CTO / cofounder exit deal after 1.5y at 600k revenue without SHA
I co-founded a deeptech company in France 1.5 years ago with another founder. We both invested €30k initially. My co-founder, who has a business background and is CEO, owns 51% of the shares and has 2/3 of the voting rights, while I own 49% of the shares and hold 1/3 of the voting rights. I have a PhD in AI and serve as the CTO. We pay ourselves modest wages and currently employ three full-time staff, all of whom I recruited and manage. The company generated €600k in revenue over the first 18 months through tenders and research services. There’s also potential for a €1.3m grant to be awarded in Q2 this year. Even though the company is doing well, I’ve decided to exit the company end of March for personal reasons: A breakdown in cofounder relationship, I can’t commit to relocating to France (I’m commuting from abroad), and I’m not happy with the recent pivot to the defence sector. We don’t have significant IP yet because I spent most of my time writing proposals that generated revenue and developing prototypes for sectors that ultimately turned out not to have a substantial market for our tech. My co-founder has offered to buy out 48% of my shares for €60k, allowing me to retain 1%. We don’t have a shareholders agreement so he could in theory dilute me by issuing new shares using company or investor money, although I could contest that in court. I'd rather move on though as I'm already looking for new roles where I currently live. I'm not interested in building a competitor. 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. Does this seem like a fair offer to you? What do I need to keep in mind in order not to lose my remaining equity after exit?
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!
> 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.
Man this is inspiring - No expectations or anything but Id love to learn more about this journey!
> 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.
Agree with that, I now know what to look for if I started a new venture. Thanks a lot for sharing your story!
Not OP, but found this very helpful in my current situation. Thank you for sharing.
> 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.
Take the 60k, push up the 1% to 5% (as that isn't going to adversely impact the company) and move on.
Agree. But don’t push up the percentage too much. Deadweight equity is toxic for a startup that has to rely on that for future funding.
I'm trying to push up the stock, but my co-founder is a tough negotiator and adamant
You’re in a much stronger position than you may feel that you’re in. Sure, your cofounder can dilute you but doing so is bad vibes that will harm team morale (because the team will know that he will screw them when their time comes).
The key to negotiation is being able to walk away. Start signalling that you’re willing to leave the company while holding on to the 49% and voting shares. That’s bad for him.
You could stand firm on 5% + 60k by telling him that’s your final offer, or you could present an alternative, e.g: you want your 30k cash back and you want equity, start at 10% equity but you’ll “give up” each 1% for 15k. If he wants you to walk away with 1% equity then he pays you 15k * 9 for the other 9%. If he’s already expecting to give you 60k, he’ll probably work out 30k + 2% = 60k and start thinking my maybe it’s a good deal, then he can negotiate himself down to whatever percentage he wants you to have. Change 15k with whatever number works for you.
That said, if walking away with the 60k is crucial and he’s a good negotiator then you probably can’t “win” and should just take the 60k + 1%.
Then push up the valuation. Find out how many euros your co-founder is willing to part with (or even borrow!) in order to get that 99% ownership that they want so badly.
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.
This comment was kind of buried but holds the key: not what you want but what your cofounder and the company needs. I'm surprised they offered to leave you any equity; comments about "it should be more" are not aligned with how companies operate. You can be a founder of an active or a dead company, but once you leave you may have "helped found" but you are no longer a founder.
Personally I would push for more cash comp and give up all equity. If the company is worth anything your former cofounder can finance your buy-out.
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 agree that he wants to rush it before the grant comes in.
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).
But the company has no assets, and this would leave the CEO in an unsustainable position. In that position they should shut the company down and continue with a new one.
No reputation, no grants, etc, would be back to square one for the CEO
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.
Agree that 1% is too small. Would be happy with 2-3% plus the cash
Would be great to chat, how can I contact you?
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 will kill almost all new investments immediately. Investors will balk at ~50% of the shares of a brand new company being owned by an ex-founder no longer involved.
How does it matter if it’s going to be diluted anyway? Investors will get their post-money 30% equity, or whatever it is, and rest of the shareholders will keep their proportion of the 70% (and ~50% pre-money gets diluted to ~35% post-money).
Yeah, I think it will be better if OP can reach an agreement somewhere in the middle where they retain just enough shares not to interfere with future investment. 5-10% of something is better than 49% of nothing. Plus they can collect some cash while the other founder and/or company still has money left, which again is strictly better than shares of an uninvestable company.
From an investors point it's very unattractive to invest in a early-stage startup where half of the shares are in the hands of a person not working there anymore.
I'm interested in coming to an agreement, I have not much to gain in holding on to all my shares.
Make sense but 60k for 600k in revenue with a pipeline to 1m or more it's quite small.
I'd try to negotiate at the very least and keep like 5% instead of 1%
Agree with that
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.
A lot of VCs will not even invest without it being in the picture. Risk of cap table dead weight is otherwise too large.
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.
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.
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.
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.
Fair? That's a valuation of ~120k when you have annual revenue of ~400k.
Could you elaborate? I get the part about valuation, I'd understand comparing it with profit/EBITDA, but I don't understand referencing revenue alone.
When you sell ~50% of shares in a company for €60k, you implicitly value the total company (100% of shares) at €120k. Your tax office will also most likely (at least in my country) use that transaction to establish a fair (market) valuation.
Of course, you can structure a deal to include discounts, but you have to be careful with that too.
A new investor in one year might scoop in and say "Well, last time your shares were valued at price x, why would I pay substantially more?".
One valuation method for startups is price to revenue, given that their costs are heavily fixed/low cost of replicating the goods you're selling. I think it's much more appropriate especially for early stage startups because they virtually never make money.
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.
Would you mind sharing your company name? I'm a master's student in AI, and after finishing my master's thesis at IBM this summer, I'll be looking for jobs.
Argile. Contact me on LinkedIn!
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.
Not OP, but this adds an interesting perspective!
> 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?
because he has a 2/3 majority, he can lift my rights for preferential subscription, which means I don't get the chance to buy them. He could issue new shares at a really low price and buy them himself.
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.
Would agree if it wasn't for employee stock pool and first founding round this year which is already going to make the 1% more like 0.65
Interested to hear why you own 49% and he 51% + more voting power. Why the difference?
Because he had started to develop contacts one year before and argued that the CEO needs more power, and I was naïve and went with it.
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.
They are not "making" €600k / year. The had some one-off grants. This is not ARR.
The €1.3M grant has not landed and you can't use that. Even if that lands, it's still not ARR.
this. The value of a company in this scenario is ARR, discounted sales pipeline, IP, and goodwill. It's likely to be very low for a departing founder, because it's almost all goodwill at this stage which for tech startups is essentially "the perceived ability of the founders to build something that eats the world", which by definition is a going concern he won't be part of.
that is correct. The company needs to build a product more or less from scratch at this point
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?
It’s a grant based organization as well which drives down its value.
Without seeing the books it’s hard to say but from this description there doesn’t appear to be any equity in the company at all.
What is that logic based on? I’m simply naive and don’t know.
No logic. Just a precedent. You can Google around for any similar cases like yours.
Any calculations that use stuff like DCF are basically nonsense that ends up being negotions about the multipliers.
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.
Understood! What do you think of the deal? Is it a fair offer?
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"