Equity: Your equity stake walking away should be whatever you've veseted -- this is why you have vesting. If you purchased your shares (I hope!), then there's nothing more to do. If they were options, ask for conversion from ISO to NQO (IRS-mandated) and an extension (10yr) on the exercise period. If the post-pivot company wants, they can keep you on as an advisor for a period at some reduced equity vest (e.g. 1/20th your founder vest). This is a nice way to transition and can be worthwhile in some scenarios.
Cash: You should expect none. If you all documented the unpaid work in the form of contractual deferred compensation (unlikely), then you can insist this be paid out as a requirement of labor laws. If it wasn't documented, then it's a sunk cost. Cash is the company's life blood, so they cannot waste it on employees that are departing or terminated. You shouldn't expect an exit package.
Realistically... If you own 10% in a "new" company (post-pivot), this is a great position for you. Their alternatives are (1) to nuke the cap table in a reset and pivot without you; it's not really worthwhile for anyone to duke it out this way; (2) if they're itching to buy you out (unlikely), you can consider whatever offer they put forward but you have no legal obligation to accept; or (3) everyone just accepts the current state of affairs as sunk costs and parts amicably. (3) is best for everyone involved -- it's mutually non-ideal.
I used to work in VC. Although I've never deal with this situation myself, I've talked to other founders who've had similar experiences.
The general thinking is that the new team is essentially a new business. This new business needs cash, and taking that away is more or less a non-starter at this point. Fundamentally, founders are compensated for seeing things through, not for partial work. It's a really hard sell to either ask a cash-poor company for cash for non-productive purposes or to ask new investors to put up cash that's going towards an exit-package (ie. someone who's not going to be contributing). The only leverage you may have is how much pain you can cause by not being bought out, which puts you in an adversarial relationship with everyone else. I don't think that's good for you.
So I'd recommend you'd just hold on to your vested shares to build good will. Indicate your intent to exit, but you like the new idea and wouldn't put additional pressure on the business at this stage. If the business is successful in the future, you may get bought out by later stage investors to simplify the cap table and reduce governance complexity. But for that outcome, you'd need to be on good terms with current investors and the new team.
Some good advice here; couple qs: did you get shares for your personal capital contribution?
Simplest thing to do if you think it will work and don't need money is just sit on your vested shares, perhaps ask for a little more as an exit package, be supportive, offer to join the board as an advisor, and move on.
If you'd like a clean break and some cash, you could call your last round investors and offer them a discount to the last price for your vested shares. Depending on the state of the company and what's next, they may be interested -- there's an implication in these conversations that you'll find SOMEONE to buy eventually, which they may or may not like. I'd guess unless things are gangbusters, you might look at 30-50% discount from the last valuation, knowing nothing about the common, the company or the pref stack.
Another possibility - you could offer to sell your shares at a discount to your cofounder, leaving him in a good spot - he could ask around for a loan / investment (in which case the company would be the buyer, and he'd benefit pro-rata).
Personal advice - keep some, sell some, stay available to help.
I agree with Joel Spolsky that nobody should get shares for personal capital contributions (at least, not unless they're investing in a round). If you want to be fastidious, set up IOUs.
I've commonly seen grants like this diluted to almost zero. I would think carefully and strategically about how you can get some sort of value for the equity you vested. Its probably harder than you think to get decent liquidity on it.
1. How much did your involvement lead to the fundraising success?
2. How much did your involvement lead to the products' early success?
3. Does it make sense to take the IP early idea that you were passionate about as part of your exit package?
==========
Expectations:
* you should expect no cash. taking cash will lead to a lower chance of a return on your equity. if you desperately need cash, you should get a small package based on your salary.
* you have no way to protect against being diluted. you have no idea how much work it will take to make this project successful. making it successful will require dilution. at best you could negotiate never being diluted under a certain amount, and making that based on successive valuations. if you leave at pre-seed, and it becomes a unicorn, you likely don't deserve 10%. what do you think you realistically deserve if this is a massive runaway success AFTER you leave.
