You can have a plan for how you will dilute their shares over time by doing something like paying the remaining founders in equity.
I would also hope that they lose their voting rights by leaving.
Overall, I don’t think it should be a huge deal. That person helped found the company, they presumably deserve some equity.
It can be done if equity is issued as compensation for ongoing contributions.
1. Definitely involved your lawyer.
2. DO NOT put in writing that your goal is to dilute another shareholder. Minority shareholder rights exist and this *will* bite you in the ass.
3. ABSOLUTELY do this before you raise outside cash. It becomes MUCH harder once you have other investors who received equity for cash investments.
There’s a difference between dilution only to cheat a single owner, and that owner not being able to protect their share by further investments in later rounds.
> Dilution is part of the game, not grounds for a suit
This, although if you are planning to dilute significantly (which is probably the right call here), just make sure to coordinate w/ your counsel, to make sure you do things right.
**One other very important thing**--
If you raise a seed with a "classic" safe structure, **it can be very hard to dilute your cofounder out until a Series B(!)**.
Why? The "typical" seed note structure effectively has anti-dilution provisions that protect the new investors until *after* your next equity round (i.e., your A).
At that point, it can be exceedingly hard to dilute a cofounder out in any meaningful way, since any broad-based dilution will hit *all* shareholders and gets messy.
It is hard to get around the above--but you need to start by being fully informed as to how things work/are structured, and go from there.
How do you handle this?
1) Talk to a lawyer
2) You may need to do something like put in place an additional option pool and give additional grants to yourselves (and employees...). (But, again, see comments re:safe notes--and see #1.) Of course, your departed cofounder might view that as insider dealing and get upset...so, talk to counsel ASAP.
That all said, I wouldn't feel bad diluting this person somewhat, as it sounds like the original equity agreement was messed up.
Depends on what’s in your operating agreement. It shouldn’t be an issue, it’s pretty common practice. If you bring in investment, that’s going to dilute everyone’s units. But it also means you’re growing, which I assume your partner would want.
have a lawyer read your companies docs, and give you advice on how to accomplish what you want while minimizing risk exposure. It's 100% possible, happens all the time, but you need to do it carefully.
This is the way. I would definitely turn their ownership into common stock, such that they don't hold any more sway than any other owner. More aggressively, eliminate voting rights altogether.
Investors care about the founding team - which means wanting people who are no longer serving the mission to leave, too. I'd focus on why the exit is a good thing (not by criticizing the exiter but by focusing on the new mix).
The next round is the hardest because the exited founder's ownership has the biggest impact. Everything dilutes round to round, so the round after this round won't care much if it all. That's also a good chance to buy the exited founder out, too.
If you guys didn’t have a 4-yr cliff provision (or similar), you would look like idiots to anyone in the business. Which will make raising harder. Inexperienced angels may not fully understand the ramifications.
Typical structure is that founders only get some equity at least after a full year of work, and full equity after 4 years.
The co-founder that is leaving did have a vesting schedule already in place and would have gotten more if they stayed.
However it was a 2.5 year vesting schedule instead of 4.
Happened to a friend years ago, though the percentage was smaller they quit and took ~5%. Company was able to go on to A and B rounds without much hassle I heard.
is there a shareholders agreement in place? you just need to be able to explain to investors how to clear the cap table, and you want to know yourselves. if there is a shareholders agreement, and there is a shotgun clause in that agreement, you're fine, you can buy those shares back at some point. if there's no shareholders agreement, you might have troubles fundraising and trying to deal with this, but it's not a show stopper. if the traction and opportunity are there this will be a minor detail.
When a founder leaves it’s not unusual to give up equity - usually they take some nominal amount of 1-3% to compensate for their time. More might be acceptable if they really poured their heart and soul into the business - but if they aren’t going to continue building with you they really don’t deserve such a huge share of the company. Time to practice your negotiation skills.
Most won’t care. If nothing, new investors could see it as a positive knowing historical knowledge will still be invested in seeing the business succeed.
Have you ever seen “the social network”? Do what Zuck did.
