CTO / cofounder exit deal after 1.5y at 600k revenue without SHA

8 years ago I went through exactly this situation.

I was 50/50 shareholder, voting rights and co-director in a bootstrapped startup with no shareholder agreement. I worked as the CTO building the product for 4 years and hired a team of 4 other developers. My co-founder hired a full time salesperson who eventually left when he couldn't make quota. I was 21 when we started the business, he was 31, and over those 4 years I just grew up to realise he wasn't a good CEO.

After multiple failed attempts to raise money I eventually called one of the investors to ask for honest feedback why he didn't invest, he told me the vast majority of his failed deals happen when co-founders fall out and predicted that would happen with us too. I decided 3 months after that email to leave the business.

I started a new company with a similar product but focussed on large/enterprise in that market, while the previous company was focussed more on small clients. I kept my shareholding but resigned as a director. The co-founder went nuclear and decided to dilute me out of the business by issuing new shares and buying them. If I had bought them I would have just been giving him the money which he'd just pay himself as a bonus and then repeat, so I just had to watch my shareholding go down to 25%. All legal avenues I went down just confirmed that the cost of litigation would cost more than whatever I'd get out of it.

The year before i left my Grandad died and left me $15k and at the time I decided to forego my salary for 8 months to help the company's cash flow situation. So I eventually offered a settlement where I would sell out of the company for $15k and be done with it.

Forward to now, my new company, still bootstrapped, is over $10M ARR and profitable with 113 employees growing at 60% a year. I have over 51% of the shareholding and over 60% of voting shares. I still write code every day and behave more of an engineer now than I ever did in the previous company.

My advice to you is to take the money and leave, start something new and just start building. You have already realised the biggest value of that company; lessons about what to look for in a future co-founder, how to run a company and build a product. Leave everything else behind, move on and I promise you'll look back at this moment in 4 years time as being the best decision you ever made.

Good luck!

> Lawyers I talked to told me different things, one that worked a lot with startups told me that it's a good deal, another one specialised in shareholder litigation told me I could squeeze the company dry.

They're not contradictory. The deal you've been offered is good and fair. However, you could take an adversarial position and squeeze your co-founder for a lot more if you're willing to sacrifice the company's wellbeing for your exit, e.g: you brought on the team and manage them, you could leverage that influence to poison them against your co-founder, the threat of you doing that would likely push up the buyout offer.

Take the 60k, push up the 1% to 5% (as that isn't going to adversely impact the company) and move on.

You're pretty much leaving with one year's pay without the risk of the startup never even making it to a year if you were to stay, and 1% of shares which might be worth something one day (kind of like a fancy lottery ticket). Make sure to have whichever solicitor you choose determine what is needed to prevent you from any future liability and walk. Your description doesn't seem to point at anything actually worth something in this startup's assets or (non-existing) IP.

They might become the next OpenAI (AI-guided hand grenades! Fancy!), or they might fold in a month or two. It's a gamble as soon as you step out of the picture.

Ask yourself this: how much time are you willing to spend on wrapping this up if you are leaving for personal reasons?

If you don’t sell him something back you may very well render the startup unbuildable. Double digit dead weight founder equity sitting on the cap table will make it in my opinion, almost impossible for your co-founder.

If you have little to no SaaS revenue and it's a software business, you should think about that too. Consulting revenue and grants are almost meaningless in the context of SaaS from an investor perspective.

Your best course of action is to wait until the 1.3 is awarded or not. Your CEO ex-partner understands this and wants your equity before this happens. Why rush? It's in your interest to slow it down.

1% at current valuation will drop as new inventors buy in. Get protection that this amount never drops and try for 10% but settle at 4% non diluting shares.

If the company dissolves you get half of the existing value anyways and that amount is trending up.

The only reason to take the 30k is if you believe the company will drop in value and fall apart quickly. If that's the case you wouldn't be looking for 1% as that would be worthless.

You have to consider taxes. If you sell in less than a year any profits over your investment are taxed at normal tax rates but over a year you pay 15% in the US. Frances has complex rules where holding it for 2 years to 6 years will drop the percent owed.

I think you are better off listening to lawyers instead of taking advice from strangers.

That being said that fact that there is no shareholder agreement might work in you favour here, since you can walk away and keep your 49% shares. Usually there are provisions that would prevent large stakes if an individual leaves the company early (vesting schedule/cliff).

I'd say push closer to 5% and more cash... but it's my understanding that putting a price on a share should be held off as long as possible, or if you must, it should be kept lowish for early-stage.

