Ask HN: Would you walk away or push onwards?

22 points by throwaway201602 10 years ago | 20 comments

Dear HN,

I'm in the middle of a personal struggle and want to hear what you would do.

1 year ago, myself and 3 partners quit our day jobs to work on our SaaS product full time. I had already built an MVP on nights and weekends. We used that to raise a seed round.

Over the next year we hired a dozen employees, gained hundreds of customers, and achieved profitability.

Everything is great, except for one co-founder. For reasons ranging from lack of cohesion to poor communication to employee complaints, it was clear that this person needed to be removed from the company.

All other founders agreed and we removed this person. We offered this person a reasonable package (equity vested into, severance, keep benefits, etc) and he verbally agreed.

A couple days later, we were served a demand letter from this person's high priced litigator demanding that his full equity be vested immediately.

Due to unfortunate lawyering nonsense, the company is not likely to have this deemed frivolous by the courts.

We're now completely stuck. Our lawyers say it would cost $150,000 to fight this in court and would take 18 months. We don't have that kind of money or time to spare. We're being forced to accept an unfair deal giving this person equity he did not earn.

I don't know if I can live with this outcome. I (and my other founders) have worked so hard for what we've built. I've given up my entire personal life for this company.

I don't know how much longer I can keep pushing through this. Is this a sign to move on or forge ahead and give this person something undeserved from my own hard work? What would you do?

Tl;dr: Scumbag cofounder screwing the company over. No choice to bend over and take it. Would you walk?

rsp1984 10 years ago |

This is a tough situation to be in and you have my empathy.

1) If you have properly set up a vesting schedule in the operating agreement his claims would be pretty baseless and assuming there's no other basis for his claims I'd venture to say you wouldn't need 150k to fight this in court.

2) Even if it turns out to be costly to fight in court, consider this: What would this person's equity be worth if you offered it in a fund raise? From your description it sounds like the fight over equity is a pretty recent event so it's unlikely you'd be forced to bend over immediately. Would it be an option to raise capital for the company and use part of the proceeds to go to court?

3) If all other options fail I'd approach the ousted co-founder together and say he can have his shares but then everyone would walk away from the company due to misaligned incentives and he'd be left with nothing. If you go this route you'd have to make this 100% clear and there can't be a single doubt about that you're going to do this.

4) Talk to a lawyer if you haven't done so already.

Hope my answers provide a little help in this matter.

Edit: added point 4)

rsp1984 10 years ago | |

To OP: Not sure why you deleted your reply but anyway:

Here's three more thoughts (I'm not a lawyer so please double-check this with one if you think it's relevant):

5) Could you get a loan to fund this? Do you have any valuable assets in the company you could use as mortgage? I don't know how it is in the US (I assume that's where you are based) but should you be victorious in court you can probably recover any legal fees from the ousted co-founder.

6) Depending on how you've set up the operating agreement there may also be the option of issuing more shares to the active members of management, thereby diluting down the ousted co-founder.

7) Depending on how much was invested so far and by whom and depending on whether the business is based on any jointly owned core IP or not, you may be able to shut down the company and re-incorporate later as a new company without the co-founder.

From experience I can also tell you that whatever you decide to do, you need to have a good gut feeling about it. If you settle it needs to be on terms that still make you feel proud of the business and about what you've achieved and you need to feel motivated to move forward.

hoodoof 10 years ago |

Has it occurred to you that this person is actually entitled to hang on to their shares?

You all made the choice to start the business together. You had the opportunity to work out ironclad provision for founders exiting.

You all worked to get it to this point.

Even if you have lost your respect for this persons contribution, it was part of the deal that they get these shares.

I understand totally if you don't like it, but have you considered that in fact this person might actually be in the right?

Lesson learned, give them the shares, live with the consequences of your decisions. If your company is going as well as you say then it is not the end of the world.

The co-founder you are referring to probably describes you guys as scumbag cofounders unfairly and unjustly booting him out.

Alternatively, get rid of the damn lawyers and ask this person what he wants to make a clean exit deal - it may be less than the full share entitlement and if that is the case then maybe you should take the deal.

