Well, it's his property. Why should he give it up/away? That's also the risk you take when you go with someone else into business - that they simply can stop working and keep 50% (or whatever share) of the business and it's their good right to do so.
Similarly it’s less common, but still not uncommon, to have provisions for leavers. Either some kind of prenegotiated basis to determine how you calculate fair value and buy back the share. Or I have seen something that was more like a reverse vesting in that the ownership expires X years after you leave.
The benefit of sorting all this stuff upfront isn’t just to avoid negotiating at the worst time when emotions are high. The game theory aspect of it requires you to balance not getting screwed with what seems fair if you’re the one that leaves.
Since you own all the stock up front the founder participates fully in shareholder voting and you don't get taxed for receiving valuable stock later (although there might be issues with the actual reverse vesting agreement from a tax law standpoint as it is a form that ties your employment with benefits).
https://www.gov.uk/gift-holdover-relief
(of course, this depends on jurisdiction)
I’ve lived in numerous countries and they’ve all applied either one or both of the following to such a situation:
* the shares are deemed “at risk” because of the exit clause, and so are not yet taxable. In Australia _I think_ you need to explicitly declare that treatment in the first tax return that the event happens, and you’d be losing some of the benefit of the long term capital gains tax discount as a result. I’d need to double check with my accountant on the specifics, but I know he suggested such a thing at one point.
* the nominal value at the time is tiny fractions of a cent per share because the company has no assets or income. So you just take the tax hit, which ends up being something like $1.
It's crystal clear what and how, and you're not going to try and low ball it because you can be forced to sell for that yourself. I don't think it's perfect, but it is simple, self correcting and crystal clear.
I'm kinda curious how the low-level details of that work out. Do you have some sort of 3rd-party service which temporarily holds one founder's offer and gives the other founder N days to make a decision? Or is there some other mechanism to prevent the founder initiating a buy out from backing out ("no you see, I wasn't actually serious about buying you out!").
If a company is clearly worth more than the offer, finding outside investment or even traditional financing through the bank shouldn't pose that much of an issue.
Inactive, uninterested founders in general will only be a burden. Either you are engaged or you are not.
Basically as far as I can tell, as far as it pertains to shares, this conflict boils down purely to differing valuations of current shares (of course I'm sure on a personal level the conflict is much more complex).
Which sounds kinda ridiculous to me given that the company had $52k in the bank and had been operating at a loss for an extended period of time.
Year 0: -10k
Year 1: 0k
Year 2: 10k
Year 3: 20k
Year 4: 40k
Year 5: 80k
Year 6: 100k
Year 7: 100k
Suddenly because a founder is leaving you expect them to start turning a profit again? That seems a little backwards.
> Suddenly because a founder is leaving you expect them to start turning a profit again?
No, it's more a question of whether you think the company will ever turn a profit. That's probably the point of contention over how much the shares are worth: do you think Elementary OS will ever financially support a team? If not then you probably lean closer towards a 0 dollar valuation (or in this event 26k). If you do then you probably lean closer to a 100k valuation.
But regardless, the value of the shares are... whatever their value is now. It doesn't matter what they might be worth in 10 years if their current value is ~zero and a founder wants to divest them now.
But the current value of shares is intimately tied to what their expected future value is. Indeed in the absence of an acquisition or IPO this is the only way to determine the current value of shares. And if different people disagree on their expected future value, they will disagree on their current value.
In general, I think what is wrong with this argument is that they are both in the wrong. They founded a company that should have been a 501c and now they are talking about its value as an asset based on the willingness of people to make donations to enable developers to work on a project.
These kinds of cream on the top FOSS projects run as companies are largely relying on naive good will of people who want to fund the best project to adapt open source to them rather than the best portion of open source for them.
This said, I reckon the real issue is that the guy wants 50/60k from the shares, so the lawyer went "we'll ask for 100k and negotiate"... but on the other side they probably think 26k was already a compromise, and aren't willing to budge further.
And I can easily understand how that would rub the other cofounder the wrong way ("Oh so you believe that Elementary OS will eventually be able to hire a team down the road but you're offering me a price that indicates the opposite, even after accounting for uncertainty? Sounds like you're intentionally low-balling me here after 10 years of hard work together.") Of course from the other co-founder's point of view 70k of debt hanging over one's head is not a fun prospect either. But nothing at first glance here, without additional details, jumps out as me as brazenly unreasonable from either side.
Legally sure but thinking more pragmatically the company is already struggling financially, why not take the money they offer and leave on good terms?
The friendship/business contacts are probably worth more than the company shares. And if the company rebounds and you miss out, well that is life. You still have been founder of a great company and that will open many future doors.
In German we would say that the smarter one compromises. Arguing only leads to both sides loosing.
Indeed. At least the lawyers seem to be winning.
I'm sure I'll be violently opposed here, but it seems like an awfully poor heuristic that creations are statically split at mint-time, as opposed to - say - the amount of labor put down over time, at least for a founding team.
For instance, let's say I and a friend created a company, and run it together for one year. She keeps her share, but stops contributing. I then keep working for 3 more years. In total, we created this thing over 5 person-years. A natural baseline split would be 20-80.
Obviously you can do more accurate heuristics based on skills, experience and other factors, and having salaried employees are outside of the equation.
In either case, I'd feel horrible in a hypothetical situation where my cofounder quits early with 50% and sit back and hope to cash in on future hard work from me. And not only that, but makes decisions over a company he's not operationally involved in.
But in general yes, my impression is there are usually agreements in place to reduce an ex-founder's share of the company over time.
That sounds reasonable. The problem is when people don't do the leg work to set up a framework to handle more complex share splits. Sans such a framework, the default is to split at mint time because that's how stakes have historically worked and the legal system should, in theory, minimize funny business possible when someone doesn't have a contract specifying any specific details.
The general outcome here is that the 'no contract' way of splitting shares is pretty bad, which seems in line with the no contract way of doing anything other transaction or business dealing. That way of doing business only works for small time transactions, say in the 2 or 3 digit range.
Investors could minimize risk by providing templates for the various jurisdictions that show how this is done, for using lawyers to codify is going to cost more than the startup is initially worth, hence the common but entirely unnecessary infighting.
I use Elementary on one box and like it (only qualm to date: no window minimize button), whereas Ubuntu is nearly everywhere else. It would be nice if the community (= people closer to the founders that they know and trust) could step in and mediate.
It is correct, once you own shares they are yours forever, and unless a contract (shareholder agreement) says otherwise, they are yours to keep. It is NOT appropriate to want to participate in decisions after a full departure. In fact, that may also cause conflicts with one's next employment. Founders that leave may retain a purely passive stake. If they are smart, they understand that that can only be a small stake, otherwise the venture is at risk, because no investor wants much "dead wood" in the share pie.
The broader question is how to monetize a Linux distribution, I find that harder to think about than monetizing open source in general, which is already a little more challenging than selling proprietary software (you can sell services, but while that is easier than selling products, it only scales linearly with headcount => bad idea).
Guys, don't fight over 30k, in tech at your levels that's two monthly salaries!
I have been a staunch advocate against minimizing windows, as I have seen people spend a significant share of their time doing it (instead of simply making visible the window they need).
Source: been there, twice. Now I keep a boilerplate partnership agreement form URL bookmarked on my phone...