I Ended Up with Just 0.15% of My Own Startup

I'm a bit curious here, since it feels like some information is missing.

You left this company in 2016, so by now, you know the outcome. You were there for under 2 years, so you only vested half. Based on my Googling, nothing physical was released and the company barely had a footprint. There's a patent (from when you would have been there), but neither you nor the "big rich man" are on it. It's also based in Oslo, which feels important to note.

I can't put my finger on it, but something feels very off here. I do agree the Reddit comments were quite inept, but at the same time, the conclusion doesn't resonate with me.

I think the real conclusion should be: A lot of startups are somewhere between risky and a straight-up scam, and very few are the next Google. If you're going to join a startup, YOU need to make sure it's the right one. If you don't have money, time is your most valuable asset, and you should be incredibly thoughtful about how you invest it.

Also, it is unclear what the posters goal is. Are they looking for advice on actions they can take? Looking for sympathy? Trying to make a political point?

Seems strange from a self described serial founder with 20 projects under their belt.

He's currently trying to be an indie hacker influencer (and his products are sold to other indie hackers), so he just posts threads like this on Reddit/Twitter/etc. It's meant to gin up anger for the sake of engagement.

https://twitter.com/johnrushx/status/1758876724123619497

Yeah this guy seems a bit odd to say the least.

It just doesn’t make sense to care so much about a 15% or 0.15% stake of an almost closed down company and that produced nothing notable. Especially when they were offered upfront to put in money, and likely had it spelled out what that means and implies.

It’s the exposure of their vulnerable self. It’s commendable because we can learn from them.

It seems like they are warning us to not let angel investors trick us into thinking we can hang with them in later rounds of funding that will very likely be necessary. It’s also a warning to put your loved ones first because business isn’t guaranteed. One likely regrets ending relationships after flaking out because one was greedier than one was smart.

If we take this story at face value, this was a recap. It’s basically the same as shutting the company down and starting over. It’s not ideal, but this only happens if everyone agrees the company is basically worth $0. Remember, the other investors also lost all their money, not just him.

If you’re going to say it’s your startup and put founder in your title, you also have to be responsible for it succeeding. You don’t get to have it both ways.

EDIT: parent comment was edited to say it’s him being vulnerable. I don’t think so; it’s him farming engagement for marketing.

Agreed - is the problem really that heavy dilution occurred, or that the startup became ~worthless? (as most do)

It is worth bearing in mind when folks are joining an early stage company (as cofounder or founding engineer) that dilution will occur, and that - especially if you don't stay with the company and continue to be valuable - it may be heavy (though usually not nearly this heavy)

The typical defense against this is a pro rata investment right - if the company tries to conduct a financing at an artificially low valuation, you are allowed to invest alongside the investors to protect your percentage position.

If you had this right, and felt 150k was too much money to support your position, you could have gone out and borrowed the money from another investor.

To be honest, if at a 1M post money valuation you couldn't justify defending your position, the company was probably, in fact, approximately worthless.

It sounded like he had a pro rata, but he couldn't afford to exercise his pro rata. Borrowing money to invest in a startup that you've left and that the board values at approximately worthless is a pretty tough sell, both to yourself and to a potential lender.

Yup. Sounds like he isn't missing out on too much.

If anything, he might actually consider himself fortunate here that the company successfully conducted its recapitalization and raised fresh equity. Maybe his otherwise-worthless shareholding will ultimately end up in the money, due to the other investors rescuing the company.

That assumes the valuation is honest. The fact we're seeing this post suggests otherwise.

It doesn't assume that at all. If the valuation on the deal is below your estimation of the true enterprise value, then this mechanism allows you to participate alongside the others and also buy cheap shares.

If you are rich enough to do that.

But OK, if you don't then you now have a smaller share of a bigger pie.

If not then you find the money somehow. Rich people don't have piles of money lying around. They just know how to convince others to lend them money at a certain rate, and hope that the profit pays all that off and leaves them a chunk. It's not magic; it's just being relatively trustworthy with risk.

