjoying working on the company together. It's mainly that they don't like or want the stress of working on a startup, and want to run it more as a lifestyle business.

Call his bluff. He’s trying to cheat you.

Have you been paid anything for your work?

Who is on the board, and who is the CEO?

Walk away or get a lawyer.

Watch the movie "Startup.com", exactly the same problem.

https://youtu.be/ibuiUXOTE4M

Those guys really think they can get away with everything, but you really need to be prepared for sociopaths.

Name and shame.

get a fucking lawyer

Seriously? If you are asking these questions, your understanding of the binding contracts belies the casual verbiage in your post. So which one is it?

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