Startups · Entrepreneurship

What to do in an equity disagreement in a startup?

rakesh balakrishnan Lead Quality Assurance Engineer | actively seeking new Test Lead position

December 6th, 2016

I work with two other co-founders on a startup. We're angel funded, though our angel took an obscene amount of equity for the little money he put in (in the 10,000-50,000 range) due to something that happened before I started to work at the startup.

I joined after the first two founders, Austin and Michael, started to work on it. Michael recently quit another startup to work on this one. (these are pseudonyms.)

I joined as the developer/a bit of business. I was the sole developer and designer of the site, of course with Austin's and Michael's non-writing-code assistance. Both guys aren't MBA-touting douchebags looking for "a hacker to make their startup a success!" - they're very knowledgeable in technology and the web, as well as business/entrepreneurship.

I originally was to receive 20% of the company. However, Austin wasn't happy with receiving only 20%, and thus wanted 24%. That meant that my equity holding was going to be reduced to 16%. (We are incorporating soon.)

Michael's all for what makes everyone more motivated to work on the startup, and the team up to this point didn't have any major disagreements or conflicts.

I surely don't want to cause any conflicts at all, considering I'm the guy that recently joined. However, I think that I'm entitled to a bit more than 16%. 20% was satisfactory for me.
What do you think I do? Suck it up and accept 16% or try to receive more?

Thanks so much in advance!
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Selvan Rajan

December 6th, 2016

I'd say going with 20% would be the ideal thing for all of you. It is not because it is the right number but because it is what initially agreed. Please do not accept anything less as you would lose down the line. Please tell him that in many companies many new people have been taken as co-founders with equal equity.
If he insists on having more than you, you could give him 1% to make it 21% & 19%.

Paul Tabet Chief Operating Officer at GlockStore.com & San Diego Sewing Co.

December 6th, 2016

This is a common issue with founders.  If you had an agreement on 20% then you should recieve 20%.  I would have a discussion with the other founder and get it resolved.  Make sure you get a stock purchase agreement and a fully diluted cap model to insure you get 20%.  Also remember your 20% will dilute with additional financings.  Hope this helps.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

December 6th, 2016

You started to work without getting the terms in writing and now you will get whatever they want to give you. Quit. The founder who wants to screw you now will continue to screw you in the future.  If you want to stay, HIRE A LAWYER and get it down on paper. 

Dmitry Kroshka Marketing, Strategy, Partnerships

December 6th, 2016

Rakesh,

I have been in startups (bootstrapped and venture) for 12 years.  I've seen this movie before. People like this hold themselves in the highest regard, are not collaborative, and are delusional. Truly. I've seen this repeat itself other companies as well.  The symptoms sometimes vary, but the disease is the same.  This person only cares about themselves - they are a tyrant, not a partner.  And usually an ineffectual tyrant, in the sense of moving the business forward.

So my advice: either negotiate your exit, or fight for your equity (hopefully you have proof), and be open with both partners about your concerns.  The best outcome is you and Michael stay on, and Austin leaves.  All good tech startups have three components, Business, Tech and UX, but those duties can be shared between two, and reinforced with hires instead of partners.

Good luck.

Sridhar Rajagopal

December 6th, 2016

Yes, if it was agreed upon, that only seems fair. And also, if one of the founders wants 24%, it should not have to come from your allocation individually! Would the other founder and the investor(s) agree to an equal reduction, to up this guy's 4% increase? If this other founder has the stuff that matters, and the others also pony up, then it would be more equitable. Not as it stands currently. 

Henry Daas Coach-Approach Strategic Advisor

December 6th, 2016

I suspect there is WAY more to this story than meets the eye so I couldn't render an opinion in good conscience. I will say that every time I have ever laid down with dogs, I'd inevitably develop a persistent urge to scratch....

Thomas Sutrina Inventor at Retired Pursue Personal interrests and family

December 6th, 2016

So what is the cost of you leaving, what you added never happened? What is the cost of the other founders if what they added never happened?  What is the cost of getting someone to make what each founder added? 

Paul Nielsen Founder at Tejon Tech

December 6th, 2016

I agree with Dmitry. Either they keep your original agreement or you exit and find a better set of co-founders. I wouldn't waste my time. 

Marvin Schuldiner Problem Solver at Sanns, LLC

December 7th, 2016

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Paul Brunson

December 8th, 2016

It's hinted at in some of these answers, and it may be a bit too late for you, but *ALWAYS* get decisions like this in writing and in particular with a startup and founders, everyone involved should agree on their ownership percentage and the articles of incorporation/cap table/etc. should reflect that. At this point I would hold off on any further work until you can agree on a number you are good with (as stated somewhere above, if you feel like you are being taken advantage of it will probably continue unless you put a stop to it now) and ensure the attorney that incorporates the company handles the cap table and any stock agreements/purchases. Until it is all official, you are left wondering.