That might be true in this case, but one partner using their knowledge as an advantage over the other to let them disproprtionately be squeezed out is just dirty business.

Nothing else. Partners are supposed to leverage the opportunity together, not each other.

It’s why attempts to simplify this and advocate for the actual innovators/creators who are just as much technical people are incredibly important.

Tech people need to retain way more of the equity, period. They create tangible value in building something. The “sales” oriented partners should earn their equity from the pool with delivering distribution or move on.

There are lots of negative risks from taking VC money. Even freshly minted from university there are enough true horror stories like this on the internet to learn from. But working in an incubator you see it all and have little excuse to be surprised (I was a founder and we were in an incubator for a while - saw some of the action!).

Avoiding outcomes like these would be a reason I would go through YC if I wanted to chase VC money rather than bootstrap. Having a strong minority investor beside you; one where the VCs do repeat business, and one the VCs care about their reputation, would be very helpful.

> Tech people need to retain way more of the equity

That's just fantasy. Common shares really suck: VC rights trump and VC model has a lot of dilution built into the success case. The median return of a any business is zero. VC money gears the risks higher for a Tech/investor. Good luck!

>That's just fantasy.

YCombinator started partially to change the fantasy.

Not fantasy at all. Below recent video from YC for technical founders on balance that's not occurring.

The lack of healthy balance between founders leads to risking investments more than they are.

If the VC model is imablanced and it incentivizes non-tech founders to do the same, both will need to understand the cheaper it gets to build and scale larger and larger.

Leveraging young founders or tech talent who might not know any better won't last long, it seems founders are learning from the experiences of others now that there have been so many more funded startups.

YC clearly talks about avoiding co-founders and situations that rip off the technical founder when they are creating so much equal value to anyone else in the start.

"How not to get screwed as a software engineer".

What they see in applications from a mile away from people being exploited in applications.

https://www.youtube.com/watch?v=fcfVjd_oV1I

Relevant discussions:

https://news.ycombinator.com/item?id=38477057

https://news.ycombinator.com/item?id=38632269

This essay is about the reality of VC power versus founders: https://siliconhillslawyer.com/2019/02/18/relationships-and-...

We can talk about the balance of power between founders and we can encourage technical founders, but VC actually holds the cards.

There are are legal remedies to challenge false valuation.

There is a near endless list of ways to be defrauded if founders engage in illegal behavior and nobody is willing to legally challeng it. These range from simply tearing up you stock grant to transferring the IP to a parallel entity.

This is speculation, but this doesn't have to be all that unreasonable:

Since OP had only 15% it doesn't seem likely that this was a "The Social Network" style trick to actively screw him out of his equity. More likely that it was really an internal round - no new outside investors could be found and the company was out of money. OP had left the company by this time and didn't value their shares enough to participate. Presumably the 15% had been vesting over 4 years, so a company that is out of money, can't raise more and had been at for >4 years, suggests to me that the 15% was really not worth much before the internal round.

So if you own a minority stake in anything, you can be told at any time that it has been reduced to a value of zero?

I guess this makes sense if they alternative was bankruptcy. If you can't inject money to help at a critical time, then I suppose it makes sense that the business you have a share of is basically worthless, and only the one that has more money is worth something.

Is this just routinely abused to disinherit a shareholder? Does this mean that being a shareholder is just about finding alliances you can use to screw others over, until you eventually get screwed yourself?

Business is just about finding alliances you can use to screw others over, and picking yourself up and doing it again when you eventually get screwed yourself.

In practice, this tactic does happen but I wouldn't say it's common enough to call it "routine". If the company is succeeding, it's usually better not to screw other shareholders over because the resulting interpersonal conflicts would risk the company's success, and then everybody is worth off. Similarly, if the company is failing but there's any chance of working with the people involved again, it's better not to screw them over because they won't work with you anymore, and word will likely get around that may hamper your ability to work with other people. It's only when the company itself is failing, or there's ambiguity about whether it's succeeding or failing, that there's an incentive to loot the carcass and screw over everyone else so that you get most of the residual value. But in that case, the company was failing anyway, so you wouldn't have ended up with much regardless.

