Selling my share of a very small startup


5

I'm walking away from a startup I helped build. It's just me and my (ex) partner (walking away because our relationship has soured), and we have a 50/50 financial split, and I also have 40% voting interest. I'm curious, is it common or even possible since I'm walking away to sell my share (50%) of my stake in the company? And if so, how does one go about in evaluating a price? It's a very small company - there's just the two of us and we're doing about $200k/year revenue. I have no idea on what it's valuation would be, but I just want to wash my hands of it and walk away at this point.

Any tips or similar experiences would be great.

Thanks in advance!

Selling Selling Business

asked Dec 8 '11 at 06:53
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Dnr
170 points

2 Answers


6

First, offer to sell it to your current partner.

There are various ways this could happen from a simple he pays you X right now and you give your full interest in the company to your partner. Another way I saw recently was one partner gave up their interest while the second partner agreed to pay them X dollars a year for 3 years. This helped with cash flow.

The best thing here is to simply be sensitive to where the company is currently at as well as it's near term prospects. Those details are going to have a major impact in the "worth" of your portion. Another factor that determines worth is the people. By removing yourself you are in effect devaluing the company. So keep in mind what your partner is going to have to do to replace you.

Second, review your organizational documents. Are you allowed to sell your interest? Does the other partner have a say? Sometimes it requires all partners to agree to a transfer of interests.

Third, a thing is only worth what someone else will pay for it. You have a very small company and, even though you own half, if you sell that half to someone else you would in effect cause your partner to marry someone they don't know.

Bear in mind that if I was approach by you, I'm sure that I would not be interested in buying into a deal like that. Small deals are extremely personal affairs (as you know) and it takes the right "synergy" between the partners to make anything work. So, try and decide the "attractiveness" of what you are leaving in determing value.

To sum up, discuss this first and foremost with your partner. It is in their (and your) best interest to simply buy you out.

answered Dec 8 '11 at 07:20
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Chris Lively
443 points
  • Good call - that's a great idea. Yeah, we have it in our business docs that I can sell my share, but that I have to give the company (in essence, my lone partner) 30 days to decide if they want to buy it out themselves. I think first and foremost, I'll approach him about it and go from there. And I agree, not that I'm irreplaceable, but having the lone developer walk away in a software startup sure does decrease its value. – Dnr 9 years ago

4

I would valuate your share from a pure financial perspective. (this is how venture capital firms calculate.)

Step 1.2.3.

  1. Valuate the entire business
  2. discount the share price because you lose one founder
  3. split in half

(I assume 200k/year is net earning.)

1. Two methods: comparative , discounted cash flow

A. Comparative ---
How much does a similar company sells for in your area? Grab a copy of small business buy&sell magazine. If you have a pizza restaurant, I am pretty sure there are some ads in the local classifieds.

If could not find the same type of business, you can look at a business with $200k/year revenue.(I assume the working capital/profit margins/risks are in the same ball park).

B. discounted cash flow ---
This is like buying bonds(or fixed return mutual funds). How much would you pay for something that gives you 200k/year?

For government bonds, the formula is PV = C/r 

PV: present value<br>
C: Coupon/ income each year<br>
r: annual interest rate/ required rate of return
Say I expect 20% rate of return, each year earning is 200k.

PV = 200k/0.2 = 1000k <----- this is your company's present value(risk discount is in 20%)

2. I assume both of you do the same amount of work. You leave, then the company lost 1/3 of its value.

1000k * 2/3 = 666.6k

3. split in half: 666.6k/2 = 333.3k

I hope this would give you some idea to start with. All the rates are purely hypothetical numbers depend on how a buyer looks at your business.

answered Dec 8 '11 at 08:28
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Reed
141 points

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