Getting shares back from my co-founders

http://www.ecquire.com/blog/getting-shares-back-from-my-cofounders/

by talsraviv • 14 years ago

100 59 14 years ago

mcherm• 14 years ago

Really a class act on the parts of Ariel and Anton. I hope that if I found myself in their position that I would be as gracious.

cera• 14 years ago

Agreed, and I believe they did the right thing in this situation. Hats off.

aneth39• 14 years ago

Could you guys expound on why this is the "right thing?" I see this very differently.

Personally, I would never have agreed to this based on my understanding of the situation. It's clear from the article that Ecquire evolved from Dropcard, even if it is an entirely different product now:

"Ecquire was getting further and further conceptually (and technologically) from Dropcard"

Almost every tech company evolves dramatically, and rarely resembles its former self after four years. If one contributes substantially in the founding stages of a company, I believe one should end up with something, even if it is a reduced stake. The company would not have made it where it is without Ariel and Anton's participation in early failed ideas or admission and participation in the incubator.

It's safe to assume their contribution exceeds zero percent, which is what the Tal pushed for and Ariel and Anton agreed to. No investor would have agreed to this, why is it right for Ariel and Anton?

ori_b• 14 years ago

> No investor would have agreed to this, why is it right for Ariel and Anton?

Because they agreed to it. It's not like they were swindled -- They had an offer to discuss the price and be bought out for a fair price. But they decided that it wasn't worth the effort, and perhaps they felt like giving the startup that they helped found a gift. If you ask for something nicely, and people are willing to give it to you without being browbeaten, I don't see anything wrong.

In short, it's the right thing because they decided it was the right thing.

tatsuke9512• 14 years ago

>Ecquire evolved from Dropcard, even if it is an entirely different product now"

What does that even mean, really? If they have nothing in common (and they might in this case, I don't really know), then the evolution is irrelevant. You can't stake a claim on all my future ideas because we once shared an idea together.

>"If one contributes substantially in the founding stages of a company, I believe one should end up with something, even if it is a reduced stake."

This has to be determined case by case, which is why I think the early equity split is meaningless. What did they contribute? Money? Code that is still being used? Other ideas that got implemented? It's pretty easy to put a price on these things. If you can't point to tangible contributions to the new business you don't deserve anything. I think the courts would agree.

ascendant• 14 years ago

Glad to see they were reasonable about it and +1 for going through with it. Hats off to everyone involved.

wilfra• 14 years ago

I know it's very un-hn and I'm going to get downvoted but..

HAHAHAHAHAHAAHAHAHA!!!

tibbon• 14 years ago

Forgive my shear ignorance, but why would two original co-founders who are no longer active holding 0.5% each scare off investors and such?

macspoofing4• 14 years ago

They wouldn't. The active founders were greedy.

talsraviv• 14 years ago

Also sort of true. @bretpiatt nailed the administrative side, but @macspoofing you are right in that we also wanted to free up equity to attract talent. It made more sense that the first equity to be set aside for employees shouldn't dilute active founders and investors if possible.

bretpiatt• 14 years ago

Each additional major shareholder is a required signature on documents, it is a question that has to be asked, "Why aren't they with you any longer?" For 'the next Facebook' investors aren't going to care if they're able to put money in at a valuation they like. For a more marginal investment the extra time to look through stuff like that may shut the deal down.

To compare, think of it like a personal resume. If you're a developer applying for a development role but you took two years out of the last five to go teach English to kids in an emerging market nation where you coded on the side (and could show Github / other public repos) anyone taking the time would commend you for the activity. Someone rushing through reviewing resumes may toss yours on the floor.

macspoofing4• 14 years ago

>Each additional major shareholder is a required signature on documents ...

You can structure your corporation in many ways. If the old co-founders were cool enough to give up their shares, they would be cool enough to, say, give the current founders proxy rights.

>"Why aren't they with you any longer?"

