I'm leaving a startup I co-founded, with some of my shares already vested. The other shareholders want me to give back more shares than specified by our vesting agreement. It does seem to make sense to do this to make the company more attractive to future investors. Legally I own these shares, and they have been well-earned through a year of extremely hard work, all the sacrifices you'd expect from a co-founder, as well as some personal financial investment.
Am I right to expect some other form of compensation in return for giving back these shares? What form could that reasonably take? Startup has been going for 12 months with 4 co-founders. The product is built and launched, but hasn't achieved traction or revenue yet.
Current equity split is: Co-founders: 40, 20 (me), 10, 5; Option pool: 10; Investors: 10; Advisors: 5
I am leaving on good terms with everyone involved.
Vesting started at 25% with the rest vesting quarterly over 3 years (via Repurchase Rights). Under the agreement, the company will have the right to repurchase 50% of my shares, leaving me with 10%.
The existing investors want to lead an Angel investment round, but say they are unwilling to do so with a non-active member having as much as 10%. They would want me to have 2% at most. This does not seem a fair amount to reflect the effort put in and risk taken.
It seems best to sort this out before they attempt to raise more cash, so they can go in with a clean ownership structure that reflects the active co-founders, investors and advisors.
Obviously I realize that if me holding 10% is going to block future investment and therefore growth of the company, it is better for everyone (including me) to release some of that equity back to the company / other co-founders.
My question is: what would be a fair and reasonable way to be compensated for doing that? The company is bootstrapping so could not easily buy back my shares for cash.
Options I've thought of:
a) The company buys back some equity at an agreed future price, to be repaid from future cash flow? (effectively converting the equity to a loan)
b) Current investors buy back some of my shares ahead of next round
c) I take a hit for the good of the company and accept giving back some equity (e.g. 5%), staying on as an advisor, so I am still playing an active role in the eyes of new investors?
d) any others options?
What would you advise?
I would recommend a promissory note, created through a lawyer, that purchases the shares back in exchange for a fair market value.
This will allow the team to recognize the value that you have provided without doing short- or long-term harm to their current cash position, and without hindering their ability to raise future money. You would be able to keep your "stake" in the company without having to give anything away for free.
Calculating FMV, on the other hand, is a much tougher question to answer. You're going to have to agree on a number somewhere between "What's the company worth now?" (not much) and "What's the company going to be worth in the future?" (hopefully a lot), while recognizing that you're no longer taking any risk for the company's future performance. When I did this with prior co-founders, the company ended up buying back the shares at a price that roughly came to $10K for a year's worth of 20-to-30-hour weeks.
Good luck. And make sure you run everything by a lawyer, or at least someone who went to law school.
Why do you have to leave? Sure, you could move away from day to day involvement, but you know the business inside and out, why not move to a less active roll, keep your 10% and give them 20% of your time? This way they get your experience and knowledge, you stay involved in the business (while spinning up a new one I suppose), and the angel investors see all 4 co-founders still engaged in the business.