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

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

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.

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.)

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

Assuming you weren't, it's very strange to force someone out right before their equity vests.

Basically, your lawyer can understand the situation better than an internet message board can. Then, a phone call from your lawyer to your co-founder could help make your co-founder become a lot more reasonable.

If the business-minded folk don't fully value the tech solution I can easily see this happening. This "devil's advocate" hypothetical is not an unheard of occurrence.

If you can afford it, find a good lawyer.

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?

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

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).

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)

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

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.

Get a lawyer right away. Keep records of everything.

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

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.

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.

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?

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.

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.

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.)

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

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

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

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.]

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

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.

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?

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'.

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.

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

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.