* one way to think about this, is what would your time have been worth at a company with a higher TC. if you would have been paid $500k including equity somewhere else, maybe you should get the same amount of equity as someone investing 500k in cash, and get the exact same dilution as they would.
* you will not find a standard answer anywhere. you need to find the best solution between:
1. your ego
2. your cofounders ego
3. giving this startup the best chance of success so that all of this time will be worth something for everyone. even if thats less than you want it to be, its better than $0. because all of the hard work lies ahead.
Small nit - protection against dilution - that may not be true; there are laws in the west coast about minority investor treatment. Your overall point -- do what you can to stay a little long and make sure the company is worth something -- is absolutely the right way to think about it.
If that actually becomes material, they'll offer to buy shares in the next round. That's the point at which this whole conversation becomes interesting; right now, it's complexity for its own sake.
I know the feeling! I left a company some years back in a complicated way, and my instinct was to drill in as well. It seems like a big deal! It really isn't, though.
If that's going to happen, it's going to happen. I've heard as many stories of it happening as I've heard stories of people unhappy with the amount of liquidity they were able to achieve early in the life of a company that later became successful.
That theoretically future investors will be reluctant to invest because the founder 10% is crowding out equity that could otherwise be used to attract key performers down the line.
I'm not saying I agree with the concern, I'm just articulating what it is. I think the answer here is super simple: walk away with the 10% vested. (Also: stop thinking in terms of %).
You don't mention how much cash the company raised, or how much cash is left. These are key questions if you want to know how much of a buyout is appropriate.
If there's not a ton of cash, they are going to be very hesitant to give much of it to a departing founder.
At the same time, you should be hesitant to just hang onto your equity on the promise that it will be bought out later. If the company isn't successful, you'll get nothing. And if the company is successful, future investors will convince your founder that you don't deserve anything and that they should do shady stuff that will dilute your shares to nothing.
You can think of your equity in terms of buckets: you get some for having the courage to start, some for the grind, and some for future returns. You're giving back the future returns bucket, not the other two. The vesting mechanism imperfectly maps to this.
Keep the equity. It's not "dead" in any real sense (though people will describe it that way to talk the value down). Dilution will hit it anyway. Again: you are already relinquishing the future value when you stop vesting.
If you have a board seat, consider staying in that capacity. Then at the next round perhaps sell the seat and equity to an incoming investor. Early on, board seats are more valuable than stock and selling that package, perhaps at a discount to the incoming valuation, is fairly compelling. Your exit then fits the playbook for exiting early angels -- it's not weird.
Taking cash is a bad signal in a couple of ways: it signals that you don't believe in the new direction and it signals the remaining founder is making poor financial decisions. Unless the framing is that you took a low buyout to walk, which isn't a great look for anyone.
Message it as what's best for the business, and be firm when they ask you to relinquish the equity. You said it very well in your post: "this is a great idea, but I'm not the right fit. I'll stay on in an advisory and governance capacity, but my last day as an officer and employee will be end of next month." Give the company lots of time and help to move on.
Help the company by setting it up to be so valuable that an incoming investor will want to remediate the situation by sweeping you off the cap table (again, like an early angel).
Depending on your counterparties it might not be possible to preserve relationships. Make sure you can afford litigation. Depending on your financial position this means get a new job or start a new business. When someone says, "relinquish or I'll sue" then you generally want to answer "my counsel will accept service at this address: xyz".
Curious, what was doing your friend, who is ready to take over and lead? Why not switch sides, take over his functions, and offer your stake for sale during the next raise at that valuation?
Why not offer your stake to the company’s investors at the previous valuation?
A pivot, by definition, means turning away from the original course of the business.
If you were really motivated by the previous goal, and you're disinterested in the new goal, why stick around?
I've seen companies pivot from "we are going to solve plastic trash recycling using automation" to "we are a trading platform for bales of plastic trash" - much more achievable, but much less interesting.
