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Advice sought: Cash only cofounders owning majority stake in start-up


#1

I’m in a complicated situation wherein my cofounders (2 of them) own majority stake in our business (let’s say 3/4 for arguments sake - cannot disclose true values). And I own 1/4. It was my idea and they were my former employers that encouraged me to execute on it with their resources. We setup the business and its been running as follows:

I put in 100% of my time and they put in about 5% of theirs respectively (settling disputes, helping with legal, doing some intros every now and then, helping to direct the company).

We want to bring in a technical cofouder for me, whom I’ve been working with (she’s been on a contract) for last 3 months. We are now restructuring the Shareholders agreement to allocate her options and give her a vesting stake in the business, and to also make room for growth.

It was agreed upon as follows:
I maintain my 1/4.
They dilute to 1/4 each.
We allocate 1/2 of the last 1/4 to our new employee on a vesting schedule; and the other half will be diluted from my existing cofounders shareholdings in an EMI scheme.

However, the change that has occured between that discussion and us drawing up the new agreement; is that they are now suggesting that they do not want employment contracts, but would rather be investors. Which essentially means that they have no legal obligation to contribute ANYTHING to the company going forward, (including financial contributions).

Is this fair?

If not, how can we do this in a way that is more equitable; and how would I go about getting them on board? What are my rights here?

Any advice would be greatly appreciated.


#2

So you brought nothing but the idea and they paid for your time working on the idea.

Feels fair to me. Reflects the essence of the actual investments.


#3

… I’d actually go as far as to say they own the whole business, and simply hired you.

It looks like without their financial contribution the whole thing just dies, and without you working on the idea… well, they would just hire someone else, no?


#4

Right now, I hear you own 1/4 of a company without vesting. They own 3/4 of a company with potential without vesting. If you have vesting on your section, you own a tiny bit of the company, and a strong need to leave or get a much better structure right now. As is, the current structure sounds a bit poisonous to the company’s well being if you’re looking to be a venture backed startup.

Is there any current mandate of any of you continuing to work on the company to maintain the shares? Or are you all currently vesting shares? Do you have non-dilution agreements in place at all?

If you are, well, this new contractor is in a really crappy position and should not join this.

I think at the “standoff” level of conflict, all 3 of you become “investors” and you happen to also take a role at the company that has no condition on your current shares. Yes, that’s shit, but so is this situation. It seems you expected one of them to take a CEO/leadership role eventually or something from what you’re saying above.

I think at the “trying to ever be able to hire people again” goal, they reduce their component to ~40% of the company, and the rest goes into a employee/future investment pool. You move your stake to whatever would match a 4 year vesting window and the role you now plan to play (CEO vs CTO). A dilution agreement for further investment rounds can possibly be set now as well.

As you are an interested party, it seems like you should all be looking at a standardized set of docs, and you personally should be hiring your own lawyer to look at them all.


#5

If this is not clear, I mean, crediting the stock you’d already have from a vesting window starting on your full time start date + a small additional credit for prior part time work.