Dissolution · Legal

Buying back stocks from former co-founder. How do you evaluate (valuate) the worth?

Alison Lewis CEO/Creative Director

September 26th, 2014

I am a former co-founder of a company. They are wanting to buy back my stocks. We are on good terms overall. I never wanted to sell my stocks and really have no incentive other than these are friends. Left on pretty good terms and are still friends. 

How in the world would I go about evaluating the price of these? 

Here is what I know:
not-funded, fully bootstrapped
post- success
great team
amazing world changing milestones have been accomplished
they need to keep going and need some more stocks to hold some key players.

I suggested they dilute. They don't want to loose their majority and repeatedly said other people who stayed deserve the stock. To be fair, that's not my problem and hasn't been for a long long time. So, how should one evaluate this? 

I believe they will be successful or will get a buy out in the future. They are wonderful and I love them to death. Thus, why would I want to sell?

It's so scary to be that guy who sold his stocks for 10K that are worth 5M in the future. I don't want to be that guy! 

I know there is a win win here. I will not give all my stocks up, no way - but if I had an idea of the worth today it would make it easier. 

Lawrence Lerner Digitalization and Transformation Coach

September 26th, 2014

Alison this happens more often than you might think. Thanks for starting the conversation.

I think you've answered your own question. You took the stocks as part of your compensation package for an early stage company, not because of their worth today. You took them with the desire and dedication to build a company and create shareholder value. In my opinion, this isn't about valuation and there isn't a win-win scenario. This is an ethical decision on your part. You need to decide if giving up value is something you want to do because you like your former team. There is nothing unfair about keeping stocks you earned as part of your compensation.

If you choose to sell today, you may lose out on value you may have put into them during your time with the company if you undersell.  This is one of the "you lose" scenarios. If you sell, earn some cash and the company goes under, "they lose." 

Based on that you should make a judgement call. Either sit on them until an event occurs or if you are feeling charitable, "give your stocks away."  Give still means selling at any value.

Suppose this wasn't a company you were part of.  Suppose you were an anonymous investor for an IPO. You purchase shares and some time down the road, can you image if the board came to you and asked for you to sell back the shares? At that point there would be a well-established sell price. It's an uncomfortable position for them to put you in. 

Good luck

Will Koffel Co-Founder at Outlearn

September 27th, 2014

Tough one, Alison.

To summarize some of the other great comments here, there are two issues:

1. Voting control of company
2. Current and potential $$ value of the shares

If your co-founders are approaching you because they have a problem with #2, then they are not your friends at all.  You took a risk, you earned a compensation package, and that's all water under the bridge.  If you feel guilty, like you are going to net $10M for surfing Facebook for 3 months in your parents garage while your co-founders sweated out an amazing company, that's a different story.  But I suspect you aren't "that founder".

It sounds like the situation is #1.  They need more shares to distribute, but don't want to dilute their voting rights.  I would talk to a lawyer about the options here, but some sort of a share conversion, or a swap of voting shares for non-voting shares sounds plausible.  I've never heard of "renting" the voting rights, but that's intriguing as well, and sort of forces them to keep on good terms with you to earn the right to vote, essentially on your behalf.

Another option might be to put you on the board (if you aren't already), and use your share block to augment their voting power.  If everyone really is aligned on the future of the business, why are they so concerned about retaining majority control over you?

Lots to think about.  But I smell some "win-win" possibilities here, don't give up on that yet.

Bill Snapper Owner Principal at SammyCO, LLC

September 26th, 2014

Personally, I'd hold onto the stocks I was vested in.  They can't be liquidated at this point.  I'm assuming you earned them.  The structure of the company stock will change drastically once a real funding event occurs.  I'd hold on to the stock until that time and then see what the valuation is and if they want to buy the stock back, trade some stock for cash, etc.

I've been there before and it was with friends and they were great.  Take that off the table and think with your business head unless it doesn't matter what this could be worth down the road.  Just my $.02 worth.

Michael Weickert ♦ Strategic & Entrepreneurial Executive ♦ Trail-blazing leadership in biotech, medical device & pharmaceutical business

September 26th, 2014

Why would you want to sell indeed! Either there is some other agenda or they are not very creative.

The obvious alternative if you don't sell is for them to give themselves enough shares/options to keep their majority when they increase shares of key employees. If this is entirely bootstrapped then I doubt there is any obstacle to this.

Should you decide for the sake of the relationship to sell some shares, there are NPV models you could potentially use to triangulate a value. If they have revenue and revenue growth already demonstrated, these would be quite practical to use. What would they use to value stock options they would be granting to key employees? A 409A is typical for that.

If you think there is likely to be a good exit and don't want to be leaving a lot of money on the table, 1) find out if that is already in the works and may be behind why they want to buy back your stock and 2) prepare a sales contract where in the event they get an exit in the next xx months/years they split the upside with you.

If you are on good terms and if you don't want to sell because you believe in them and expect success then I would tell them that, share the obvious alternative, and if they don't back off, be concerned that perhaps we are not on such good terms after all.

Eric Wold

September 26th, 2014

I think you helped create the value your "friends" are looking to cash in on.  Wasn't the prospect of helping to increase the value a big part of the reason you got involved in the first place, and the reason they wanted you involved?  So you fulfilled your part of the bargain and the future looks good for the investment.  I feel they have crossed an ethical line in asking you to give up the stock for their own enrichment.  That's not something that friends do.

Eric Wold

September 26th, 2014

Is this really about control or money? What if they paid you to convert your shares to restricted stock?
Could they consolidate voting power without screwing you financially? It would be generous of you to offer such an idea, and their reaction will tell you what is really motivating this. 

Scott Elrod mHealth technologist☁ex-COO/CIO@Cloud 9-tech for behavioral health■ex-CIO@AmeriDoc(now Teladoc) healing 1.5M patients

September 26th, 2014

how to slice it
how to eat it

Alison Lewis CEO/Creative Director

September 26th, 2014

I feel like this too. I told them to dilute, they are not liking that idea... so feel a little on the spot. 

Alison Lewis CEO/Creative Director

September 26th, 2014

Great stuff. 

I ask myself how would I approach this if I was them and needed to buy back some shares? How would I get shares back if we needed them? For example, a former founder of mine has many, we'll have to buy some back. No way investors will invest with that person having so much. I am on both sides here and it's interesting. Keep the comments going. 

Paul Bostwick

September 26th, 2014

They need to solve their problem another way. Paying you a premium for your stocks is one straightforward way (you can offer them a low interest payment plan so they can pay from earnings.) Diluting works. Maybe swapping for a larger number of other stocks (non voting?) If it is the control they want there must be some way for them to rent the shares or buy some options from you? Or buy them from you and at the same time sell you the right to buy them back for X after a certain date (assuming X is less than the guessed at market price) to keep some of the gains in your grasp? That assumes they have enough unencumbered stocks to move into play for the new folks (which I still count as other people's problems.)

I think you do a NPV calculation based on a theory of the exit. If they share the exit theory (and they should or you go find a more positive team to spend your capital) then the price will be reasonable... Anything less is a charity done for a friend (quite noble) anything more is knowing when you have the upper hand and taking what you can (cold, but this is money.) You can give them a discount for the risk they spare you by handing over cash today, but you liked the risk so they should pay you to abandon the possible upside. That is a wash.

Finally I think the test of this is: will they feel the pain as well and in proportion to the gain they hope to get from this move. If everybody is sacrificing some of their upside to get a more likely win, then I'd try to make it go (not as a gift, but as a shared sacrificial move) if not, change the deal to spread the pain.