Interestingly the same pattern applies in a lot of situations, because it falls out of the game theoretical incentives and so any situation with the same incentives tends to give the same result. When things are going good, everybody cooperates, and is happy to take a relatively small part of an expanding pie. When things start going badly, everybody fights over who gets the last slice. Makes me worried for the state of humanity over the next 10-15 years.

Yes. I’ve seen all of those things happen.

My uncle went through a very similar situation as the OP. He was CTO at a medical startup that raised a ton of money early on based on promising research and early results. Federal approval in the medical industry takes a mountain of cash and a long runway, by the time they got close to approval the money had dried up and the CEO was deep in the weeds of political infighting among the company leadership.

I forget the exact details as both the CEO and the board were pulling quite a few nasty moves along the way, but eventually an internal round was used similarly to set a much lower valuation before raising more outside capital. My uncle hadn't left on the best terms, the company was attempting to shove him out and block him from taking part in the internal round to protect his early shares.

Not too surprisingly this ended up in court (or arbitration?), but the moral is the same. When you take early shares there are ways the value can be stripped from you even if the shares aren't. There are good arguments for an internal round to reset a lower valuation, but it can easily be used as an offensive tactic to go after current share holders.

I don't think people often realize what all is really on the table when signing up for a startup. I've worked for a few early startups and will take options or shares, but I view them entirely as a gamble and assume outside investors will chip away at their value before anything is ever cashed in. If I were ever to join as an executive level or founding board member I'd be worried more about sizing up the other members than the business itself. Unfortunately its sometimes more about politics and dirty tactics at that level than it is about what the company is actually producing.

Owning equity in a startup doesn’t guarantee financial security. Understand the risks associated with dilution and internal funding rounds, and consider diversifying your investments to mitigate potential losses.

Don’t blindly trust leadership or assume they always have your best interests at heart. Stay informed and be willing to challenge decisions that could negatively impact you or your stake in the company.

Agreed w others, a workaround is see if any other VCs want your pro rata at some discount, where they front you the money and you agree on some split. The startup likely has right of first refusal, which begins a negotiation.

Presumably if an internal round, the company is dying, so nearly worthless, just IP and team. The new worth is almost entirely the $ going in, and the team that is sticking around to make it work as an incentive. The new $ dilutes the old $, and to get new employees, additional shares are issued, further diluting the old ones.

For such a rebirth, it's not clear - how much should some person who helped recruit a failing team + 1 year of dev be diluted? For people sticking around and the new $, how much should they be incentivized to stay and put in new $, and what % should go to the former 1-year employee doing nothing? That's the pre-money valuation decision.

Does the percentage really matter? You own X number of shares at Y value, so X*Y=$Z.

Doesn’t matter if it’s 20% of the overall issued shares or 0.2%.

If you’re not in a position to buy more shares when they are issued your percentage goes down but, if the new shares are issued at a greater value than what you got your shares for then you have more $Z.

It matters if the pre-money valuation at which the new shares are issued is inaccurate.

You own 10% of a company that was valued in the last round of funding at 10 million dollars. You have put in significant amount of work since and company has raised a lot more revenue. The fair market value is now at a 100 million dollars, but the existing shareholders put in another 90 million dollars at the same pre-money valuation as last round, diluting every existing share down by 90%. Congrats you now own only 1% of the company and just got robbed of over 8 million dollars. (Fair value of your stock went from 10% of 100 million = 10 million to 1% of 190 million = 1.9 million).

I suppose it depends on how the ownership stake is defined for it to be “getting screwed” or not? The equity I’ve had has always been X shares, Y price, equating to A% of the current issued shares. In both companies this has been over 10%. It’s then always been explained that to maintain my %, shares would need to be issued to me as part of the follow on rounds, but even if they weren’t the value of my stake (which is all that matters in my opinion) still goes up (assuming not a down round).

