Ask HN: What to do in an equity disagreement in a startup

I'd say that you haven't provided enough info.

Important data points include:

- How long did they do the startup before you? Did they take more risk? Is anyone getting paid now? If they got it to the point of being angel funded, they've hit a milestone and might deserve a bit extra. I dunno why Austin would deserve more than Michael.

- What do they do for the startup? Is Austin valuable? Experienced? Expensive? Incredibly knowledgeable about the market you're attacking? If he's verifiably badass and is critical to the success of the company, he might deserve more. If he's setting aside a $250k gig, he's probably risking more than you and might deserve more.

- You're clearly valuable from a implementation angle... Is the startup solving a technology problem? Sure there's coding, but if you're building a niche CMS for dentists or something, technology isn't going to make or break you. Sales will.

On a higher level, my gut tells me that the team composition is off. Two guys who don't design or code and one guy (you) who does both? Totally depends on the type of business, but for many startups I'd wonder what they're doing all day for the first 3-6 months.

I'm pretty amazed that after an apparent agreement someone would decide that you and him both getting 20% wasn't enough and he needed 24% at your expense.

That's a pretty ridiculous move for someone to make, in my view. It goes well beyond dollars and cents, I'd think. It's obviously not about the percentage points. Losing 4% isn't that big of a deal, and yet neither is gaining 4%. But asking someone who is roughly equal to you to accept this type of agreement isn't trivial. You should probably ask yourself why this person was willing to go through all this potential heartache including the personal issues such a move would cause for a measly 4%.

In addition, where's Michael's sacrifice? If he's all for "what makes everyone more motivated" he should be willing to give up 2% himself, along with you giving up 2%. Fairness is important.

In fact I'd suggest it as a way to keep negotiations going forward. You sacrifice,if and only if Michael sacrifices similarly.

Seconded. I don't understand why the extra 4% has to come from your hide.

Why not have everyone with a current stake give up 1% to the new guy? This demonstrates everybody is committed to doing whatever it takes to get him on board, because it's best for everyone. When your biz guys start thinking we should do X, if and only if X is free... you're screwed.

Yeah, that would ring alarm bells for me too. If there waqs an actual agreement that the original poster get 20% and then one of the other founders reneged on the agreement, then if i was in that position I would be seriously wondering if I could continue to do business with people who're apparently untrustworthy.

My advice to canhasinternet: you can either accept 16%, or you can insist on 20% and walk away if you don't get it. Whichever you do is up to you. But you should insist on getting a deal in writing and the other founders sticking to it. If they won't do this, they are untrustworthy and you should walk away.

That's a good point. I'll look into it. Thank you.

Simply say that your 20% was already agreed to and that it's not negotiable. It seems to me (and of course, I can't know from short post) that Austin is negotiating for the sake of negotiating... maybe because he was taught to be a "hard charger" in business school? Regardless, you have already framed the situation as "try to receive more." No, you already have 20%, and now Austin wants 4% of your 20%. The answer is "no," unless you have something you want to "purchase" for your 4%.

This is pretty much what I'd do. You could also make it a test. Tell him you're not giving up any equity and see if he handles it in an ethical and respectful way. If he doesn't I'd walk. Not because 4% is that important, but because he's going to suck to worth with.

I don't have time to type out a long answer, so forgive me if this brief version comes off too harsh.

It seems like you haven't had a success yet with another startup, and a solid track record will, over time, be far more valuable than the 4% you're squabbling over.

Concentrate on making the company work (but also make it clear you don't intend to give up any more equity). Use this as a learning experience, and go into your next company stronger and wiser.

Given the very frail odds of success most startups have, it is likely not worth your time obsessing over this.

Thank you. I haven't had enormous success with another startup, no. Definitely will take this into consideration. Thanks again.

If you're not getting paid, and the business is pre-revenue, you're a founder. You can build a track record with people who aren't going to dick you over. They're reneging now; they'll renege later.

If they offered you 20% initially, they're obliged to give it to you. Once someone names a number, they have to stick to it.

At some point, you need to be able to stick up for yourself and rationally discuss tough issues amongst yourselves.

If you can't stand up for yourself here, you should understand that this may lead to the future concessions based on a past history of being "easily swayed".

Discuss this with your co-founders and be open about the situation. Better to get past the tough inter-personal issues early, rather than later when it will become even more complicated and difficult to turn back on sunk costs.

Any start-up with 2 business guys and change, and one hacker, isn't starting out very well.

Why don't you start a company and take 100% of the equity?

> Why don't you start a company and take 100% of the equity?

I'd like to not be a douchebag, though. I work on other startups that I own 100% equity with (or split down 51/49)

> Any start-up with 2 business guys and change, and one hacker, isn't starting out very well.

Well said.

youre a moron. a bunch of hackers doesnt just make a company. if the team is well rounded, everyone has a specific role, then it's a strong company.

Please don't call people names.

I'm sorry, just irked me at the time. Like peter/webwright said, not enough info. No excuses, I messed up.