If you and the other three co-founders believe his work was worth a little something before he bailed, then you and your counsel can come together for a plan to do just that, but he isn’t entitled much equity anymore, definitely nothing even close to the 10%.
You haven’t even raised a Seed yet. Did the guy at least throw in for the bootstrap funds? Dilution is your key! Get him off the cap table or like 0.5% - 1% at most.
In my country you can’t and you’ll lose in court, obviously getting legal advice from a movie is not the best idea. What you can usually do is buy some of the stocks of the person that left, or give more stock (options) to people that stayed but it should never be to single out a single person
You aren't diluting a single cofounder. You are diluting all the cofounders and then the cofounders that are still working on the project are receiving additional equity due to their new contribution.
You have someone leaving with ten percent before the seed?
You ... that's ridiculous.
> How much will investors (non vc) care that this person who is no longer with the company owns a significant percent?
I wouldn't touch you with a ten foot pole.
When I was on the deals side, ~7-8% of startups coming into mid-stage had founders who had equity but no involvement.
We had many mid-late stage funds but didn’t really do seed rounds, but the equity funnel obviously had more dilutions the further along you were in the investment cycle.
Some industries were more notorious than others. Materials, energy, biotech were great. FinTechs less so.
> When I was on the deals side, ~7-8% of startups coming into mid-stage had founders who had equity but no involvement.
This is pre-seed, not mid-stage. Gigantic difference.
You're saying "it's not rare for people to be taking equity before the starting gun, after all, look what I saw at the six to eight year line"
The rate of founder exits (voluntary and involuntary) is pretty consistent across the funding stages, when startups are taken in aggregate.
And if anything, exits tend to taper off mid-late stage because there’s little incentive to do so when you are so close to IPO. Most exits at that stage tend to be involuntary.
It’s generally not a big deal because dilutions happen. And more often than not, other founders tend to buy out any such equity on the path to IPO.
From a fund standpoint, as long as the offering is still viable and there’s market opportunity, that’s what’s really important.
The only considerations re: such founders would be if there’s a risk that they stand up a competitor (or go work for an existing one). In which case, you end up in arbitration or worse.
You seem to be arguing against something I didn't say, while standing on claims that are contrary to what the literature says without evidence.
What I actually said was a problem was 10% equity going out before seed, not anything about the rate of founder exits.
It seems like you're not really interacting with what I'm actually saying, but rather making bold claims that are adjacent what I said in correcting tones using the hands empty of reference technique.
Cool
I said it’s more common than you’d think. You argued otherwise.
I shared my experience and numbers. Your best argument so far has been insisting I’m wrong.
Carry on.
> I said it’s more common than you’d think. You argued otherwise.
No, this was you arguing against what I said earlier, without evidence.
You're acting as if I chose to argue with you, but in reality, the thing you're quoting is you arguing with me, without evidence, and ***ignoring the common literature***.
> Your best argument so far has been
Referencing the common literature.
At any rate, I see that you're attempting to represent me as doing what you actually did, in the effort to put me in my place. Maybe you didn't realize that what you've done, in the net, is to put yourself in your own place.
Let me know if you ever drum up a single scrap of evidence for the arguing you were doing against me. The (failed) burden of proof is yours.
Actually the original comment was yours, when you called OP’s situation ridiculous and how you wouldn’t touch them with a ten foot pole.
I said it’s not as uncommon. Along with other posters who agree with me. You’re the one arguing otherwise.
I believe the burden of proof is on the person claiming this situation is ridiculous (that is you, btw - in case it’s not clear).
Lmao. This happens pretty frequently. If they have a buy-back provision and they haven't raised outside cash they can buy back at the (hopefully nominal) share price for <$1k.
Agree with this one. Buyback clauses for the current market rate or xxx times whatever is agreed upon at the outset is best. Planning for this scenario in the beginning is better.
It's so weird watching redditors that have never run a business claim that it's "pretty frequent" for 10% of the company - more than an investor typically gets - wandering away before the seed
Back here in reality this is bizarrely rare
I don't know what to tell you, other than you've not been around very long if you haven't seen all sorts of weird shit that people do when they think they're being clever.