As others have said you don't want to squeeze it too hard because you'd either jeopardize the future of the company or he could just close up shop, abandon the shares and reopen a new business, especially if there are no other current stakeholders to worry about.

1% IMHO is too small, especially considering you hired and ran good staff for 1.5 years, which is a critical time, and are already revenue-generating. At least push for 2 or 3. I doubt the other founder will accept anything higher than 3, but business types routinely undervalue the technical folks that actually build the money machine. ;)

This is the problem with cofounding, though... It's like owning a home vs. renting... it's far easier to move if you're just renting... Best of luck to you

I was most recently director of engineering at a startup for a year (as first employee, not cofounder), hired 3 good people who are still there, then stretched myself too thin with a toddler at home and we had to part ways (this was hard). Might be fun to have a chat if you're interested.

Keep the shares and quit the company. It you don't need the cash it's pointless to sell your shares (you don't have to)

He'd need to raise capital at some point, new investors could buy your shares at a higher value.

This situations is why I tend to recommend reverse vesting of shares for the founders. I’m helping a small new startup getting set up and there are potential issues between the founders that could easily cause fractures that means somebody leaves. After talking with them reverse vesting was decided as the way to ensure this exact situation does not happen.

I am a lawyer, but not your lawyer (and not a french Corporate Law lawyer). I've also founded 2 tech startups. It sounds like a poor deal - alternatively it's a low opening bid ... get better legal/commercial advice on this one.

You’re getting a 100% return on your investment and keeping a piece of equity for upside. I’d say it’s more than fair, it’s generous. You will get diluted over time, same as all the other equity holders, wouldn’t worry about it.

Not a lawyer, but been involved in two startups where a founder left with some animosity and a lot of emotions, once as a third party and the other as the leaving founder. Short answer from my experiences: you can't take equity with you but you can get more money.

Slighty longer answer: dead weight founder equity on the books will kill the company unless it's already achieved some level of success and you're into a more dividend phase (doesn't sound like it) or it's young but doesn't need to ever take outside money . From your perspective it may "feel" good to keep some of your baby but you don't want that, as the company will fail/wildy succeed and you'll be really upset, or (more probable) land somewhere on the spectrum from mildly successful to zombie and you won't care about it.

I think you can probably get a bigger buy-out, but have no details. You don't typically value a young company on one-time, past revenues but on projected or recurring sales. A grant might impact goodwill in the future, but a potential grant wouldn't have much impact in my view. These deals around very early stage companies are not going to pay out like a typical startup (wild valuations on theoretical future growth) but on assets and free cash flow. You should push for a buyout in line with that, while recognizing you are not driving and if your CEO thinks it is unreasonable they can stall, fight or torpedo the company before paying you out.

You could agree to have the value of the company evaluated by a neutral outsider. There are specialists for it -- on the VC side and expert advisors for the legal system and arbitration courts. Typically the regional chamber of commerce keeps a list of accredited experts.

Where I am from (Germany), many founders agreements refer to a neutral arbitration body to resolve conflicts regarding the value of company shares. Typically the agreement requires that you attempt an arbitration process before triggering a real lawsuit.

> I'd rather move on though

If this was true, you’d take the $60k.

What do you actually value? Moving on with your life or trying to wring every possible dollar out of this thing that you say you’re done with and want to move on from?

Fair? That's a valuation of ~120k when you have annual revenue of ~400k.

I am a CEO of a young French startup in France (bootstrapped to 6 employees) and I hold a PhD in AI. But overall I have limited knowledge about partnership breakdowns.

I would recommend to compute the worth of your equity not based on a startup valuation but on how much money would you have made if you would have been a consultant.

Indeed, the hard work on the startup has not been achieved yet. It takes a lot of times, energy and lucks to go through all stages.

The best scenario for you (in terms of satisfaction and experiences) remains that the company succeed.

Morale of the story is that always have SHA, and preferably with reverse vesting ( with some cliff ) so that if you leave early you get something but if almost immediately nothing.

Having said that, I would go with trying to improve the numbers - eg 5% of company as your remaining share ( that makes it still probably fine in investors pov ), or more money, depending on which you want.

You can get more than €60k.

I am not a lawyer, but I've been in a similar situation recently.

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We were 50/50 partners; I was technical, he was business + provided the financing. In 18 months we built valuable IP, but it wasn't ready for external use. Our relationship broke down over financial conflict and diverging visions for the future. He is secure financially and could afford to take a longer term view, whereas I needed to validate product market fit quickly and start generating revenue.

