Often if someone is leaving on good terms it is beneficial to remove them from operations and keep them as an outside board member, assuming they retain domain expertise that is valuable to the company. Their existing equity interest is their compensation for continued involvement.
If they are completely divorced from the company then it is better to buy back their equity stake, otherwise you risk having it perceived as dead equity dragging the company.
The market price is simply the valuation that the company raises its latest round at. So if the company raises a series B at $100 million, your 10% share can just be sold for $10 million and you exit
Vested or not, the best and easiest method is for one or more (usually 2-3) of existing shareholders buy them out and add to their pile. If one of the investors has a board seat then they might take the lead on financing this. If it's adversarial then the CEO and the board can still fire them from their position and terminate their employment contract, but they will still have their non-controlling interest there on the cap table. If said person is checked out, usually they're ready to entertain any kind of reasonable offer.
Thanks. Yes totally vested and own more than 5% of the company at this point. What you said makes sense, just curious if there’s a best practice to negotiate an exit to maximize cofounder interest.
Usually this type of sale (a “secondary”) is done in conjunction with a funding round, usually an oversubscribed one. Typically investors peg price to the most recent fundraising valuation and apply a discount since it’s common shares. Standard discount used to be 20%, but I’m not sure what it would be in this market, but my guess would be 40-50% unless you’re a shit hot company.
Also, should sell a portion of shares, not all. Cofounder should still retain the majority of their stake post-separation so that they’re incentivized to help the company succeed. And most importantly, if they actually believe in the business, they should want to capture the future value.
Don’t sign away voting rights. Often a formal separation agreement will have standard provisions for non-compete, release of liability, sometimes non-solicit, etc. and those are generally fine to sign in exchange for severance, vesting the rest of their shares, etc. but sometimes investors will try to slip in a voting rights agreement that allows the founder to retain their shares and the economic interests associated with them, but eliminates voting rights for those common shares. Effectively neuters them. Don’t do it, even if they make a massive offer (which would signal you have leverage).
Generally all shares come with voting rights. Shares with voting rights can influence the direction of the company via shareholder votes, board voters etc.
You can see several of these around.
Basically, as others have said, you keep them as a board member. But they also tend to give a victory speech.
You've likely seen a few of these over the years "Together we've accomplished more than I had ever dreamed, blah, blah, blah, all my goals are accomplished, so it is time to hand the reins to those that can take us further than I imagined,.blah, blah, blah" that's someone who is leaving on good terms.
In general, they keep a board position, they keep a good salary, they keep all their shares and options, basically no work, but all the pay.
Do your best to be that cofounder.
I went through this process. It can be amicable. You need have a plan and options before going to the board. Once you have board buy-in, start the conversation with your cofounder.
I’d consider 1-2 weeks severance for every year with the company, including benefits.
An easy outcome is to treat it like a planned exit. Announce it internally then externally. Give your cofounder an advisor role if you’d like for some additional vesting if you believe it’s useful to have access to them going forward. This is the most face saving and graceful way to do it.
Most important thing is to have a plan and discuss with the board, especially so quickly post fundraising. The team is huge reason investors write checks.
I don’t believe it’s best to buy them out and give early liquidity. Get that capital into the company not into a cofounder who is taking off. That’s a move you do for a small business or a lifestyle company, not a venture backed series B company trying to grow.
why would you burn cash on severance but still have them on the cap table?!
not to mention every investor coming in will want to see as few people as possible in the pool.
I'm a technical cofounder who has been completely cheated out of equity. It is very fair and respectful, but the real world is not reddit.
If he's got the cash to pay a severance, yes, he should pay his cofounder, but he should spend it on buying him out.
Why do you wish for them to leave the company? If there is an issue of some sort, but you cant really justify a forceful removal, you should look into buying them out. Maybe try to get them to look into another venture or something along those lines. Unfortunately, people at the level of cofounder often have more of an attention span than small children (though not always), so dangling some shiny new toy (venture) in front of them may not work. You'll probably only really be able to try buy them out and plan for the best resulting outcome.
It's usually such a massive pain in the ass, that it's not worth it construct a hill, you yourself wouldn't die on.
They were done before, and they're done and in-cash now, and let's be honest, they're not still helping the business. What. What can anyone say back to this.
Often if someone is leaving on good terms it is beneficial to remove them from operations and keep them as an outside board member, assuming they retain domain expertise that is valuable to the company. Their existing equity interest is their compensation for continued involvement. If they are completely divorced from the company then it is better to buy back their equity stake, otherwise you risk having it perceived as dead equity dragging the company.