Went through a similar scenario a few years ago, similar valuation range and stage. The person was nice, so we amicably decided to settle at around 3% sweat equity.
interesting, i might end up doing something similar. if you don't mind me asking, how much did you sell the remainder of your shares for? was it close to your FMV? i feel like i'm already being negotiated hard by being forced to sell my equity to minimize dead equity and then instead of selling at the 409A valuation, being sold at the FMV seems like i'm losing another battle. thoughts?
Oh, also: if you feel like you're being forced to do anything, or negotiated hard against at all, or losing battles, just lawyer up. Depending on your jurisdiction you could start saying things like, "I dunno, sounds like oppression -- let's just do what's best for the company here".
I’ve been through this type of thing a few times and there aren’t many good solutions. The new business needs cash so taking some is a tough pitch to the new team’s executives. New investors are rarely keen to see funds going to an exit fund. You can make threats and indicate you won’t go quietly into the good night, but that makes things adversarial. At some point in the future, your equity could become a problem that will be worth taking care of. At this point, your best path to dollars is to become the problem, but if you do that, it’s a lot more difficult to see one of those future exits shape up.
1. Don't ask for cash or an exit package imo. This isn't a mature, profitable company. It's a startup. You took a shot, you missed, and you're quitting. I think it's fair for there to just be a clean break there. Either that, or stick with the company and see it through.
2. Keeping the vested equity seems fair to me. The entire point of that vested equity is to represent the sweat you put into the business.
Agree, but asking for his personal investment contribution back is totally fair. Also, make sure you understand how future investment will affect your 10%. Don't want to be left in a Eduardo Saverin (Zuck) situation.
What is fair is to be open with your cofounder and investors.
Should I just keep the vested equity?
Should the other stockholders just dilute your holdings?
Is a cash buyout common or appropriate?
Probably less common that telling you to pound sand. Cash is the life blood of a company and giving you cash is very damaging to the startup.
To put it another way, you need to negotiate. To negotiate you need to care about the interests of the other people and in the case of a startup recognize that the vast majority of the work is in the future. And that there is no value in sunk costs. Good luck.
As someone who has never been in this situation, some of the replies in this thread are very disappointing. They basically seem to amount to, "eh, go pound sand, quitter."
You've put in a ton of work during the hardest period for a startup. That's not worth nothing.
In opposition to these other people, I'd say maybe a frank but congenial discussion with your co-founder is in order. Something along the lines of being burnt out or not agreeing with the current direction of the company, those details don't matter so much. If think you'd want to ultimately fall on you wanting to "pass quietly into the night."
Sometimes people come up with solutions on their own that would surprise you. You just gotta not pigeon hole them into a particular type of response from the start.
The issue has nothing to do with whether he worked hard, it has to do with the fact that the work the company did ended up being not very valuable, so much so that the company is doing something completely different.
Ultimately he created very little value and therefore is entitled to very little value. The company can just go out of business and start fresh!
Raising money is not value.
2-5% could be appropriate. 10% is completely insane.
Bullshit. He helped build a company that could even continue past a year. That's better than literally 80% of the startup market. Look up BLS statistics. Not only that, he helped build a company that could even bother to attract the attention of investors. Prima facia, someone thinks there's value there.
The world is full of jokers talking about starting a business and jokers who have "started" a business but are faking-it-to-make-it off of credit cards. You can't do that for a 18 months. OP has built something. It may not be the software he started out to make, but it's certainly a business that some investor thinks has a chance of being a going concern.
The fact that the other founders are deciding to pivot is just a luxury of the fact that the company has inertia, not value, which is why they are switching ideas.
Our OP doesn’t want to work on the new idea, the one that might have value, therefore he is entitled to very, very little.
You do not understand the economics of VC backed startups.
Equity: Your equity stake walking away should be whatever you've veseted -- this is why you have vesting. If you purchased your shares (I hope!), then there's nothing more to do. If they were options, ask for conversion from ISO to NQO (IRS-mandated) and an extension (10yr) on the exercise period. If the post-pivot company wants, they can keep you on as an advisor for a period at some reduced equity vest (e.g. 1/20th your founder vest). This is a nice way to transition and can be worthwhile in some scenarios.