I’ve never really understood the focus on percentages, they aren’t the value.

I’d say you’re in a good position. If the company dies you didn’t waste any more money on the down round. If it has a good liquidation event, I’d talk to an attorney because I’m sure you’ve got a case.

Anti-dilution clause, look it up, and next time get someone experienced you can trust involved in reviewing/drafting the contracts.

How many investors will do a deal with a founder who wants an anti-dilution clause? That would have to be a very special founder. An alternative is a deal that values all the hours of sweat equity. In that situation, the founder could have "invested" the hours/dollars they had banked, assuming they are getting paid below rate. That keeps everyone aligned to the same goals.

People participating as principals in startups should know this, but it's useful to have a reminder like this every so often.

@dang can we change this to a link to the original source?

https://www.reddit.com/r/Entrepreneur/comments/1asosph/i_end...

Or just let it get flag-killed; do we really need reddit tales that are too-good-to-be-true on the homepage?

If you pay attention it was posted on HN by exacty same user as on reddit.

So I suppose whoever posted it telling story of his own.

Ignoring the fact, that 15/1100 shares are ~1.36% so in your case they had to add roughly a 100x the current shares, not 10x like in your example. This already reads like the company was not doing well at that point.

Side note: If it wasn't a down round, measured from your entry event, your shares gross value still went up.

In general: If the company needs 100k in cash, and all shareholders add cash relative to their share in the company, there is no dilution, cash is added, all is good. If some or all of the current shareholders can't add cash relative to their shares, you need an external investor, that investor has to "get shares from somewhere". If the investor would buy them from the current shareholders directly, there would be no new money in the company, the money would go to the shareholders, that is not what we want here. So new shares are created and only shareholders that do not do a pro rata investment dilute their shares relative to their current share, and maybe a partial pro rata investment, to make up for these new shares, which is fair. Without a down round, valued individually for each entry event of the current shareholders, nobody loses any money here.

I do not understand why you are upset. Am I missing smth?

All your comment talked about was money in the abstract, so you totally missed the point.

The point was that here we have a technical founder who spent years of their life working hard to build a product only to have their hard work de-valued in ownership terms by a non-technical founder who would be cleaning toilets were it not for their ability to scam naive engineers into doing The Work for them.

The moral of the story: don't work hard for someone who can de-value your hard work on a whim while laughing all the way to the bank.

I've looked through job listings on workatastartup and I've interviewed with some of those companies. I've also submitted proposals to YC and joined their cofounder search site. So I am mildly familiar with the landscape of VC funding and startups.

On the cofounder search site I had dozens of non-technical co-founders who were trying to scam me out of years of my life by offering me anywhere from 10% to 49% equity as a...get this...COFOUNDER. These people don't want to do the work to develop the skills necessary to make their oftentimes idiotic visions a reality and they almost all want controlling equity stakes, as described in this poor bastard's story.

> here we have a technical founder who spent years of their life working hard to build a product only to have their hard work de-valued in ownership terms by a non-technical founder who would be cleaning toilets were it not for their ability to scam naive engineers into doing The Work for them.

How can you conclude that? You have only heard one side of the story. The other probably goes something like:

> I hired a CTO who turned out to be incompetent and was unable to build the organization and take advantage of a great opportunity. When we finally convinced him to leave, the company was near failure and we had to raise money at a near zero valuation to keep the lights on. He's getting quite a deal with 0.15% for putting in no money when the rest of us had to risk putting money in to rescue his failure.

And there's no way to tell what's true. Usually in these cases both sides make themselves out to be saints and the other side is the devil, and best to just not believe a word of any of it without evidence.

> You have only heard one side of the story.

Yep. I don't need to hear the side of the story of the people who devalued the hard work of others within their org for their own personal gain.

The only side of the story I need to hear is the side of the CO-founder who was only given 15% stake in the company to begin with so that they could never protect themselves from the clearly Machiavellian CEO.