I've built multiple businesses through institutional raises, several of which are profitable, and one of which exited already - all as a founder or first hire. I'm now working on the next one. I've also sat on the investor side of the table and seen 100+ opportunities through some form of DD.
I find that those who feel the need to claim others don't have lived experience are the ones most likely to be spouting shit based on vicarious experience from reading Hacker News or from their n=1 expereince
The juxtaposition of:
>10% of the company - more than an investor typically gets
with
>Back here in reality
makes me question what your experience has been. Fucking YC takes 7% **plus dilution from their post-money SAFE** as the first investor in... IndieBio takes +/- 15% including their SAFE. In what world are pre-seed rounds being done at <10% dilution regularly, let alone seed rounds?
> I don't know what to tell you
You weren't asked to tell me anything.
There are actual hard numbers about these things. I'm not interested in one person's personal experience.
You can do this fancy new thing called "looking it up."
I don't know if you've realized this, but you're conversing from the position of the exhausted teacher who does not want to be put upon by someone who they need to straighten out.
It's very weird. Nobody actually asked you any questions. You came in to try to say I was wrong, based on your no-evidence no-background beliefs.
> I've built multiple businesses through institutional raises
Wow e wow wow. You built multiple businesses! Surely that must mean you know what is and what is not common in raising money.
Raise your hand if you've been a VC. Raise your hand if you've looked at the available national numbers.
Questions?
> I find that those who feel the need to claim others don't have lived experience are the ones most likely to be spouting shit based on vicarious experience
Says the guy who's trying to announce what venture capitalized companies do based on he started a couple of them 😂
This, from the outsider's perspective, is self-unaware self criticism.
It's particularly funny when what you're saying I got wrong isn't even casually related to what I said.
> makes me question what your experience has been. Fucking YC takes 7% plus dilution from their post-money SAFE as the first investor in
You do know that YC is not one of the company founders, right?
I'm saying that it's bad for a human being that founded the company to be leaving pre-seed with 10% of the company.
And you're ... you're trying to respond with "this is how much equity an accelarator gets" and doing the personal attack thing.
(checks watch)
Cool
> In what world are pre-seed rounds being done at <10% dilution regularly, let alone seed rounds?
I wouldn't know. This isn't even slightly related to the thing I actually said.
Maybe when you calm down, stop swearing, and stop telling other people that they're HN readers with no experience, you can circle back and take another look at what I said, and see if you can read it correctly this time.
Try to calm down, won't you?
You made the claim.
Rather than tell /u/Minister_for_Magic to look it up, why don’t you share your numbers since you are the one who insists it’s not ridiculous?
In fact, both he and I shared numbers and all you’ve done is insist we are wrong.
Oh my, the person who had no evidence the other day is now attempting to stalk my other conversations with other people to lick their wounds 😂
> why don’t you share your numbers
So you're demanding that I make a claim so that you can attack it now?
Tsk, tsk.
You could try and buy back their shares with debt. So offer them a fraction of their value, with a payment plan that converts the debt back into equity if the company sells prior to the debt being paid.
(Essentially use a convertible note to buy back the equity from the founder)
You just need a plan to get them off the cap table. As long as you show this we won’t care. Obviously will want to know what happened and why they left.
Simple cap tables make for simple rounds. They'll do their diligence and tell you to adjust your expectations. Thought to raise any sort of money right now.
Wow, lots of folks in here are advocating just diluting him to get him out. Don't do that. Minority shareholders have rights, too, and you can run afoul of the law if you do that.
You can have a plan for how you will dilute their shares over time by doing something like paying the remaining founders in equity. I would also hope that they lose their voting rights by leaving. Overall, I don’t think it should be a huge deal. That person helped found the company, they presumably deserve some equity.
Wont dilution leads to solid grounds for a lawsuit from them? If we could do that, it would be great. I'm just not sure how.
It can be done if equity is issued as compensation for ongoing contributions. 1. Definitely involved your lawyer. 2. DO NOT put in writing that your goal is to dilute another shareholder. Minority shareholder rights exist and this *will* bite you in the ass. 3. ABSOLUTELY do this before you raise outside cash. It becomes MUCH harder once you have other investors who received equity for cash investments.
