Ask HN: I'm leaving a startup I helped build soon, how can I protect myself?

4 points by lins1909 2 years ago | 8 comments

Hi HN,

For the past year, I've been working as the sole developer of a product together with a cofounder who has a sales/marketing background.

We haven't signed an official contract, but we do have an agreement in writing (texts) about what the equity split is.

I've done a lot of work on this and we're now ready to go live with the product.

However, I'd like to take a step back from the product over the next year as I'm going back to study and I want to focus on other interests. I'm open to still being involved, just not as an active developer.

What are my options here for ensuring that if this startup is successful and gets sold, I still get a significant piece of the pie? Our equity split is 50-50.

anonzzzies 2 years ago |

Officially move the product to a company, add a management contract with voting rights, amounts etc; try to get someone you both trust on board so you don’t get deadlocked over every tiny thing if you two disagree. I did this a few times, even with co founders I actually never met irl; it works well as long as there is a framework and clear expectations and clear limits on what the other can do by themselves or what needs a majority.

gus_massa 2 years ago |

It's somewhat standard to have a "1 Year Cliff and 4 Year Vesting". So 50%-50% may be "unfair"[1] if the other cofounder continues working and you left the project completely.

I don't understand what the other cofounder has been doing this time, because it's too difficult to sell a product that still don't exist.

[1] Sorry if "unfair" sounds too agresive. But I think you must ask someone that is used to this cases how to split the equity. Also, it looks like you are not leaving the project completely, so it's more complicated.

meiraleal 2 years ago |

The product doesn't have income yet, right? So it's still in a phase that it needs to put money on it to continue. Do you plan to support the development of it through your own money? If so it would make sense for you to keep your share.

The product you developed is a liability and needs maintenance. The only thing you can do is sell your share, which wouldn't be easy (thus proving my point).

shoo 2 years ago | |

another way to frame this is that while the startup has negative cash flow, someone will need to invest cash to allow it to continue to operate -- either until it is written off as a failed venture, or transforms into a viable business. whoever is investing cash will get equity in exchange, diluting the two founders' equity shares.

in the event that the remaining founder is working to sell the product and grow the business while not drawing a salary, and without outside investment, it would be fair for that founder to be compensated with additional equity as if they were making cash investments equal to a reasonable wage for that founder, which would dilute the equity of other co-founders who were no longer working for the startup.

mooreds 2 years ago |

For anyone else reading this, this situation is exactly why I recommend having these hard discussions before you write a single line of code. I did with the startup I co-founded. We essentially wrote up our "divorce papers" before we got "married". When it came time to leave, it was hard emotionally, but all the mechanics were laid out in writing.

We used the Nolo books (the partnership has a great chapter about how to handle the situation where a partner wants to leave, which is good for giving you ideas about how to handle things like ownership buy backs, if someone dies or is disabled, etc) and a good lawyer.

It feels risky to spend money doing this for something that is "just an idea" but don't forget you'll be spending your time (which is more precious than money) for months or years on this project too.

I realize this doesn't help the OP, but maybe it'll help some folks before they start working together.

brudgers 2 years ago |

Tell your partner what you want to do.

Ask them what they think is fair.

If you don't like what they say, hire a lawyer or let it go.

Good luck.

PS: All the profits are in the future and all the remaining work is in the future too. You are not committed to doing the remaining work. What do you think treats your partner fairly?

romerocarlos 2 years ago |

I understand that a Profit Sharing Agreement would be the solution. You could negotiate a formal written agreement that guarantees you a percentage of future profits, even if you reduce your active participation. This could be a fixed percentage of profits or royalties. The most important thing is to make sure you have everything in writing and that both parties agree. It would be advisable to consult with a lawyer specialized in startups and entrepreneurship to help you structure an agreement that protects your long-term interests. This will avoid future misunderstandings or disputes. Also consider that 50/50 companies are the most difficult to manage in situations or conflicts between their shareholders, which can cause paralysis in the company's operations. Good luck.

smarri 2 years ago |

I'd get something more formal than text messages, as there is a risk you will own nothing and these are worthless. Definitely need a contract or other agreement.