>But Cass followed up later with an email that he didn’t want to give up his shares in the company.
Well, it's his property. Why should he give it up/away? That's also the risk you take when you go with someone else into business - that they simply can stop working and keep 50% (or whatever share) of the business and it's their good right to do so.
The risk was not having these things sorted out at the start. It’s pretty standard to have vesting schedules, even for founders. For exactly this kind of situation. Most Series A investors will stipulate such a requirement, and if there was already a vesting schedule it all resets as part of the investment.
Similarly it’s less common, but still not uncommon, to have provisions for leavers. Either some kind of prenegotiated basis to determine how you calculate fair value and buy back the share. Or I have seen something that was more like a reverse vesting in that the ownership expires X years after you leave.
The benefit of sorting all this stuff upfront isn’t just to avoid negotiating at the worst time when emotions are high. The game theory aspect of it requires you to balance not getting screwed with what seems fair if you’re the one that leaves.
Yes reverse vesting (which is common) means that you start by owning your, say, 33% share from the start and each month you stay your quitting penalty reduces by 1%. So if you quit 1 month in you need to sell back 32% at basically no cost.
Since you own all the stock up front the founder participates fully in shareholder voting and you don't get taxed for receiving valuable stock later (although there might be issues with the actual reverse vesting agreement from a tax law standpoint as it is a form that ties your employment with benefits).
That's interesting, I never heard of reverse vesting. I thought you'd be liable for capital gains tax (since you're making a "gift to the company/cofounder", you'd have to use the real market value of the gift to compute CGT), but it seems that the tax rules have a special case defined exactly for this circumstance:
At the risk of making sweeping generalisations about tax law interpretations in multiple jurisdictions…
I’ve lived in numerous countries and they’ve all applied either one or both of the following to such a situation:
* the shares are deemed “at risk” because of the exit clause, and so are not yet taxable. In Australia _I think_ you need to explicitly declare that treatment in the first tax return that the event happens, and you’d be losing some of the benefit of the long term capital gains tax discount as a result. I’d need to double check with my accountant on the specifics, but I know he suggested such a thing at one point.
* the nominal value at the time is tiny fractions of a cent per share because the company has no assets or income. So you just take the tax hit, which ends up being something like $1.
I've seen a few pair of founders with great success have an agreement that one could at any point for any reason, decide to buy out the other party. Catch is that if you invoke that the other party can switch it around and demand that you accept that pay for your share.
It's crystal clear what and how, and you're not going to try and low ball it because you can be forced to sell for that yourself. I don't think it's perfect, but it is simple, self correcting and crystal clear.
This only works well if the parties have equal access to that kind of cash. Otherwise you might get into a situation where the richer founder can just decide to buy the other founder out at a price which is unfair but still beyond their cash means.
That assumes that the founders have enough intimate knowledge of the other founders personal financial situation. They clearly risk becoming a victim of it them if the other founder can find enough money.
If a company is clearly worth more than the offer, finding outside investment or even traditional financing through the bank shouldn't pose that much of an issue.
> Catch is that if you invoke that the other party can switch it around and demand that you accept that pay for your share.
I'm kinda curious how the low-level details of that work out. Do you have some sort of 3rd-party service which temporarily holds one founder's offer and gives the other founder N days to make a decision? Or is there some other mechanism to prevent the founder initiating a buy out from backing out ("no you see, I wasn't actually serious about buying you out!").
The mechanism is triggered by one founder making a clear statement, usually in writing, that they want to trigger it. From that moment on, they are bound to it.
Apart from invoking it in writing, I think such manoeuvres go through a lawyer, which a court will usually accept them as stating the truth about when an offer was send and received. I'm also sure the clause have some text about how long the other founder has to answer and how long they have to come up with the money if they decide to switch it around.