If there is a vesting period, perhaps negotiate that to be shorter. Often times a founders shares will vest over time, so that if you quit in a month you don't retain an inappropriate amount of the company compared to the effort put in. Since you are taking a 'hit', that could be a beneficial negotiation. Read the paperwork. Three times. Make sure you understand every sentence.

You are asking us because you feel like you've been taken. You were told (promised?) that you would get 20%. Now it's down to 16% because someone's a crybaby, and your the only one getting shorted.

There's simply no right answer about what to do. And that's the crappy part about starting a company. Sometimes the rules change. Sometimes people are mean. Sometimes you get screwed. Staying with the company could either be the smartest thing or the dumbest thing you ever do. You asked for advice, so your not 100% on staying. But that also means your not 100% on leaving. So you see potential.

If you really don't know, stay. If it's fun, keep going. If not, bail instantly. This is your 'get out of jail free with no guilt' card. Later on, if things are crappy, and you just want to leave, but everyone is depending on you to work for cheap and slug through it more, and you just don't see it going anywhere, or realize it's not fun, or it turns out these guys really are assholes (which hopefully would show itself sooner, if not now) and no, you don't want to spend every waking moment of your life with them, you can just quit.

Don't look at it as losing 4%. Look at it as you are losing 20% of your stake (4/20). Are you willing to leave 20% of what you were originally supposed to receive to Austin?

Another point to consider: In the end, 4% worth of equity won't make or break anyone (unless it tips the balance of power), seeing as if the company is successful you will all be "rich" in some sense. The issue is not 4%, but working with someone who demands it, and demands it from you only it appears.

Why is Michael ok with Austin getting more than he is? Was the startup all Austin's idea? Did Austin contribute more? Is it all a seniority thing (Austin was there first, then Michael, then you)? Also, you never specified what Michael and the Angel's shares were. I'm assuming that the Angel got 40% while the three founders originally planned for 20% each.

I would stand my ground and say I was working for 20% + stipend and that's what I expect AND now that it was threatened I want it in writing before moving forward. It should take the 3 of you no more than 30 minutes to have a meeting to agree on it and write up a simple contract for each of you. Then again, contracts can be messy and you should cover your bases (what work is required of each of you, how long the contract is good for - until incorporation when a final contract is created I would imagine - and what happens is someone doesn't deliver). Sorry if that sounds like conflicting advice. Get a lawyer.

This could be pure speculation, as I don't know the details, but it seems Michael messed up the negotiations with the angel, and is trying to rectify it by negotiating you down. I'm not a hacker, more the business person, and when negotiating with hackers I offer a relatively low equity stake, fully expecting to be pushed up - to invert this process like Michael, well, if you get close to an exit, make sure he isn't in charge of negotiations with the buyer.

The best option for me is that both you and michael give up 1.5% to Austin(total 3%). And, tell him that both of you already lose 1.5% and he only losts 1% since he initially demands 4%(4-3=1). I think he will be satisfied with this option.

Anyway, I am more interested in knowing how this startup goes on with two business guys and one developer. Could you please update us more with this dummy account again? Thank you.

I was involved in a much similar situation... a start-up with 2 business guys and 3 tech guys. The tech team was 3 not-yet-graduated students, and we were always suspicious of the business guys.

However things turn out, just be sure that your "%" is the same kind of "%" as theirs is -- if your shares get diluted, so do theirs. This way, all interests are aligned: you all have slices of the same pie, and work to make that pie larger.

From what you've posted, it seems completely unfair for the 4% to come from you alone. It should be diluted from the remaining 80% not owned by Austin, and it should be agreed upon by all that own that 80%. In other words, it shouldn't be Austin asking you for 4%, it should be Austin asking everyone involved for 4%.

Best of luck.

I advise you to consider dissolving your partnership as soon as you can.

I had once experienced a similar situation: The business guy, who had experience in SAP area (he was an expereinced SAP-Consultant) had come up with the idea of founding a new freelance job search site, me being the developer.

Having developed a nice prototype using the latest technologies and after we were ready to form the new company there surfaced an issue: He, the business guy said that he receive the %60 and me the %40. The reason was that he has the initial idea and he thought of the business model and the related intricacies and that he has employed all his vast (and past) experience on the target customers... and he wasn't far from truth at this respect...

However still, his wanting a marginal majority just didn't feel right, considering that both of us afforded the expenses without getting any income.

So my advice to you: When it just doesn't feel "right" then think seriously to drift apart. The numbers are just the indicators of the main purpose behind: They, the business guys want and will always want more than you as long as you are doing business "together"

And oh by the way, it doeesn't have to be running a startup , you could be doing business in other relationships, i.e. they or he might rent their office or home to you and in that case... you guessed it right: They would try to charge you as much as possible, so beware..

> This is an anonymous account.

> the first two founders, Austin and Michael...

It may be an anonymous account, but I hope you realize that you've just made an un-anonymous post...

>I originally was to receive 20%...

Lesson learned the hard way: at your next startup, don't do any work until this stuff is nailed down.

