Don't fall for the 40% of nothing once you are close of making money. They just don't want to share the pie.
> They will not entertain the idea of me buying them out for cash.
Don’t sell, don’t give, don’t walk away. Stand firm. This was a binding agreement they can’t get out of. You have all the power here. You know you have something. They have established a lower bounds on its value. It’s way more than 40% of 400k.
Best of all. Don’t let your customers know it’s founders are going through this. It’s obvious, but make sure you keep your cool and composure. It will pay off in the long run.
For both of them if partner can separate head and ass.
Value to a founder does not imply value to the market.
https://www.mwl-law.com/wp-content/uploads/2018/02/RECORDING...
- 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.
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.
The parent comment of this thread was talking about keeping 40% of nothing.
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.
First they have time to just fire him, and without contractual protections she/he’s out before vesting a single share. Most US states are At Will employment, meaning they don’t need a reason. If the CTO wants to contest the firing, where will they get $30K+ to pay a lawyer sue over a nearly worthless business?
If he/she is able to vest their first year before getting fired, but they then dilute the CTO further, where is the CTO going to get $30K+ to pay their lawyer sue over 10% of a nearly worthless business?