Cash: You should expect none. If you all documented the unpaid work in the form of contractual deferred compensation (unlikely), then you can insist this be paid out as a requirement of labor laws. If it wasn't documented, then it's a sunk cost. Cash is the company's life blood, so they cannot waste it on employees that are departing or terminated. You shouldn't expect an exit package.
Realistically... If you own 10% in a "new" company (post-pivot), this is a great position for you. Their alternatives are (1) to nuke the cap table in a reset and pivot without you; it's not really worthwhile for anyone to duke it out this way; (2) if they're itching to buy you out (unlikely), you can consider whatever offer they put forward but you have no legal obligation to accept; or (3) everyone just accepts the current state of affairs as sunk costs and parts amicably. (3) is best for everyone involved -- it's mutually non-ideal.
I used to work in VC. Although I've never deal with this situation myself, I've talked to other founders who've had similar experiences.
The general thinking is that the new team is essentially a new business. This new business needs cash, and taking that away is more or less a non-starter at this point. Fundamentally, founders are compensated for seeing things through, not for partial work. It's a really hard sell to either ask a cash-poor company for cash for non-productive purposes or to ask new investors to put up cash that's going towards an exit-package (ie. someone who's not going to be contributing). The only leverage you may have is how much pain you can cause by not being bought out, which puts you in an adversarial relationship with everyone else. I don't think that's good for you.
So I'd recommend you'd just hold on to your vested shares to build good will. Indicate your intent to exit, but you like the new idea and wouldn't put additional pressure on the business at this stage. If the business is successful in the future, you may get bought out by later stage investors to simplify the cap table and reduce governance complexity. But for that outcome, you'd need to be on good terms with current investors and the new team.
Some good advice here; couple qs: did you get shares for your personal capital contribution?
Simplest thing to do if you think it will work and don't need money is just sit on your vested shares, perhaps ask for a little more as an exit package, be supportive, offer to join the board as an advisor, and move on.
If you'd like a clean break and some cash, you could call your last round investors and offer them a discount to the last price for your vested shares. Depending on the state of the company and what's next, they may be interested -- there's an implication in these conversations that you'll find SOMEONE to buy eventually, which they may or may not like. I'd guess unless things are gangbusters, you might look at 30-50% discount from the last valuation, knowing nothing about the common, the company or the pref stack.
Another possibility - you could offer to sell your shares at a discount to your cofounder, leaving him in a good spot - he could ask around for a loan / investment (in which case the company would be the buyer, and he'd benefit pro-rata).
Personal advice - keep some, sell some, stay available to help.
I agree with Joel Spolsky that nobody should get shares for personal capital contributions (at least, not unless they're investing in a round). If you want to be fastidious, set up IOUs.
I've commonly seen grants like this diluted to almost zero. I would think carefully and strategically about how you can get some sort of value for the equity you vested. Its probably harder than you think to get decent liquidity on it.
Is it legal to dilute this to zero? Can't you sue post-exit (e.g. Saverin and Facebook)?
At a normally-papered startup? Yes. No.
Important Questions:
1. How much did your involvement lead to the fundraising success?
2. How much did your involvement lead to the products' early success?
3. Does it make sense to take the IP early idea that you were passionate about as part of your exit package?
==========
Expectations:
* you should expect no cash. taking cash will lead to a lower chance of a return on your equity. if you desperately need cash, you should get a small package based on your salary.
* you have no way to protect against being diluted. you have no idea how much work it will take to make this project successful. making it successful will require dilution. at best you could negotiate never being diluted under a certain amount, and making that based on successive valuations. if you leave at pre-seed, and it becomes a unicorn, you likely don't deserve 10%. what do you think you realistically deserve if this is a massive runaway success AFTER you leave.
* one way to think about this, is what would your time have been worth at a company with a higher TC. if you would have been paid $500k including equity somewhere else, maybe you should get the same amount of equity as someone investing 500k in cash, and get the exact same dilution as they would.
* you will not find a standard answer anywhere. you need to find the best solution between:
Small nit - protection against dilution - that may not be true; there are laws in the west coast about minority investor treatment. Your overall point -- do what you can to stay a little long and make sure the company is worth something -- is absolutely the right way to think about it.
