Ethics and legality of leaving a company mid-raise


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I am in a complicated situation and would appreciate advice from experienced founders and also investors so I take the right ethical course and also avoid legal issues.

I am the CTO of a small startup which is currently raising funding, but am seriously thinking about leaving the company. Context is everything: I had joined after the initial founding when we had 3 engineers and about 10 other employees. They had an MVP and a few early customers but basically just getting started, no real traction. I was coming in to improve the product and specifically add AI / ML capabilities which is my background.

Over the course of the last year we ran out of money, and I had personally lent (not invested) my own money to keep paying salaries while we closed out the round. We expected this to take a month but it never happened and all employees left. I single-handedly created a new product about 7 months ago, showed the non-datascientist sales guy how to explain it, and basically built everything up from scratch. In the last 3 months we have been getting good traction and in fact have been talking to investors who are interested.

Here is the problem -- I have only about 1% equity, $200k lent (which is all my savings), and basically made the company we have today from nothing. The other 2 founders agree that I deserve more equity but are not willing to really give up more than a few percent which is ridiculous. Besides bringing the technical skill, I have invested more actual money than either of them. It is literally 3 of us and every line of code in production is something I wrote in the last 5-6 months. If they aren't willing to negotiate -- which they have shown they are not, then I feel like staying is allowing myself to get taken advantage of. However, the only way I see ever getting my money back (and paying off debts) is if the million dollar investment they are working on securing comes through.

I very much want to continue working on the idea and building the technicals myself but I can see how from an investors point of view that would look -- invest a million and the guy who actually is building the product gets $200k then leaves to build the same product in his own company. I could even see this being illegal or getting sued which I would like to avoid. I would not be taking any code/IP with me, I would be writing again from scratch inside the new company and in California there aren't really non-competes. I would only be paid by the company what I had lent so they would still have the majority of the money to hire and build as they see fit (I am not sure if they have told investors they owe me money I haven't been interacting with them at all).

What should I do? Obviously I have made many mistakes to arrive in this position but how can I get out of this in an ethical way and also hopefully with some or all of the money I have lent?

One thought I had was to become a supplier -- they can still operate the store front and own their clients but I own the factory and the IP. In this way I own the value I build but they can still operate without interruption? I'm sure investors would still hate this as the IP value of the company is not there. I am just about to start discussions with them about me leaving, the investment is expected to close in the next month. Help

Equity Venture Capital Ethics Investors Pivot

asked May 29 '18 at 23:35
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George84
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Equity Venture Capital Ethics Investors Pivot