> I surely don't want to cause any conflicts at all

Wrong attitude. That's EXACTLY what someone who's trying to steal 4% of the company from you wants to hear.

> What do you think I do?

Determine your BATNA (best alternative to a negotiated agreement). Maybe that's bending over and taking 16%. Maybe it's walking.

Figure out what you want to do, then do it.

> It may be an anonymous account, but I hope you realize that you've just made an un-anonymous post...

They are pseudonyms.

> Lesson learned the hard way: at your next startup, don't do any work until this stuff is nailed down.

Good advice.

> Wrong attitude. That's EXACTLY what someone who's trying to steal 4% of the company from you wants to hear.

Also a good point. I still don't feel in the right doing so.

> Determine your BATNA (best alternative to a negotiated agreement). Maybe that's bending over and taking 16%. Maybe it's walking. Figure out what you want to do, then do it.

Thanks for your feedback!

"Getting To Yes" by Roger Fisher http://www.amazon.com/Getting-Yes-Negotiating-Agreement-With...

As a sort of sequel to "Getting to Yes", I recommend Shell's "Bargaining for Advantage": http://www.amazon.com/Bargaining-Advantage-Negotiation-Strat...

I am trying to reconcile "angel funded" with "we're incorporating soon."

Was Austin not happy with 20% or was he not happy with you and he each getting 20%? The difference between 20 and 24 (or 16 and 20 for that matter) is going to be hard to detect for the likely range of exits.

Also "not happy" before you've incorporated is not a good reason to change equity: you should have a rationale based on expected contribution and degree of risk (and/or whatever other factors you three feel are appropriate). But "I want more than you" is not a good discussion to be having now.

You clearly don't have a written agreement about equity stakes. Otherwise you would be getting screwed in much more interesting ways. So it sounds like you don't have 20% equity you have 0% equity.

Ask for 20% or even more. Ownership is not everything it is the ONLY thing! If you are the sole developer, a indispensable part of the startup, you should be able to get you fair share. Stop all work until you do.

Starting work before the official incorporation can be a good thing if you can show that you are a damn good developer. Having a mba degree and being knowledgeable in "entrepreneurship" and "technology" doesn't mean shit in this arena.

are you getting a salary on top of equity?

I received a small stipend in the low thousands area to start working on it.

Otherwise, no.

With whom was the arrangement that you get 20%? Austin, Michael, and the Angel? Some subset?

If Austin agreed you would have 20%, but now wants some of that back, some options other than shifting the full 4% from you to him include:

- be firm: tell Austin to stick to his agreement; dare him to leave. (If he quit another job, and is fighting for an extra 4%, he thinks the company is valuable. And even if they're great guys, does the company need two non-coders at this pre-incorporation stage?)

- acquiesce but in an equitable fashion: agree that as a beautiful and unique snowflake, Austin deserves 4% more... but take it pro-rata from all other partners (including the angel if at all possible)

- seek compromise: while asserting that the original 20% agreements for you and he should stand, also say you respect his unique value, his longer tenure as a contributor, other opportunities he gave up, whatever in his mind justifies 24%. (Also, perhaps, that you've drawn a small stipend from invested funds while he may not have.) So offer to cede to him a little of what he wants. At the smallest, this is 1% more for Austin taken pro-rata from everyone; at its largest this might be 2-3% from you given to him. If his real psychological need is just acknowledgment of his slightly-higher founder status, even a slight 1% bump may be enough to put the renegotiation behind everyone.

Also consider whether the level he's seeking, in combination with other owners, changes the possible majority-interest (50%+epsilon) coalitions. That may be the real agenda.

Sticking up for yourself is important so you are respected and fairly treated in the future. (It's also a signal that you highly value and are dedicated to the company, and can discuss difficult issues involving founder tradeoffs.) On the other hand, seeking a mutual compromise, if Austin does have any plausible claim to greater value/sacrifice/seniority, shows a willingness to be flexible in aligning interests. Just make sure if you compromise you earn some kudos for a being a team player who is owed some slack in the next dispute.

If negotiations get stuck, and the Angel is truly locked at their share, perhaps they can be a neutral mediator. Or maybe there's another person everyone trusts.

Usually, someone in particular is the de facto leader/prime-instigator/CEO. Whoever this is should nudge everyone towards a fair resolution (which might be 'live with the original split' if the original split was a firm and well-understood arrangement). Otherwise, this leader is abdicating their responsibility for establishing an environment of trust and predictability.

I've given Austin some benefit-of-doubt in the above options -- there legitimately may have been some tentativeness about the original split discussions, or some reason he has greater value and deserves greater equity. But if in fact Austin is the 'de facto CEO', I'd be more worried. This sets a precedent of him renegotiating to his own benefit, which could turn toxic down the road.

One designer/developer, 20% equity down to 16%, doesn't want to make a fuss and still likes and is impressed with them and believes they are all for what makes everyone more motivated.

they're very knowledgeable in business/entrepreneurship.

They sure are.

However, I think that I'm entitled to a bit more than 16%

Entitled how? It's an agreement - whatever you can all agree with.