Just keep the vested equity. That's why there's vesting.
10% is a large drag on the cap table.
If that actually becomes material, they'll offer to buy shares in the next round. That's the point at which this whole conversation becomes interesting; right now, it's complexity for its own sake.
I know the feeling! I left a company some years back in a complicated way, and my instinct was to drill in as well. It seems like a big deal! It really isn't, though.
Or they'll find a way to dilute the co-founder's shares so they don't have to buy them out.
If that's going to happen, it's going to happen. I've heard as many stories of it happening as I've heard stories of people unhappy with the amount of liquidity they were able to achieve early in the life of a company that later became successful.
What does that mean?
That theoretically future investors will be reluctant to invest because the founder 10% is crowding out equity that could otherwise be used to attract key performers down the line.
Nah, they can just issue more. He's already giving up 40% -- plenty of head room.
I'm not saying I agree with the concern, I'm just articulating what it is. I think the answer here is super simple: walk away with the 10% vested. (Also: stop thinking in terms of %).
You don't mention how much cash the company raised, or how much cash is left. These are key questions if you want to know how much of a buyout is appropriate.
If there's not a ton of cash, they are going to be very hesitant to give much of it to a departing founder.
At the same time, you should be hesitant to just hang onto your equity on the promise that it will be bought out later. If the company isn't successful, you'll get nothing. And if the company is successful, future investors will convince your founder that you don't deserve anything and that they should do shady stuff that will dilute your shares to nothing.
Keep the vested equity and move on. Anything else is asking too much.
Very similar situation.
You can think of your equity in terms of buckets: you get some for having the courage to start, some for the grind, and some for future returns. You're giving back the future returns bucket, not the other two. The vesting mechanism imperfectly maps to this.
Keep the equity. It's not "dead" in any real sense (though people will describe it that way to talk the value down). Dilution will hit it anyway. Again: you are already relinquishing the future value when you stop vesting.
If you have a board seat, consider staying in that capacity. Then at the next round perhaps sell the seat and equity to an incoming investor. Early on, board seats are more valuable than stock and selling that package, perhaps at a discount to the incoming valuation, is fairly compelling. Your exit then fits the playbook for exiting early angels -- it's not weird.
Taking cash is a bad signal in a couple of ways: it signals that you don't believe in the new direction and it signals the remaining founder is making poor financial decisions. Unless the framing is that you took a low buyout to walk, which isn't a great look for anyone.
Message it as what's best for the business, and be firm when they ask you to relinquish the equity. You said it very well in your post: "this is a great idea, but I'm not the right fit. I'll stay on in an advisory and governance capacity, but my last day as an officer and employee will be end of next month." Give the company lots of time and help to move on.
Help the company by setting it up to be so valuable that an incoming investor will want to remediate the situation by sweeping you off the cap table (again, like an early angel).
Depending on your counterparties it might not be possible to preserve relationships. Make sure you can afford litigation. Depending on your financial position this means get a new job or start a new business. When someone says, "relinquish or I'll sue" then you generally want to answer "my counsel will accept service at this address: xyz".
You're not going to sell a board seat. Not how it works. You probably can't even sell the shares!
Curious, what was doing your friend, who is ready to take over and lead? Why not switch sides, take over his functions, and offer your stake for sale during the next raise at that valuation?
Why not offer your stake to the company’s investors at the previous valuation?
A pivot, by definition, means turning away from the original course of the business.
If you were really motivated by the previous goal, and you're disinterested in the new goal, why stick around?
I've seen companies pivot from "we are going to solve plastic trash recycling using automation" to "we are a trading platform for bales of plastic trash" - much more achievable, but much less interesting.
Went through a similar scenario a few years ago, similar valuation range and stage. The person was nice, so we amicably decided to settle at around 3% sweat equity.
interesting, i might end up doing something similar. if you don't mind me asking, how much did you sell the remainder of your shares for? was it close to your FMV? i feel like i'm already being negotiated hard by being forced to sell my equity to minimize dead equity and then instead of selling at the 409A valuation, being sold at the FMV seems like i'm losing another battle. thoughts?
