Co-founder exiting after pivot – what's a fair exit package?

Equity: Walking away, your stake should be whatever you've veseted -- this is why you have vesting. If you purchased your shares (I hope!), then there's nothing more to do. If they were options, ask for conversion from ISO to NQO (IRS-mandated) and an extension (10yr) on the exercise period. If the post-pivot company wants, they can keep you on as an advisor for a period at some reduced equity vest (e.g. 1/20th your founder vest). This is a nice way to transition and can be worthwhile in some scenarios.

Cash: You should expect none. If you all documented the unpaid work in the form of contractual deferred compensation (unlikely), then you can insist this be paid out as a requirement of labor laws. If it wasn't documented, then it's a sunk cost. Cash is the company's life blood, so they cannot waste it on employees that are departing or terminated. You shouldn't expect an exit package.

Realistically... If you own 10% in a "new" company (post-pivot), this is a great position for you. Their alternatives are (1) to nuke the cap table in a reset and pivot without you; it's not really worthwhile for anyone to duke it out this way; (2) if they're itching to buy you out (unlikely), you can consider whatever offer they put forward but you have no legal obligation to accept; or (3) everyone just accepts the current state of affairs as sunk costs and parts amicably. (3) is best for everyone involved -- it's mutually non-ideal.

I used to work in VC. Although I've never deal with this situation myself, I've talked to other founders who've had similar experiences.

The general thinking is that the new team is essentially a new business. This new business needs cash, and taking that away is more or less a non-starter at this point. Fundamentally, founders are compensated for seeing things through, not for partial work. It's a really hard sell to either ask a cash-poor company for cash for non-productive purposes or to ask new investors to put up cash that's going towards an exit-package (ie. someone who's not going to be contributing). The only leverage you may have is how much pain you can cause by not being bought out, which puts you in an adversarial relationship with everyone else. I don't think that's good for you.

So I'd recommend you'd just hold on to your vested shares to build good will. Indicate your intent to exit, but you like the new idea and wouldn't put additional pressure on the business at this stage. If the business is successful in the future, you may get bought out by later stage investors to simplify the cap table and reduce governance complexity. But for that outcome, you'd need to be on good terms with current investors and the new team.

I've commonly seen grants like this diluted to almost zero. I would think carefully and strategically about how you can get some sort of value for the equity you vested. Its probably harder than you think to get decent liquidity on it.

Some good advice here; couple qs: did you get shares for your personal capital contribution?

Simplest thing to do if you think it will work and don't need money is just sit on your vested shares, perhaps ask for a little more as an exit package, be supportive, offer to join the board as an advisor, and move on.

If you'd like a clean break and some cash, you could call your last round investors and offer them a discount to the last price for your vested shares. Depending on the state of the company and what's next, they may be interested -- there's an implication in these conversations that you'll find SOMEONE to buy eventually, which they may or may not like. I'd guess unless things are gangbusters, you might look at 30-50% discount from the last valuation, knowing nothing about the common, the company or the pref stack.

Another possibility - you could offer to sell your shares at a discount to your cofounder, leaving him in a good spot - he could ask around for a loan / investment (in which case the company would be the buyer, and he'd benefit pro-rata).

Personal advice - keep some, sell some, stay available to help.

Just keep the vested equity. That's why there's vesting.

Important Questions:

1. How much did your involvement lead to the fundraising success?

2. How much did your involvement lead to the products' early success?

3. Does it make sense to take the IP early idea that you were passionate about as part of your exit package?

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Expectations:

* you should expect no cash. taking cash will lead to a lower chance of a return on your equity. if you desperately need cash, you should get a small package based on your salary.

* you have no way to protect against being diluted. you have no idea how much work it will take to make this project successful. making it successful will require dilution. at best you could negotiate never being diluted under a certain amount, and making that based on successive valuations. if you leave at pre-seed, and it becomes a unicorn, you likely don't deserve 10%. what do you think you realistically deserve if this is a massive runaway success AFTER you leave.

* one way to think about this, is what would your time have been worth at a company with a higher TC. if you would have been paid $500k including equity somewhere else, maybe you should get the same amount of equity as someone investing 500k in cash, and get the exact same dilution as they would.

* you will not find a standard answer anywhere. you need to find the best solution between:

  1. your ego
  
  2. your cofounders ego

  3. giving this startup the best chance of success so that all of this time will be worth something for everyone. even if thats less than you want it to be, its better than $0. because all of the hard work lies ahead.

If you have PMF, everyone staying behind is taking full market salaries and your valuation is based on a priced round then you should likely keep all your vested equity undiluted.

However, I assume that, as a pivot implies, you are pre-product market fit. In which case here are some questions to consider.

What is the value of the company after the pivot? How much of what was done pre-pivot has any relevance to the post-pivot company?

Is the startup valued at $20m or do you have SAFEs with a $20m cap? If the company is _worth_ $20m that means you've probably had a priced round and someone would likely pay $2m for your vested equity. Is that correct? Sell to them with a substantial, say ~50%, liquidity preference that goes to the Company (likely the Board's approval is required for a share transfer).

In large part the purpose of the SAFE is to avoid valuing the company. What valuation did you put on your 409A? Are you equating your "given a win-state valuation" (the cap) with your actual valuation (409A).

There is a Michael Seibel video where he talks about founder equity. In it he suggests that you should give back a lot of equity if pre product market fit as this will actually maximize your total return.