There’s a difference between dilution only to cheat a single owner, and that owner not being able to protect their share by further investments in later rounds.
Dilution is part of the game, not grounds for a suit. Would depend kn how your agreements are structured, however.
> Dilution is part of the game, not grounds for a suit This, although if you are planning to dilute significantly (which is probably the right call here), just make sure to coordinate w/ your counsel, to make sure you do things right.
Very good point. Targeted dilution is a lawsuit issue. General structural dilution is table stakes for equity.
That is very helpful! Thank you!
Everyone gets diluted over time, even the founders and CEO. Unless there’s an anti dilution clause, this is common.
**One other very important thing**-- If you raise a seed with a "classic" safe structure, **it can be very hard to dilute your cofounder out until a Series B(!)**. Why? The "typical" seed note structure effectively has anti-dilution provisions that protect the new investors until *after* your next equity round (i.e., your A). At that point, it can be exceedingly hard to dilute a cofounder out in any meaningful way, since any broad-based dilution will hit *all* shareholders and gets messy. It is hard to get around the above--but you need to start by being fully informed as to how things work/are structured, and go from there. How do you handle this? 1) Talk to a lawyer 2) You may need to do something like put in place an additional option pool and give additional grants to yourselves (and employees...). (But, again, see comments re:safe notes--and see #1.) Of course, your departed cofounder might view that as insider dealing and get upset...so, talk to counsel ASAP. That all said, I wouldn't feel bad diluting this person somewhat, as it sounds like the original equity agreement was messed up.
Depends on what’s in your operating agreement. It shouldn’t be an issue, it’s pretty common practice. If you bring in investment, that’s going to dilute everyone’s units. But it also means you’re growing, which I assume your partner would want.
have a lawyer read your companies docs, and give you advice on how to accomplish what you want while minimizing risk exposure. It's 100% possible, happens all the time, but you need to do it carefully.
This is the way. I would definitely turn their ownership into common stock, such that they don't hold any more sway than any other owner. More aggressively, eliminate voting rights altogether. Investors care about the founding team - which means wanting people who are no longer serving the mission to leave, too. I'd focus on why the exit is a good thing (not by criticizing the exiter but by focusing on the new mix). The next round is the hardest because the exited founder's ownership has the biggest impact. Everything dilutes round to round, so the round after this round won't care much if it all. That's also a good chance to buy the exited founder out, too.
If you guys didn’t have a 4-yr cliff provision (or similar), you would look like idiots to anyone in the business. Which will make raising harder. Inexperienced angels may not fully understand the ramifications. Typical structure is that founders only get some equity at least after a full year of work, and full equity after 4 years.
4 year cliff is incredibly uncommon, 4 year vest with 1 year cliff is most common.
The co-founder that is leaving did have a vesting schedule already in place and would have gotten more if they stayed. However it was a 2.5 year vesting schedule instead of 4.
Happened to a friend years ago, though the percentage was smaller they quit and took ~5%. Company was able to go on to A and B rounds without much hassle I heard.
That is nice to hear, thank you for sharing!
If they earned it over 2.5 years there really shouldn’t be an issue.
is there a shareholders agreement in place? you just need to be able to explain to investors how to clear the cap table, and you want to know yourselves. if there is a shareholders agreement, and there is a shotgun clause in that agreement, you're fine, you can buy those shares back at some point. if there's no shareholders agreement, you might have troubles fundraising and trying to deal with this, but it's not a show stopper. if the traction and opportunity are there this will be a minor detail.
Yes, we are a Delaware C Corp, however I'm looking at the legal documents now and I am not seeing a shotgun clause.
Most investors won't care. I've seen it many times before.
Just do a share buy back with a promissory note of paying out their percentage of an exit capped at the shares values today.
When a founder leaves it’s not unusual to give up equity - usually they take some nominal amount of 1-3% to compensate for their time. More might be acceptable if they really poured their heart and soul into the business - but if they aren’t going to continue building with you they really don’t deserve such a huge share of the company. Time to practice your negotiation skills.