CEOs in general, tend to be charismatic. They tend to be storytellers. That's often the reason they are chosen for their role; it's often their only real skill -- the ability to develop and push narrative.

In my view, I am better off not hearing the CEO's side of the story. Because I, like many people of average or below intelligence, am unlikely to be able to see through the lies in their narrative. Regardless of what's true, I would probably be convinced by whatever they say.

I have personal experience being fooled by charismatic people. The only side of the story I need to hear is the side of the person who was duped.

> And there's no way to tell what's true.

15% stake for a co-founder who clearly didn't understand the stakes (pun intended) involved in taking such a low equity share clearly points out where the evil lies here.

People who think they don't need to hear both sides of the story are why Machiavellian CEOs are successful in the first place. If people withheld judgment and investigated for themselves their tactics won't work.

But why you completely dropping the idea that CTO drove company to the bankruptcy? you can work really hard but if you don't have required skills to do the job it does not metter how much you work.

And OP admited he never worked with hardware before

I don't think that is the point at all. I think the point is that the value of your shares are issued at a point in time, and given the volatility of an early stage startup valuation, it's just as much to 100x in the right direction as in the wrong direction. If it goes 100x in the wrong direction and the startup needs to recapitalize, then whatever stream of work the startup was on prior has effectively failed and its equity position is worthless.

This is part of the risk you take working at a company at that stage. If that kind of downside risk isn't palatable, then you've learned a very valuable lesson: you probably want to be more selective with the startups you do choose to work with, or simply work at a more established company.

There are a significant amount of startups out there which differ significantly in quality. Given that you as an early stage employee are trading your fair market liquid TC for equity, you are effectively investing in said startup ("sweat equity") -- so you need to ensure you are "investing" with the same level of diligence you would expect any sophisticated angel or seed investor would, especially because you cannot diversify for the period of time you are engaged with said company. If you do not feel equipped or ready to do this kind of diligence, then it is highly likely you won't be confident about your decision to work in early stage startups in general.

Of course, there is no free lunch. More established companies often come with a quality of life at work that is not comparable to early stage startups. But for many, this tradeoff for a better risk adjusted total compensation is worth it.

> They basically decided the company was near worthless valuation pre-money.

That may well have been true. If the company was out of reserves/revenue/sales/contracts and about to end without new investment, then it may have had little value, and it makes sense for any new investment to work from the current value of the company.

Can't say if it was fair in this case, but it could have been. It may even have worked out to your benefit. Without the investment you may have ended up with 15% of $0, rather than 0.15% of something.

Or not, but let's say it was. In that case this was fair.

At any point a company takes on investment, it makes sense to do so based on the current value of the company.

Suppose a start-up reaches a point where it's out of money to continue, doesn't have cash flow, and can't find additional investors. At that point the company is nearly dead and may be worth very little. The people remaining may still believe in the company and, if they are able, may be able to keep it going with investment from their own pockets.

I've posted this many times regarding startups.

"Why didn't I get any money from my startup? - A guide to Liquidation Preferences and Cap Tables"

https://www.reddit.com/r/startups/comments/a8f6xz/why_didnt_...

This post has a lot of numbers and rounds of funding showing the dilution. It is detailed but the math is very easy to follow.

I've worked at 2 startups. Both "failed" but not because of dilution but bad decisions by the executive team. My shares were supposed to be worth $500K to $2M but I ended up losing about $100 because of some tax stuff.

Maybe someone can explain this to me....

If the company was worth zero before the new round of investment, then surely the investors would not put any money into it?

So, if on the other hand it was worth something, then it's worth what people are willing to pay for it. In this case they valued the company at 1000 shares * 10K, or 10 MM. So OP should receive 15% of that.

An alternate case might be that the new valuation anticipated future profits and so was 100 MM, but since realizing such profits requires further investment that OP cannot make, their share is restricted to 15% of 10 MM, rather than 15% of 100 MM.

But in no case does it make sense to value the company before recapitalization at near-zero.

