CEO didn't really function for a year+, steps down, but want to keep his equity minus a bit. Make sense?


1

We are 3 partners, working on a mobile / web startup for a year and 4 months.

The CEO didn't put this startup as his #1 priority as he's involved in some other ventures. Apart from a meeting or a call once in a week or few, he didn't invest even a single hour on this project. He had some contribution to the product definition, but less than mine.
The other partner still keeps his day job.
I'm the only one that was working only part time while having this startup as my #1 priority.

The CEO was the one coming with the original idea, but that idea was already there in the market, nothing really innovative. Based on my ideas we changed the business model completely and made it a B2B2C.

We didn't get much success so far. We've built an initial product, but since the CEO was not really there, and following a lot of personal issues, we didn't get market traction nor investors.

Few months ago I said to the CEO he should step down and provide me the chance to make this startup a success. He didn't agree.

Since then I validated the business model further with potential customers and industry leaders (still no sales, but we are getting closer).

Now the CEO wants me to take his position, while he is formally stepping down.
BUT - he wants to keep his equity (currently 44%, while I'm having 28% like the 3rd partner), minus 8%.

I think that since the startup status is still very initial, he can't just quit and keep a lot of equity. It doesn't make sense to me that a person who didn't contribute much so far, and that is not going to contribute further, is going to have so much benefits out of the other 2 partners sweat.

What do you think is a fair equity he should be keeping? Any advice will be highly appreciated. Thanks!

Co-Founder Equity Partnerships

asked Mar 13 '13 at 08:44
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The Lean Startupist
6 points
  • What's the wording in your legal agreement? Do you have a legal agreement, right? – Leonardo Herrera 5 years ago
  • Yes, we do have a legal agreement, but here are no relevant definitions for this situation there. – The Lean Startupist 5 years ago
  • Ah - See Jeremiah's answer below then. – Leonardo Herrera 5 years ago

2 Answers


4

Being an "idea person" I can assure you that ideas, in and of themselves, are worth very little. It sounds to me like his primary contribution was his idea which doesn't mean much until there's actually a business behind it. If there was an incorporation and a legal agreement then this very much depends on the agreement. If not, he technically doesn't have any shares and you don't have to give him anything. If there is an agreement in place that says he gets 44%, then you might have a hard time reducing his share.

Personally I would make sure that he still gets some equity, but certainly not 44%. Even the 14.6% that Stanley mentions above seems pretty generous for what you've described.

answered Mar 14 '13 at 07:53
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Jeremiah Prummer
441 points
  • Thanks a lot, Jeremiah! – The Lean Startupist 5 years ago
  • This is the ticket. For me, 10% is more than fair. If his idea is any good, and you become a successful enterprise, this is still a really good number. – Leonardo Herrera 5 years ago
  • You're welcome, glad I can be of some help. I'm interested in how this works out. You should leave another comment here once you're done with this. – Jeremiah Prummer 5 years ago

2

read this question and great response about the fairness of ownership allocation:

Forming a new software startup, how do I allocate ownership fairly? the thing you need to consider is a reasonable vesting schedule. (if vesting schedule wasn't spelled out in the begining) if he steps down after 16 months, and you assume a typical 4 year vesting, it would be fair for him to get 44% x (16/48) or 14.6%, and not 100% of his equity

answered Mar 13 '13 at 09:12
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Stanley
162 points
  • Thanks for your answer, Stanley. – The Lean Startupist 5 years ago

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Co-Founder Equity Partnerships