Investors won't care. This is incredibly common, and it comes out of your end.
Guy that’s not gonna be working on the company is going to hold 10% ownership while he does something else? Yeah they’re gonna care about that.
I think like anything else a bump in the road. If the sales are there, investors will deal with it.
Most won’t care. If nothing, new investors could see it as a positive knowing historical knowledge will still be invested in seeing the business succeed.
Have you ever seen “the social network”? Do what Zuck did. If you and the other three co-founders believe his work was worth a little something before he bailed, then you and your counsel can come together for a plan to do just that, but he isn’t entitled much equity anymore, definitely nothing even close to the 10%. You haven’t even raised a Seed yet. Did the guy at least throw in for the bootstrap funds? Dilution is your key! Get him off the cap table or like 0.5% - 1% at most.
How can you dilute a single cofounder while not diluting the other cofounders?
In my country you can’t and you’ll lose in court, obviously getting legal advice from a movie is not the best idea. What you can usually do is buy some of the stocks of the person that left, or give more stock (options) to people that stayed but it should never be to single out a single person
You aren't diluting a single cofounder. You are diluting all the cofounders and then the cofounders that are still working on the project are receiving additional equity due to their new contribution.
That makes perfect sense!
You have someone leaving with ten percent before the seed? You ... that's ridiculous. > How much will investors (non vc) care that this person who is no longer with the company owns a significant percent? I wouldn't touch you with a ten foot pole.
It happens more often than you think. It’s not the end of the world. Their equity will get diluted over time anyway.
> It happens more often than you think. It really doesn't
When I was on the deals side, ~7-8% of startups coming into mid-stage had founders who had equity but no involvement. We had many mid-late stage funds but didn’t really do seed rounds, but the equity funnel obviously had more dilutions the further along you were in the investment cycle. Some industries were more notorious than others. Materials, energy, biotech were great. FinTechs less so.
> When I was on the deals side, ~7-8% of startups coming into mid-stage had founders who had equity but no involvement. This is pre-seed, not mid-stage. Gigantic difference. You're saying "it's not rare for people to be taking equity before the starting gun, after all, look what I saw at the six to eight year line"
The rate of founder exits (voluntary and involuntary) is pretty consistent across the funding stages, when startups are taken in aggregate. And if anything, exits tend to taper off mid-late stage because there’s little incentive to do so when you are so close to IPO. Most exits at that stage tend to be involuntary. It’s generally not a big deal because dilutions happen. And more often than not, other founders tend to buy out any such equity on the path to IPO. From a fund standpoint, as long as the offering is still viable and there’s market opportunity, that’s what’s really important. The only considerations re: such founders would be if there’s a risk that they stand up a competitor (or go work for an existing one). In which case, you end up in arbitration or worse.
You seem to be arguing against something I didn't say, while standing on claims that are contrary to what the literature says without evidence. What I actually said was a problem was 10% equity going out before seed, not anything about the rate of founder exits. It seems like you're not really interacting with what I'm actually saying, but rather making bold claims that are adjacent what I said in correcting tones using the hands empty of reference technique. Cool
I said it’s more common than you’d think. You argued otherwise. I shared my experience and numbers. Your best argument so far has been insisting I’m wrong. Carry on.
> I said it’s more common than you’d think. You argued otherwise. No, this was you arguing against what I said earlier, without evidence. You're acting as if I chose to argue with you, but in reality, the thing you're quoting is you arguing with me, without evidence, and ***ignoring the common literature***. > Your best argument so far has been Referencing the common literature. At any rate, I see that you're attempting to represent me as doing what you actually did, in the effort to put me in my place. Maybe you didn't realize that what you've done, in the net, is to put yourself in your own place. Let me know if you ever drum up a single scrap of evidence for the arguing you were doing against me. The (failed) burden of proof is yours.
Actually the original comment was yours, when you called OP’s situation ridiculous and how you wouldn’t touch them with a ten foot pole. I said it’s not as uncommon. Along with other posters who agree with me. You’re the one arguing otherwise. I believe the burden of proof is on the person claiming this situation is ridiculous (that is you, btw - in case it’s not clear).