Not a smart move for the parting founder though as keeping a 50 % stake of an unprofitable company will drastically reduce the chance of that company succeeding. The remaining founder won't be able to secure funding (no sane VC will touch a company with such a cap table) or offer those shares to new hires. Shares are a means to generate value, they should be handed out in exchange for taking risks (as the original founders), doing work (early hires / employees) or contributing money (investors). Having a large fraction of shares just "lie around" without contributing anything is pretty damning for a startup. Most likely outcome of those situations is that the remaining founder will abandon or sell the company.
It appears the final offer was to keep a 5% stake, not a 50% stake, and then get the remaining 45% bought out for 100k (30k upfront, 70k over 10 years), and the disagreement was over whether that 45% was worth closer to 100k or 26k.
Basically as far as I can tell, as far as it pertains to shares, this conflict boils down purely to differing valuations of current shares (of course I'm sure on a personal level the conflict is much more complex).
Maybe. Being paid out 100k for 45% of any future exit of the company forever doesn't seem unreasonable on the face of things, even if the company only has 52k in the bank and has been operating at a loss for a long time. But that would depend on the specifics of what the company has in the pipeline. But if you think the company is likely to follow something like the following trajectory of net income then 100k for 45% doesn't seem all that unreasonable, even with time discounting.
Has that been true? I don't know what the company's financials have looked like year over year.
> Suddenly because a founder is leaving you expect them to start turning a profit again?
No, it's more a question of whether you think the company will ever turn a profit. That's probably the point of contention over how much the shares are worth: do you think Elementary OS will ever financially support a team? If not then you probably lean closer towards a 0 dollar valuation (or in this event 26k). If you do then you probably lean closer to a 100k valuation.
From the looks of it they never turned a reliable profit to pay two developers. They received a one time anonymous donation in 2018[1], that led to the second developer and looks like they were averaging about 16K a year then.
In general, I think what is wrong with this argument is that they are both in the wrong. They founded a company that should have been a 501c and now they are talking about its value as an asset based on the willingness of people to make donations to enable developers to work on a project.
These kinds of cream on the top FOSS projects run as companies are largely relying on naive good will of people who want to fund the best project to adapt open source to them rather than the best portion of open source for them.
Well the tweets said sales fell and haven't recovered since COVID, which has been going on for two years now.
But regardless, the value of the shares are... whatever their value is now. It doesn't matter what they might be worth in 10 years if their current value is ~zero and a founder wants to divest them now.
> It doesn't matter what they might be worth in 10 years if their current value is ~zero and a founder wants to divest them now.
But the current value of shares is intimately tied to what their expected future value is. Indeed in the absence of an acquisition or IPO this is the only way to determine the current value of shares. And if different people disagree on their expected future value, they will disagree on their current value.
well, they'll basically lose half the costs immediately, since they'll stop paying the second developer's salary. If that's 16k and they lost 10k last year, this year they can be in the black if they don't dip further.
This said, I reckon the real issue is that the guy wants 50/60k from the shares, so the lawyer went "we'll ask for 100k and negotiate"... but on the other side they probably think 26k was already a compromise, and aren't willing to budge further.
Those numbers are made up sure, but they're meant to demonstrate that a 26k valuation of 45% of your company after 10+ years in business means you effectively believe your company will never be able to support more than one employee (presumably the founder themselves), by contrasting with how modest even a 100k valuation means you think the future of the company will be. It's fine to believe Elementary OS will live on in perpetuity as a single person free lance project, but is a pretty stark contrast with where I think Elementary OS wants to go and means that one of the co-founders presumably should come out and say Elementary OS will never be a company, but rather a one-person free lance project.
And I can easily understand how that would rub the other cofounder the wrong way ("Oh so you believe that Elementary OS will eventually be able to hire a team down the road but you're offering me a price that indicates the opposite, even after accounting for uncertainty? Sounds like you're intentionally low-balling me here after 10 years of hard work together.") Of course from the other co-founder's point of view 70k of debt hanging over one's head is not a fun prospect either. But nothing at first glance here, without additional details, jumps out as me as brazenly unreasonable from either side.
> Well, it's his property. Why should he give it up/away?