Our conflict boiled down to our different circumstances and the way that we could each afford to approach the business. I still liked working with him, despite that.

I realised that I didn't have much leverage from the business and financial perspective, but I knew that I was the most capable person to continue to develop the product, and that he valued working with me and my time highly. The only leverage I had was the option to continue to develop and grow the product.

I offered to sell my equity to him, and transition into a consulting role. In the process, I tripled my annual salary, reduced my working days, cut travel, and eliminated the stress associated with needing the product to succeed yesterday. I also received a modest payout for the value of my equity. Our personal relationship immediately improved.

It took a while to work out the details, especially since we were both apprehensive due to the breakdown in communication, but now we are both very happy.

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Your business is already structured in a way that gives you little leverage (49/51 ownership and reduced voting rights). But you are obviously valuable to the organisation due to your demonstrated capability to bring in grants and tenders.

You are at your cofounder's mercy in terms of what they're willing to pay for your equity, since they are the only buyer.

If you just walk away, you minimise your leverage.

So I'd encourage you to dig deeper into the nature of your conflict. Can you decompose the conflict into parts and understand them separately? Is there a world where you slowly transition out of the organisation? This might result in a fairer payout than the simple value of your equity.

For example, if you were willing to commit to working remotely on the project for 6 or 12 months, even at reduced hours, you could significantly improve your value over that time by commanding a higher consultancy rate. Your cofounder justifies this by paying you for your time (which they value), rather than your equity (which they can lowball). You justify this by strategising that it's a mature way to extract the most value from your equity and committed time, and view it as an amortised payment for your equity.

> We don’t have a shareholders agreement so he could in theory dilute me by issuing new shares using company or investor money

How does that work? Wouldn't that dilute his share as well? And wouldn't the valuation increase accordingly, making your share keep its value intact?

Take the 60k and the 1% undilutable “founder’s shares” and move on, it will be much better for your soul and the faster you do this deal and move on, the faster you start something else with all the new expertise and learnings.

Interested to hear why you own 49% and he 51% + more voting power. Why the difference?

Do check with a tax lawyer what that €60k looks like after taxes!

CEOs with formal business backgrounds are really good at squeezing technical types in negotiation. He might be betting on you being so tired of the company you'll take the lowball and running. But you still have some leverage given your ownership, and it sounds like your relationship hasn't completely deteriorated. I wouldn't burn the bridge yet.

€60k seems pretty low for half of a company making €600k/y and is about to get a €1.3M grant. I'd ask for the following:

1. €150k for the buyout 2. Some percentage of the incoming grant, since your work clearly contributed to its approval 3. Clear termination of any claims to your IP/copyright

It's not the best deal that they're offering but it's not a ripoff. Try to salvage whatever good faith you two have left, get everything in writing. I think you can both come out of this satisfied.

you need to negotiate a proper shareholders agreement for that 1% with specific anti-dilution provisions and tag-along rights. The military pivot actually gives you leverage - defence contracts often require stable cap tables and background checks on all shareholders.

Since it's a service based company EBITDAx3 would be a fair deal.

What's the current EBITDA?

I have started four venture backed companies since 1995 … And I was lucky to have mentors … and since then, I have metored hundreds of companies. A couple of items I focus on is: (a) founder relationships and (b)what it takes. Regarding (a) I mention: no one likes lawyers until you need them. I learned this in my first company. tl;dr: your founder agreements should be tight. So much can go wrong when so long. One thing that happened to me was: “My founder passed away in his late 20’s … and who controlled the 40+% that hey owned? His wife? Girlfriend?” This was a challenge. And who owns what? Well, generally the entity. CTO’s genearlly find this the hard way: “Well it was me and team who …”. In my experience, that’s not how it works … How does down roads work? And dillusion? The board? These are complicated concepts that have a huge impact on the company and idea. Hollywood creates myths of success and failure … but remember they are just mthys. How the world works … well, that’s a different thing.

Go ahead and squeeze dry, just because you can. You have little to lose.

> I co-founded a deeptech company in France 1.5 years ago

We understand you are Québécois, but how old is the company?

60k sounds reasonable and is better than nothing.

All the work is in the future and it never was your company.

You want to move on and lawyering up is the opposite of that.

It is also the opposite of building goodwill. Good luck.

Work for the defense sector.

Putin won't be as nice to you when he takes over France. Trust me on this.

lol "deeptech"