The startup is still a fledgling and you have to keep contributing either work or capital. You didn’t want to continue contributing work, and you lacked the capital, so your ownership was diluted so the startup could survive.

The company could have been incorporated in such a way that it would have prevented this.

Always make sure you get your own lawyer whose goal is to maintain your interests to review any paperwork of this nature.

Older person perspective: I have gotten (and sometimes been able to sell!) equity in five companies in my lifetime. It's the main part of my wealth, but its surprising how much real estate and slow and steady investing can get you over time if you have a good income.

I tell my kids, always try to get equity or ownership rights over anything you do, when you can.

However, these things have gotten so much more complicated in my life time and frankly much more deceptive and hostile to employees who don't have a finance degree. And sometimes it helps to have a finance degree and cash to kick in. (Rich like the OP says.)

As an example: The first salaried job I ever had (19), at a completely boring company (I did their IT) they let you put a % of your paycheck in a thing called an ESOP. I put a little in, forgot about. About ten years later the company was sold and they tracked me down to give me a nice check. One class of stock, no RSUs, if the CEO made money I made money. The last start up I worked at: they had an incredible number of rounds, not all classes of stock were the same, and RSUs. It actually worked out well for me. But I can see how you can use the dream of a big pay out and then pull the rug out in indecipherable ways.

It doesn’t matter what pct of equity you were given until the company is successful. I’m very honest with potential founding members of my startup. I can offer 2%-5% for certain roles, but if we fail, you’re not getting anything. And if you walk away, you’re essentially giving that equity back.

This is a long post about not understand startups and funding and has little to do with VCs.

Sounds like a 'pay to play' down-round.

It feels like you had 15% before the round but the company was probably underwater, and as a common share holder that equity was probably worth nothing.

A 10 year old hardware startup burning cash in this funding environment is going to raise on pretty poor terms if they can raise at all.

99% dilution does seems super high for a down round though, even with ratchets.

I've heard startup attorneys call this a "cram down - pull through". You cram down the cap table and then some of the old equity holders are included in the new allocation, either through more investment or performance incentives.

It is fairly common, and legitimate for a struggling company. There are legal remedies for improper valuation, but YMMV.

>> cap table

These are the magic words. If someone says to you in an offer "stock" and then tries to give it a "value" you say these magic words...

"Can I see the cap table."

If the answer is anything other than "Its in your inbox right now" then you go back and tell them that you want the shares but the value of them is ZERO without the cap table. You then ask for more cash/signing bonus etc.

That, and buying a single share as soon as you possibly can (if your staying or if you think there is an exit in the future)... once your a share holder new rules apply to you, around finance and funding!

> The trick was the pre-money valuation was decided by the “internal round” participants. They basically decided the company was near worthless valuation pre-money. This then meant you owned 15% of nearly nothing.

And if that pre-money valuation is very wrong you can sue them for fraud. Judges won't take kindly to that sort of maneuver.

Doesn't matter if it's an internal or external round. The same can happen either way, just you call it dilution if it's external.

I don't think this can be defended against... You just need to make sure that if 50+% of the shareholders ever club together to make any decision, that your interests are on the majority side.

What's the company worth now? I once passed on a similar funding round at a startup that I had left. The investors in that round lost ~80% of their additional capital.

How does the story end? Is the company worth anything today?

Yeah, I kinda want to see this vending machine

https://www.bybubbly.com/en

> "both the founders and early investors lost nearly all their shares. (99% of it)"

I understand from this sentence that the company was in such an horrible financial situation that even the other people who were on the same situation as you agreed that it was better to raise debt on horrible terms rather than to bankrupt the company.

What was the status of the company before ?

It could have "simply" just been desperate that everybody agrees to be diluted.

The other possibility is that, if you were only 2 shareholders, that the other guy, created an artificial funding round, essentially diluting you (eventually potentially as a Breach of Fiduciary Duty).

The key is to understand what is his position now, if he actually lost or not.