tech-company, equityWe are 2 developers currently looking to join a startup. The existing product let’s call it marketplace for the sake of this discussion. The first marketplace they launched had a medioker year. It was also rediculously expensive, as it was developed by a web agency. After the first year there was little to no succes and lets say 50-60K invested to 0 profit. (Budgets were spent wrong, money was spent wrong, things went wrong generally…)
At this very moment the original founder is still active in the project. 2/4 off the original founders no longer actively “work” for the project. They no longer want to actively participate but don’t want to quit either. I don’t blame them, we are trying to make this company grow, why would they just give up their shares in the middle of growth?
At this point we enter a company that is on the hinge of extinction. We make the very foolish decision to develop and overhaul the entire platform before an investor is found. In the hope that the new platform would look more professional and appealing to investors. To great pleasure to the current stakeholders (who are no longer active in the project) we have now successfully launched the new marketplace but are actually still negotiating terms (shares and equity). No investor has been found to date.
At this point we are discussing with the owner and one of his active partners weither we are not better off ending the old company and creating a new one. Hence we are creating a lot of additional value. And are also working on some offspring idea’s. On which we would have to share profits with the other stakeholders.
We feel like we have an enormous responsibility and drive to make this company grow. Our tasks vary from active support to marketing, designing and developing and maintaining the project as well as account for hosting and maintenance of the entire project.
The current prospect for us is to get 8% of the shares vested within this year. And another 4% over the coming 2-3 years based on objectives and the active work we do.
I feel like the idea’s we are contributing and the work we are putting into this project exceed the amount of shares we are currently being “handed”.
What are good arrangements that are both good for the owner of this project, as well as us the new spirits! Should we dump the old company and it’s name for the sake of it? We currently still have a moderate userbase. Can we create new shares to create an exit for the old shareholders? What should our strategy be?
UPDATE We’ve had our meeting but I must say it was quite hectic. They litterally said creating the new company was not an option as there was already 80-90K invested as well as a lot of time. (I understand this but wasting all the money(80 to 90k), creating a company with little turnaround We’ve had our meeting but I must say it was quite hectic. They litterally said creating the new company was not an option as there was already 80-90K invested as well as a lot of time. Also they were of the opinion they did create a certain name for themselves as well as a decent platform with a steady userbase ( after 1 year 70% of the users are no longer active) aswell as it wouldn’t be fair to the other 2 passive Shareholders.
Our current new proposal is to have 15% of the shares upfront as we will be creating and executing the 2nd more valuable concept later this year. We will be creating value from the moment it’s launched. Another 10 to 15 over the course of 3 years. Ex 6,666 / y
Then we would want a financial saying (voting rights) for budgets spent higher then 6000 USD.
Some concerns are that the person with the idea holds more then 51% off al shares and is planning to invest/trade his own money in company for newly created equity. He has a veto over every decision. We do not want to see another year where money is not spent well. My colleauge is at the point where he doubts we could continue like this. We already have an exit strategy involving handing over the code and guaranteeing any bugfixes within a month in exchange for golden handshake.
my biggest concern is not to end up screwed here.
Some arguments we want to use. The old userbase is worth little. The old platform is far worse then the new but cost them 40k. Also none of its code has been reused. We literally only use the old data and users (which are kinda stale in my opninion). So our contribution should rate higher or at least equal? maybe 3k in a year. Also they were of the opinion they did create a certain name for themselves as well as a decent platform with a steady userbase ( after 1 year 70% of the users are no longer active) aswell as it wouldn’t be fair to the other 2 passive Shareholders.
Our current new proposal is to have 15% of the shares upfront as we will be creating and executing the 2nd more valuable concept later this year. We will be creating value from the moment it’s launched. Another 10 to 15 over the course of 3 years. Ex 6,666 / y
Then we would want a financial saying (voting rights) for budgets spent higher then 6000 USD to one single instance. To make sure money is spent wisely and to prevent invoices to br e created from another company in his own holding aka transfering funds.