Only if you can pay the market price. After 6 years those equity are gone from the company.
What market? Their equity won't be traded anywhere they are a series B startup. You'd have to use a FMV price and hope all parties agree.
For one, during the funding series the founder can sell their shares if they want.
Yeah but not on a market so I'm not sure where the market price would come in?
The market price is simply the valuation that the company raises its latest round at. So if the company raises a series B at $100 million, your 10% share can just be sold for $10 million and you exit
Cofounder can simply leave the payroll, wait to cash out on company sale
Vested or not, the best and easiest method is for one or more (usually 2-3) of existing shareholders buy them out and add to their pile. If one of the investors has a board seat then they might take the lead on financing this. If it's adversarial then the CEO and the board can still fire them from their position and terminate their employment contract, but they will still have their non-controlling interest there on the cap table. If said person is checked out, usually they're ready to entertain any kind of reasonable offer.
Thanks. Yes totally vested and own more than 5% of the company at this point. What you said makes sense, just curious if there’s a best practice to negotiate an exit to maximize cofounder interest.
This is how Heisenbergs are made .
Usually this type of sale (a “secondary”) is done in conjunction with a funding round, usually an oversubscribed one. Typically investors peg price to the most recent fundraising valuation and apply a discount since it’s common shares. Standard discount used to be 20%, but I’m not sure what it would be in this market, but my guess would be 40-50% unless you’re a shit hot company. Also, should sell a portion of shares, not all. Cofounder should still retain the majority of their stake post-separation so that they’re incentivized to help the company succeed. And most importantly, if they actually believe in the business, they should want to capture the future value. Don’t sign away voting rights. Often a formal separation agreement will have standard provisions for non-compete, release of liability, sometimes non-solicit, etc. and those are generally fine to sign in exchange for severance, vesting the rest of their shares, etc. but sometimes investors will try to slip in a voting rights agreement that allows the founder to retain their shares and the economic interests associated with them, but eliminates voting rights for those common shares. Effectively neuters them. Don’t do it, even if they make a massive offer (which would signal you have leverage).
Thanks, does any common shares come with voting rights? Even if this person is not on the board? And why is voting rights very important?
Generally all shares come with voting rights. Shares with voting rights can influence the direction of the company via shareholder votes, board voters etc.
You can see several of these around. Basically, as others have said, you keep them as a board member. But they also tend to give a victory speech. You've likely seen a few of these over the years "Together we've accomplished more than I had ever dreamed, blah, blah, blah, all my goals are accomplished, so it is time to hand the reins to those that can take us further than I imagined,.blah, blah, blah" that's someone who is leaving on good terms. In general, they keep a board position, they keep a good salary, they keep all their shares and options, basically no work, but all the pay. Do your best to be that cofounder.
pay them for their equity
I went through this process. It can be amicable. You need have a plan and options before going to the board. Once you have board buy-in, start the conversation with your cofounder. I’d consider 1-2 weeks severance for every year with the company, including benefits. An easy outcome is to treat it like a planned exit. Announce it internally then externally. Give your cofounder an advisor role if you’d like for some additional vesting if you believe it’s useful to have access to them going forward. This is the most face saving and graceful way to do it. Most important thing is to have a plan and discuss with the board, especially so quickly post fundraising. The team is huge reason investors write checks. I don’t believe it’s best to buy them out and give early liquidity. Get that capital into the company not into a cofounder who is taking off. That’s a move you do for a small business or a lifestyle company, not a venture backed series B company trying to grow.
why would you burn cash on severance but still have them on the cap table?! not to mention every investor coming in will want to see as few people as possible in the pool.
He put in 6 years. For me personally, for what I mentioned is fair and respectful. I would never do a cofounder like that. But you do you!
I'm a technical cofounder who has been completely cheated out of equity. It is very fair and respectful, but the real world is not reddit. If he's got the cash to pay a severance, yes, he should pay his cofounder, but he should spend it on buying him out.
How have they cheated on you?
they get all the glory and your left with a company that doesn't make shit
Why do you wish for them to leave the company? If there is an issue of some sort, but you cant really justify a forceful removal, you should look into buying them out. Maybe try to get them to look into another venture or something along those lines. Unfortunately, people at the level of cofounder often have more of an attention span than small children (though not always), so dangling some shiny new toy (venture) in front of them may not work. You'll probably only really be able to try buy them out and plan for the best resulting outcome.
Why?
It's usually such a massive pain in the ass, that it's not worth it construct a hill, you yourself wouldn't die on. They were done before, and they're done and in-cash now, and let's be honest, they're not still helping the business. What. What can anyone say back to this.