It's a 3 second answer if it actually comes up (and it wouldn't). Lots start-ups have "lingering" shareholders/founders who may or may not be part of the company. It just isn't a big deal.

amorphid2• 14 years ago

I recently sold my startup. Oh yeah! The deal was much harder than I expected because the deal's tems required me to get 100% of shareholders to agree to the buyout. Those shares I issued early all on in my startup's life felt like serious baggage towards the end. The deal had a deadline, and one guy didn't decide to sell until 6:00 a.m. of the day the deal was set to expire. It was stressful to say the least.

pbreit2• 14 years ago

Call them "advisors" and it wouldn't raise an eyebrow. And I'm not sure I understand the resume comparison or think it holds.

ckdarby• 14 years ago

This guy should have kept this quiet instead of going for the PR anyone in the future who is looking to invest into this company is going to come across this article.

As much as everyone is stating how gracious this is this would actually be a warning sign for me to invest any amount of money into this company.

Two previous co-founders willing to throw away a combined 1% of the company for less than an hour of effort. Puts the real valuation of this startup into view when you have two previous co-founders literally throw their equity away.

Consider this startup marked to avoid in the future of any round...

marquis• 14 years ago

As long as the paperwork is clear, and there is genuinely a marked difference between the original work and the work that has gone on the last couple of years by the new owners, I don't see it as a problem. People are dropping out of companies all the time, and I see this as an amicable agreement and also highly creative.

koide• 14 years ago

I think they sold it cheap. They should have asked for something more involved than dancing where nobody even glances at you.

For example, getting invited as audience to a live TV show and yelling something of interest/funny.

jamster• 14 years ago

I think it was terrible deal. Why give up shares you earned?

tatsuke9512• 14 years ago

Kudos to the minority shareholders for giving up a legal entitlement graciously...

...but why on earth is there a stringent corporate structure and equity doled out years before there is even a concrete idea or tangible business?

ColinWright3• 14 years ago

Because if you don't do it at the start when there's really nothing to bid for and nothing at stake, you have to do it later when there's lots at stake, and the negotiations become difficult and unpleasant.

Best to have a genuine agreement up front, and keep it fresh.

tatsuke9512• 14 years ago

>"Best to have a genuine agreement up front, and keep it fresh."

Seems to me that's what happened in this situation, and they ended depending on the good will of co-founders.

Where as, had they simply dissolved the relationship with the first business and started anew, we wouldn't talking about this.

gyardley2• 14 years ago

Because they did it correctly.

When you start working with others on a company, structure and ownership needs to be sorted out before, not after.

Yes, it ended up being a bit of a pain for this guy and his startup, but it's not nearly as painful as the conflicts over IP and equity that result when you don't hammer this stuff out before building.

tatsuke9512• 14 years ago

>"Because they did it correctly."

Huh? They split up equity in a non-existent business that ended upcoming back to bite them on what amounts to a completely different project that the other co-founders did not participate in whatsoever. It was only through the honesty of these other co-founders that they were able to steer away from real trouble. Those co-founders could have given up nothing had they so chosen.

That's the correct way to do things? Looks to me like this is a lesson in the exact wrong way to do it.

We have laws in this country to prevent people from getting screwed. Work with people you like and trust, and focus on building a product, not on what your "stake" is.

nickler• 14 years ago

Innovation wins again. Way to disrupt the 'shareholder negotiations' space with a crowd sourced, freemium model.

The only issue with scaling, however, is the music licenses as there's value being exchanged. Napster meets reverse Angellist, well played.

jfarmer• 14 years ago

The "official" way to do this is through what's called a 409A Valuation, a process designed to assess the fair market value of your common stock (and other classes, eventually).

You can do one yourself (note: talk to your CFO first -- you have someone handling that if you've closed a convertible note, right?), or pay a third party (usually a bank) to do it. They're relatively inexpensive.

You'll have to do one if you ever want to grant options (or RSUs) to potential employees. How else do you set the options' strike price?

aneth39• 14 years ago

If the early shareholders invested significant time and effort into the business, I don't see why it's 'right' for them to give up their shares. While they are certainly entitled to do so, pressuring them to drop even their 0.5% seems unethical to me.

If those early founders actually did not contribute much in those early days, I would revise this opinion. However as it stands, it seems akin to asking an early financial investor to return his equity. If I give you $50,000 and you pivot ten times, I should still own a piece of your company. Same goes for early founders.

The early founders had already agreed to diminish their share to 1% combined. Pressuring them to go any lower seems greedy and unnecessary assuming they invested significant time and energy over a long period of time, even if it was for an earlier idea.