Some concerns are that the person with the idea holds more then 51% off al shares and is planning to invest/trade his own money in company for newly created equity. He has a veto over every decision. We do not want to see another year where money is not spent well. Another concern is that the owner is trying to concince us creating the new platform is exchange for his everlasting resoect. Wow such respect. Very apreciated aka passive blackmailing. My colleauge is at the point where he doubts we could continue like this. We already have an exit strategy involving handing over the code and guaranteeing any bugfixes within a month in exchange for golden handshake to minimize our losses.
my biggest concern is not to end up screwed here.
Some arguments we want to use. The old userbase is worth little. The old platform is far worse then the new but cost them 40k. Also none of its code has been reused. We literally only use the old data and users (which are kinda stale in my opninion). So our contribution should rate higher or at least equal?
Do you have any contracts in place with the current owners? You mentioned that you revamped the “marketplace” and was foolish before you found an investor, but this is not foolish. You need to make something worth investing in first. The key question is were you paid for your work developing the new site or is any contact in place? Does the existing company own the code you wrote?
If you somehow own the code or are necessary to work on the app because you are the only one who knows it well enough to modify, then i think you should work to start a new company and offer to bring the old owners into the new company, but with reduced shares for them. You as the new owner and main driver of any increased in revenue should get a much larger share than 4-8% (all depending on how difficult it was for the original user base to grow).I honestly think that if you 2 developers are going to somehow save this company and the other alternative is that it will not work and have to close, then you should have 51% of the company.
Be gentle with negotiations and perhaps you can start off lower and add in increased shares if the userbase/revenues increase substantially because of the work you contributed.
Let’s start with things you already know.
First, it’s dumb to invest without any kind of agreement. And that’s what you’ve done. Using the founders’ logic, you have injected $30-50k of sweat equity, in a business that was worth next to nothing, in exchange for the hope of a low double digit stake.
Second, cash consumed bears no relation to value created. If the original platform had generated, say, a run-rate of $1M p.a. revenue, do you think they’d have calculated your equity as joining developers on the basis of the $90k they spent, or on the c. $100k p.m. it led to? The founders’ argument is bogus: you knew that up front, but you’ve let them stick with it.
Third, you can’t build trust on your own. You want everyone to value your input. But the passive shareholders clearly don’t.
How do you make progress? I think you have to negotiate towards a position that has the following shape:
The company going forward should have a share structure that primarily reflects the cash and sweat input going forward
Historic shareholders should be recognised in two ways: first, with either a fixed or a capped valuation for their shares as at present; second, through a modest retained (ideally non-voting) equity position
It would certainly be straightforward to achieve this by transitioning to a NewCo, but there are plenty of ways to achieve this either by introducing a NewCo with a contractual relationship or/and an equity relationship to the original company, or by a set of agreements between shareholders keeping just the original company. If you can agree the principles, you can hire someone to make that happen.
It’s worth working really hard to get on the same side of the table. But you also have to face up to the fact that the way things are headed at present, it’s possible that the founders aren’t going to agree to any deal that’s fair to you.
Your leverage is that, based on what you’ve described, the firm isn’t going to get investment unless you’re involved. The trouble is, every day that passes you’re making that less true.
Good luck. I have to be candid and say that in my experience this kind of situation rarely ends well. But there are steps you can take to move towards a reasonable agreement if the personal dynamics and the legal position are favorable.
It’s all about the value add. An idea in and of itself isn’t worth much.
None of these things are of substantial value unless you’re working on the product and you’re committed. You can make the small case that a mentor role provides value, but chances are it just replaces some other mechanism of surpassing a problem.
The rule of thumb is that if you can pay for it pay for it, if you can’t pay for it, and you can’t live without it, trade equity for it.
The original owner starts with 100% of the equity, but unless they can design the product, make the product, sell the product, etc. They are sitting on a big pile of nothing. If you’re the people who can really bring them to market, they should prefer to have 25% of a million dollar valuation instead of having 90% of a zero dollar valuation.
The owner of the company probably had a bad relationship with the first development team because they were hard to work with. The authority that they had for the project was less than the liability they had for a product. Liability and authority must always match.
All of that being said, the initial company needs to be shut down, a new company needs to be formed. You should get equity equal to your contribution. If things don’t work out with you then they can reboot again. If they want to hold the equity in escrow until you demonstrate the value, that is reasonable, but they shouldn’t give you a pathetic amount of equity and yet expect you to carry this to success.
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