Legally sure but thinking more pragmatically the company is already struggling financially, why not take the money they offer and leave on good terms?
The friendship/business contacts are probably worth more than the company shares. And if the company rebounds and you miss out, well that is life. You still have been founder of a great company and that will open many future doors.
In German we would say that the smarter one compromises. Arguing only leads to both sides loosing.
I'm sure I'll be violently opposed here, but it seems like an awfully poor heuristic that creations are statically split at mint-time, as opposed to - say - the amount of labor put down over time, at least for a founding team.
For instance, let's say I and a friend created a company, and run it together for one year. She keeps her share, but stops contributing. I then keep working for 3 more years. In total, we created this thing over 5 person-years. A natural baseline split would be 20-80.
Obviously you can do more accurate heuristics based on skills, experience and other factors, and having salaried employees are outside of the equation.
In either case, I'd feel horrible in a hypothetical situation where my cofounder quits early with 50% and sit back and hope to cash in on future hard work from me. And not only that, but makes decisions over a company he's not operationally involved in.
As I mention here: https://news.ycombinator.com/item?id=30612983, at the monetary level, I don't think this is a conflict over a 50% stake, but rather over the valuation of a 45% stake (at the end it would be a 95-5 split).
But in general yes, my impression is there are usually agreements in place to reduce an ex-founder's share of the company over time.
>I'm sure I'll be violently opposed here, but it seems like an awfully poor heuristic that creations are statically split at mint-time, as opposed to - say - the amount of labor put down over time, at least for a founding team.
That sounds reasonable. The problem is when people don't do the leg work to set up a framework to handle more complex share splits. Sans such a framework, the default is to split at mint time because that's how stakes have historically worked and the legal system should, in theory, minimize funny business possible when someone doesn't have a contract specifying any specific details.
The general outcome here is that the 'no contract' way of splitting shares is pretty bad, which seems in line with the no contract way of doing anything other transaction or business dealing. That way of doing business only works for small time transactions, say in the 2 or 3 digit range.
When you set up a start-up, you should now give ownership out that generously; give out options that vest over time, and place provisions in the shareholder agreement that specify what happens if one co-founder leaves.
Investors could minimize risk by providing templates for the various jurisdictions that show how this is done, for using lawyers to codify is going to cost more than the startup is initially worth, hence the common but entirely unnecessary infighting.
I use Elementary on one box and like it (only qualm to date: no window minimize button), whereas Ubuntu is nearly everywhere else. It would be nice if the community (= people closer to the founders that they know and trust) could step in and mediate.
It is correct, once you own shares they are yours forever, and unless a contract (shareholder agreement) says otherwise, they are yours to keep. It is NOT appropriate to want to participate in decisions after a full departure. In fact, that may also cause conflicts with one's next employment. Founders that leave may retain a purely passive stake. If they are smart, they understand that that can only be a small stake, otherwise the venture is at risk, because no investor wants much "dead wood" in the share pie.
The broader question is how to monetize a Linux distribution, I find that harder to think about than monetizing open source in general, which is already a little more challenging than selling proprietary software (you can sell services, but while that is easier than selling products, it only scales linearly with headcount => bad idea).
Guys, don't fight over 30k, in tech at your levels that's two monthly salaries!
I have been a staunch advocate against minimizing windows, as I have seen people spend a significant share of their time doing it (instead of simply making visible the window they need).
It’s open source right? Shut down the company (or stop working on it, that’s what the other founder is doing, value will quickly plummet to zero). Set up a new company with you as the only owner, then proceed where you left off.
In fact you can. With no other formal agreement in place, any cooperative venture is an equally-owned "general partnership", and no partner can legally do anything to diminish another's ownership. And all business debts, however they are incurred, are shared equally too.
Source: been there, twice. Now I keep a boilerplate partnership agreement form URL bookmarked on my phone...
Well, it's his property. Why should he give it up/away? That's also the risk you take when you go with someone else into business - that they simply can stop working and keep 50% (or whatever share) of the business and it's their good right to do so.