Unlike most of the comments here, I'm not sure this was a class act. Given that the early founders voluntarily gave up their equity, I suppose the continuing founders deserve some benefit of the doubt.

I don't think I would have agreed to give up my last bit of equity as I would feel 0.5% was fair simply for being a part of the early team formation, ideation, and apparently discarded product development work. I would probably be annoyed by the offer and ignore it.

wtvanhest• 14 years ago

The problem is the "size" as in number of participants, in the Cap table rather than what people are getting paid in the event of an exit.

All else equal, you want less people on your cap table for each round. Big cap tables increase complexity.

I wouldn't be suprised if the current CEO were to pay them on the backend regardless of his dance.

[edit] I shouldn't guess what the CEO that I do not know would do, but I would expect myself to reward them later, just not contractually. This is really relationship/person dependent.

pbreit2• 14 years ago

Is that really true? Two original founders with 0.5% each?

aneth39• 14 years ago

Two former cofounders with a combined 1% of equity should not have any effect on the future of the company. Even if it did have some minor impact, those shareholders earned and deserve their shares. Companies regularly give shares to advisors, board members, employees, friends, landlords, etc...

I could be off a bit, but I don't think "extra" shareholders become an issue unless their stake is large (>5%) or there are a large number. Regardless, two minor former cofounders hardly seems a significant burden, and eliminating their stake for minor convenience is suspect.

If this was the justification used by the continuing founders, they were either ignorant or taking advantage of their former partners' ignorance.

> I wouldn't be suprised if the current CEO were to pay them on the backend regardless of his dance.

I wouldn't count on it. This is not generally human nature, nor is it compatible with the behavior reflected in this article.

antonber• 14 years ago

As the Anton of Ariel and Anton in this post, the logic behind returning the shares is based on the fact that the business should really have been restarted with a fresh cap table rather than keeping the old cap table in tact. The old cap table was maintained for reasons of convenience, and given that the company has a completely different product, focus, code-base, team, etc etc, I only have shares in this company on the basis of the poor decision to not launch a new company.

Also - Paul and Tal are awesome guys who have been hard at work for 4 years without any input from me. I think Ecquire will be a great success, and the divestment of my shares has nothing to do with my perception of the company's potential.

aneth39• 14 years ago

You are certainly entitled to give up whatever equity you like, and perhaps you are a better man than me for not feeling you deserve such a minor stake. If you feel you did the right thing and fully comprehend the situation, it is not my place to challenge your decision. I'm only expressing my thoughts, and my feeling that this is not the way to handle pivots with former co-founders anymore than it is a way to handle pivots with investors.

I don't know how long and hard you worked, how related your work was to the ultimate direction, whether you participated in early fundraising, advised the continuing founders, etc. All of those could impact my thoughts on this. Going on the assumption that you worked long and hard - you contributed to the ultimate direction and team and you earned something.

"Pivots" are all the rage in startups these days. Why is it any more acceptable to ask for vested founder shares to be returned than to ask for shares to be returned from early cash investors or advisors? Does YC return shares to founders who pivot after leaving YC?

I think it can be fair to renegotiate stakes according to impact, as it appears you did to get down to 0.5%, but eliminating clearly earned stakes entirely seems rarely justified. Re-incorporation makes sense in many cases, but in others will open the new company to accusations of fiduciary violations largely for the same reasons.

anonymoushn• 14 years ago

Are your dashes masquerading as underscores?

damoncali• 14 years ago

I would never have done that, from either side of the table. But it brings up a good question: when is a "pivot" a new company altogether?

aneth39• 14 years ago

I ultimately decided not to join a cofounder who was in a situation analogous to this. An investor owned > 1/3 of the company, but cash was almost gone and the original idea had failed due to TOU issues with a third party. The only option was to pivot entirely, with little money and investors owning a huge chunk. I saw this as unfair, and pushed for a new company - the investors after all had invested in the original idea, and should take some responsibility for its failure.

I would also have agreed to investors putting in more money, combined with issuing additional shares to the founders to keep their stakes the same, or to the investors reducing their stake. The thing is, investors to my knowledge will never be as "gracious" as Arel and Anton.

There is a lot of grey area between pivot and new company where ethics and legalities come into play, and I don't know the right answers. I'd love for someone like pg to expound on this.

Getting shares back from my co-founders

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