And for gods sake stop spending money on lawyers - you are destroying your company firstly via time dilution and secondly by wasting money. Part of running a company successfully is to know exactly what it means to win, to compromise and what it means to take a pragmatic outcome that lets you get on with the job.

geobmx540 10 years ago |

It's great you have a signed vesting schedule - I think everybody here is confused by the problem. Nobody has any insight into what alleged deception you are being accused of, and you didn't share (and that's completely fine).

It sounds like the "don't have that kind of time" is specifically because of "We're in talks with (really) big pockets", but again, we have no insight into what those talks might look like.

Disclosure: IANAL, just an asshole.

Is this an acquisition? If so, be really sure they actually want to acquire you, then maybe it's worth just giving the guy his shares to get your deal done (or attempting to negotiation - always negotiate)

Is this an investment? Again, how sure are you they really want to invest, and how long can you live without it? You should talk to your current team and potential investor about possibly fixing the cap table and how you could achieve that (ie cram down the value of the shares and top up current employees)

When I'm in the right (fuck it, even when I'm not), with a preponderance of evidence, I usually tend to not take kindly to people coming after me - at least for a bit, you have little to lose to start the process of going to court - you can always settle between now and then. This is like any other negotiation, his first salvo is give me everything, you're turn to respond in kind with "go fuck yourself because X,Y and Z, and by the way, we will have to counter file as you are causing irreparable harm to our company because of A, B and C".

You can always borrow money over time - ie 10K to start, and see how it goes, maybe you settle and you have to find a way to pay it back, maybe 10K is enough to get the guy to back off.

tommynicholas 10 years ago |

This is what I, taking into account my personal situation of course, would do:

- Make it clear to the co-founder that the business will be between much more likely and 100% likely to shut down if they maintain this complaint. While this seems like it's showing them the power they have, it's much more important to show them how fragile the value of any shares they have are.

- Make an offer between the original offer and 100% vesting. Make it cash heavy if you can, possibly contingent on funding. Make this offer exploding - they need to decide within 1 week and if they don't, you will pull everything except what you feel legally required to put on the table (the vested stock only, no benefits, no severance) and fight this.

This will drag on and kill your company if you let it, and settling could work. If settling doesn't work, you're in a new position, but you need to get this in a position where it will be resolved or not resolved quickly. Then you will know what you're dealing with more clearly, but you are not left with the binary choice you think you are.

hoodoof 10 years ago |

Does your cofounder read HN? You might find yourself reading this thread in court.... or your cofounder might turn up here to comment.

exolymph 10 years ago | |

They went through and deleted comments with more details, interestingly.

exolymph 10 years ago |

You have to decide which is harder to take: the loss of equity or the opportunity cost + risk of going to court.

Edit: I think you're going to have to take a loss either way. It's a matter of doing the cost-benefit analysis and betting on probabilities.

tylercubell 10 years ago |

> we were served a demand letter

Your cofounder isn't suing you yet so don't panic. They're playing the intimidation game to get what they want.

> We're now completely stuck.

No, you're not. You're in a negotiation and you need to show strength.

> Our lawyers say it would cost $150,000 to fight this in court and would take 18 months.

Try to see if the other side would agree to non-binding mediation to try to resolve the issue before bringing it to court.

> We don't have that kind of money or time to spare.

Does the other side? Does your cofounder really want to bankrupt the company in order to get equity worth zippo?

> I've given up my entire personal life for this company.

> Would you walk?

You already knew the answer before you asked the question.

protomyth 10 years ago |

"For reasons ranging from lack of cohesion to poor communication to employee complaints, it was clear that this person needed to be removed from the company."

Are we talking about just bad attitude or behavior that could have legal implications?

jey 10 years ago |

I'm confused. You state that there's a 36 month vesting agreement with a 1 year cliff. Why doesn't the vesting agreement make this a non-issue?

matchagaucho 10 years ago |

100% "shotgun" vesting is common in this situation.

Now, whether those shares are liquid or not depends on the RSU or options structure.

It's common for a Co-Founder to exit with 100% vesting, but the actual payout of those shares is contingent on a liquidation, funding, or revenue event.

Consider 50% cash now and 50% contingent on achieving $1M in ARR (for example).

You also need to consider your reputation in the industry. Framing this as "unfair" does not send a particularly good signal... especially since you terminated this person, who presumably took significant risk to quit a day job and build a company from scratch.