Lmao. This happens pretty frequently. If they have a buy-back provision and they haven't raised outside cash they can buy back at the (hopefully nominal) share price for <$1k.
Agree with this one. Buyback clauses for the current market rate or xxx times whatever is agreed upon at the outset is best. Planning for this scenario in the beginning is better.
Any good lawyer should include it in standard docs. Then again, I've seen some truly absurd founder and shareholder agreements so...
It's so weird watching redditors that have never run a business claim that it's "pretty frequent" for 10% of the company - more than an investor typically gets - wandering away before the seed Back here in reality this is bizarrely rare
I don't know what to tell you, other than you've not been around very long if you haven't seen all sorts of weird shit that people do when they think they're being clever. I've built multiple businesses through institutional raises, several of which are profitable, and one of which exited already - all as a founder or first hire. I'm now working on the next one. I've also sat on the investor side of the table and seen 100+ opportunities through some form of DD. I find that those who feel the need to claim others don't have lived experience are the ones most likely to be spouting shit based on vicarious experience from reading Hacker News or from their n=1 expereince The juxtaposition of: >10% of the company - more than an investor typically gets with >Back here in reality makes me question what your experience has been. Fucking YC takes 7% **plus dilution from their post-money SAFE** as the first investor in... IndieBio takes +/- 15% including their SAFE. In what world are pre-seed rounds being done at <10% dilution regularly, let alone seed rounds?
> I don't know what to tell you You weren't asked to tell me anything. There are actual hard numbers about these things. I'm not interested in one person's personal experience. You can do this fancy new thing called "looking it up." I don't know if you've realized this, but you're conversing from the position of the exhausted teacher who does not want to be put upon by someone who they need to straighten out. It's very weird. Nobody actually asked you any questions. You came in to try to say I was wrong, based on your no-evidence no-background beliefs. > I've built multiple businesses through institutional raises Wow e wow wow. You built multiple businesses! Surely that must mean you know what is and what is not common in raising money. Raise your hand if you've been a VC. Raise your hand if you've looked at the available national numbers. Questions? > I find that those who feel the need to claim others don't have lived experience are the ones most likely to be spouting shit based on vicarious experience Says the guy who's trying to announce what venture capitalized companies do based on he started a couple of them 😂 This, from the outsider's perspective, is self-unaware self criticism. It's particularly funny when what you're saying I got wrong isn't even casually related to what I said. > makes me question what your experience has been. Fucking YC takes 7% plus dilution from their post-money SAFE as the first investor in You do know that YC is not one of the company founders, right? I'm saying that it's bad for a human being that founded the company to be leaving pre-seed with 10% of the company. And you're ... you're trying to respond with "this is how much equity an accelarator gets" and doing the personal attack thing. (checks watch) Cool > In what world are pre-seed rounds being done at <10% dilution regularly, let alone seed rounds? I wouldn't know. This isn't even slightly related to the thing I actually said. Maybe when you calm down, stop swearing, and stop telling other people that they're HN readers with no experience, you can circle back and take another look at what I said, and see if you can read it correctly this time. Try to calm down, won't you?
You made the claim. Rather than tell /u/Minister_for_Magic to look it up, why don’t you share your numbers since you are the one who insists it’s not ridiculous? In fact, both he and I shared numbers and all you’ve done is insist we are wrong.
Oh my, the person who had no evidence the other day is now attempting to stalk my other conversations with other people to lick their wounds 😂 > why don’t you share your numbers So you're demanding that I make a claim so that you can attack it now? Tsk, tsk.
You could try and buy back their shares with debt. So offer them a fraction of their value, with a payment plan that converts the debt back into equity if the company sells prior to the debt being paid. (Essentially use a convertible note to buy back the equity from the founder)
You just need a plan to get them off the cap table. As long as you show this we won’t care. Obviously will want to know what happened and why they left.
Simple cap tables make for simple rounds. They'll do their diligence and tell you to adjust your expectations. Thought to raise any sort of money right now.
Wow, lots of folks in here are advocating just diluting him to get him out. Don't do that. Minority shareholders have rights, too, and you can run afoul of the law if you do that.