Oh, also: if you feel like you're being forced to do anything, or negotiated hard against at all, or losing battles, just lawyer up. Depending on your jurisdiction you could start saying things like, "I dunno, sounds like oppression -- let's just do what's best for the company here".
If you need your initial investment back you could also take a note payable.
seems like i'm losing another battle
If you frame it as a battle, you are already losing.
Because it is a battle where you are outgunned and out organized.
And in a battle you go from being a former employee/founder to an existential threat while burning your relationships.
They're forcing you to sell?
Buy sell agreements are common.
I’ve been through this type of thing a few times and there aren’t many good solutions. The new business needs cash so taking some is a tough pitch to the new team’s executives. New investors are rarely keen to see funds going to an exit fund. You can make threats and indicate you won’t go quietly into the good night, but that makes things adversarial. At some point in the future, your equity could become a problem that will be worth taking care of. At this point, your best path to dollars is to become the problem, but if you do that, it’s a lot more difficult to see one of those future exits shape up.
If the company is pivoting, 0% beyond asking them to buy out your vested shares unless you want to keep them.
1. Don't ask for cash or an exit package imo. This isn't a mature, profitable company. It's a startup. You took a shot, you missed, and you're quitting. I think it's fair for there to just be a clean break there. Either that, or stick with the company and see it through.
2. Keeping the vested equity seems fair to me. The entire point of that vested equity is to represent the sweat you put into the business.
Agree, but asking for his personal investment contribution back is totally fair. Also, make sure you understand how future investment will affect your 10%. Don't want to be left in a Eduardo Saverin (Zuck) situation.
What’s a fair exit package in this situation?
What is fair is to be open with your cofounder and investors.
Should I just keep the vested equity?
Should the other stockholders just dilute your holdings?
Is a cash buyout common or appropriate?
Probably less common that telling you to pound sand. Cash is the life blood of a company and giving you cash is very damaging to the startup.
To put it another way, you need to negotiate. To negotiate you need to care about the interests of the other people and in the case of a startup recognize that the vast majority of the work is in the future. And that there is no value in sunk costs. Good luck.
Might not be the answer you want but ask for a vacation. A long month away might be enough to clear everything up. Doing startups is tiresome.
As someone who has never been in this situation, some of the replies in this thread are very disappointing. They basically seem to amount to, "eh, go pound sand, quitter."
You've put in a ton of work during the hardest period for a startup. That's not worth nothing.
In opposition to these other people, I'd say maybe a frank but congenial discussion with your co-founder is in order. Something along the lines of being burnt out or not agreeing with the current direction of the company, those details don't matter so much. If think you'd want to ultimately fall on you wanting to "pass quietly into the night."
Sometimes people come up with solutions on their own that would surprise you. You just gotta not pigeon hole them into a particular type of response from the start.
The issue has nothing to do with whether he worked hard, it has to do with the fact that the work the company did ended up being not very valuable, so much so that the company is doing something completely different.
Ultimately he created very little value and therefore is entitled to very little value. The company can just go out of business and start fresh!
Raising money is not value.
2-5% could be appropriate. 10% is completely insane.
Bullshit. He helped build a company that could even continue past a year. That's better than literally 80% of the startup market. Look up BLS statistics. Not only that, he helped build a company that could even bother to attract the attention of investors. Prima facia, someone thinks there's value there.
The world is full of jokers talking about starting a business and jokers who have "started" a business but are faking-it-to-make-it off of credit cards. You can't do that for a 18 months. OP has built something. It may not be the software he started out to make, but it's certainly a business that some investor thinks has a chance of being a going concern.
The investors invested on a previous idea.
The fact that the other founders are deciding to pivot is just a luxury of the fact that the company has inertia, not value, which is why they are switching ideas.
Our OP doesn’t want to work on the new idea, the one that might have value, therefore he is entitled to very, very little.
You do not understand the economics of VC backed startups.