Remember if you raised $2m at $20m cap but have spent $1m your remaining co-founder is essentially taking $1m at $5m cap if compared to starting again (since they still have to hand over 10% to the investors and now they have to hand over 10% to you too but you spent $1m so they are giving up 20% for $1m).

Would it be more sensible for your co-founders to start a new company and offer the investors a substantial chunk or all of their remaining money back or to come with? Did they invest in them, you or both of you? In a liquidation how much would you get?

I would suggest that you should look to offer at least 90% of your vested equity to not have the remaining equity diluted. A good rule of thumb here would be what could you sell the company for today with no one staying (more than the a few months for minimal hand over) and divide the amount you raised by this number and this is the dilution you should be looking for.

You don't mention how much cash the company raised, or how much cash is left. These are key questions if you want to know how much of a buyout is appropriate.

If there's not a ton of cash, they are going to be very hesitant to give much of it to a departing founder.

At the same time, you should be hesitant to just hang onto your equity on the promise that it will be bought out later. If the company isn't successful, you'll get nothing. And if the company is successful, future investors will convince your founder that you don't deserve anything and that they should do shady stuff that will dilute your shares to nothing.

Curious, what was doing your friend, who is ready to take over and lead? Why not switch sides, take over his functions, and offer your stake for sale during the next raise at that valuation?

Why not offer your stake to the company’s investors at the previous valuation?

My two cents…

1) They buyout the shares. If they don’t want to do that then…

2) Sell the company.

If either of these can’t happen the company is dead and everyone parts ways. It’s as simple as that. No free rides here.

Keep the vested equity and move on. Anything else is asking too much.

Went through a similar scenario a few years ago, similar valuation range and stage. The person was nice, so we amicably decided to settle at around 3% sweat equity.

Very similar situation.

You can think of your equity in terms of buckets: you get some for having the courage to start, some for the grind, and some for future returns. You're giving back the future returns bucket, not the other two. The vesting mechanism imperfectly maps to this.

Keep the equity. It's not "dead" in any real sense (though people will describe it that way to talk the value down). Dilution will hit it anyway. Again: you are already relinquishing the future value when you stop vesting.

If you have a board seat, consider staying in that capacity. Then at the next round perhaps sell the seat and equity to an incoming investor. Early on, board seats are more valuable than stock and selling that package, perhaps at a discount to the incoming valuation, is fairly compelling. Your exit then fits the playbook for exiting early angels -- it's not weird.

Taking cash is a bad signal in a couple of ways: it signals that you don't believe in the new direction and it signals the remaining founder is making poor financial decisions. Unless the framing is that you took a low buyout to walk, which isn't a great look for anyone.

Message it as what's best for the business, and be firm when they ask you to relinquish the equity. You said it very well in your post: "this is a great idea, but I'm not the right fit. I'll stay on in an advisory and governance capacity, but my last day as an officer and employee will be end of next month." Give the company lots of time and help to move on.

Help the company by setting it up to be so valuable that an incoming investor will want to remediate the situation by sweeping you off the cap table (again, like an early angel).

Depending on your counterparties it might not be possible to preserve relationships. Make sure you can afford litigation. Depending on your financial position this means get a new job or start a new business. When someone says, "relinquish or I'll sue" then you generally want to answer "my counsel will accept service at this address: xyz".

What’s a fair exit package in this situation?

What is fair is to be open with your cofounder and investors.

Should I just keep the vested equity?

Should the other stockholders just dilute your holdings?

Is a cash buyout common or appropriate?

Probably less common that telling you to pound sand. Cash is the life blood of a company and giving you cash is very damaging to the startup.

To put it another way, you need to negotiate. To negotiate you need to care about the interests of the other people and in the case of a startup recognize that the vast majority of the work is in the future. And that there is no value in sunk costs. Good luck.

I’ve been through this type of thing a few times and there aren’t many good solutions. The new business needs cash so taking some is a tough pitch to the new team’s executives. New investors are rarely keen to see funds going to an exit fund. You can make threats and indicate you won’t go quietly into the good night, but that makes things adversarial. At some point in the future, your equity could become a problem that will be worth taking care of. At this point, your best path to dollars is to become the problem, but if you do that, it’s a lot more difficult to see one of those future exits shape up.

1. Don't ask for cash or an exit package imo. This isn't a mature, profitable company. It's a startup. You took a shot, you missed, and you're quitting. I think it's fair for there to just be a clean break there. Either that, or stick with the company and see it through.

2. Keeping the vested equity seems fair to me. The entire point of that vested equity is to represent the sweat you put into the business.

If the company is pivoting, 0% beyond asking them to buy out your vested shares unless you want to keep them.

Might not be the answer you want but ask for a vacation. A long month away might be enough to clear everything up. Doing startups is tiresome.

talk to your lawyer, imo.

As someone who has never been in this situation, some of the replies in this thread are very disappointing. They basically seem to amount to, "eh, go pound sand, quitter."

You've put in a ton of work during the hardest period for a startup. That's not worth nothing.

In opposition to these other people, I'd say maybe a frank but congenial discussion with your co-founder is in order. Something along the lines of being burnt out or not agreeing with the current direction of the company, those details don't matter so much. If think you'd want to ultimately fall on you wanting to "pass quietly into the night."

Sometimes people come up with solutions on their own that would surprise you. You just gotta not pigeon hole them into a particular type of response from the start.