I think oftentimes "firing" is the wrong way to look at this.
I founded my startup with two cofounders. We all agreed, with the benefit of hindsight about eight months in, that we were the wrong guys to be working on this together and that we should step back and look at the situation. I started that process but they could see it too.
We analysed the problem (their skills were more ephemeral than executional… networking/introductions/ideas) and it led to us occasionally overindulging in "taking the idea for a walk". I was frustrated because I felt very strongly that we should be building and dedicating all our time to shipping software and speaking to our users.
The conversations were entirely amicable. They had both invested cash and time, and had received equity + founder's round equity as a result. They kept their bought equity and we reduced the founder's round equity by 50% each, and I reallocated it later on to two fantastic directors who have been, for near enough a year, surrogate cofounders. Both of my original cofounders dip in with advice as we need it and have since been really helpful.
Nobody was fired and I appreciate that sometimes it's necessary to have a sterner conversation (and indeed sometimes it's probably appealing in the heat of the moment). The thing to remember is that everyone has an emotional attachment to the company, and that makes it a very tricky conversation to have.
I have a question - when calculating % of shares for founders, do you calculate the time put in on top of cash, or only the cash being put in?
Say you have three founders, one who puts up a larger portion of cash but doesn't do any work, and two others who actually do consistent work and put in some cash. Should the ownership be divided by cash alone?
Work it out this way: founder's round is the first round. That's before any cash goes in. Who is going to be quitting their job is usually the best indicator. If everyone is quitting their job, and everyone has technical skills to offer, and everyone is 100% focused then presumably it's a 33/33/33 split. After that has been done, money goes in either as a loan or for equity at a price agreed by the company. So if a founder put in $100,000 for 10% of the company, all the founder's round equity would be diluted (33*0.9=29.7%).
Stop right here and define "this" and think about it from many different perspectives. One of the biggest challenges with founder issues from my personal experience and from talking with other founders is lack of clarity people have in their heads about the objective position. They immediately want to jump to solutions or to fixing the problem without even being able to elaborate the precise problem beyond "he sucks" or "he can't do x" etc. The problem with stopping there and not critically thinking further is that you risk not trying hard enough and smart enough to make conflicts between founders work out. For every tragic founder story, there are plenty of successful stories where if you dig deeper, you will find the successful founders who at one point were at significant disagreement but instead of moving on, they took the time to deliberately make things work out. This may require Founder A to coach Founder B in a specific area or for Founder B to rapidly change certain behavior etc.
From the outset, be willing to invest time and brain to making things work out before deciding to split. This itself is a huge ask. If a founder isn't willing to engage in good faith difficult conversations on a daily basis(about any topic), that is a bigger grounds for splitting for me than any specific issue.
People are often quick to rush in and slow to leave. We should be slow to enter, and quicker to leave once we know how to recognize, and see the writing on the wall.
You will learn more from business partnership and making one succeed will make it that much easier to succeed in other relationships including love, and marriage.
Pretty interesting article in the way that you explain some really diplomatic way to handle these kind of situation. But I really think the best way to avoid these kind of problem is to set each founder role in the company. I just wrote an article about that as a reaction to your article: http://news.ycombinator.com/item?id=5029029
I think the first step is having a series of frank conversations about the issues.
If nothing changes / get fixed, then I think you need to move to a mode where you take action.
In some cases, your co-founder will decide to part ways or resign as they will know things are not working and may be quite unhappy themselves.
If it gets to the point where you are actually firing someone, it should not be a surprise to them that there are large, unresolved issues. These should have been discussed a bunch of times before.
Either way, you will need to consult with various parties on both sides.
It helps if before there is a problem you accuse them of mental instability and create a culture of bias and ostracism and lighten their workload. Prevent them from participating in any way with the running of the company. Send them on wild goose chases. Assign them things that do very little and will never see the light of day. This has the double effect of giving them more time to worry about the immense workload that is being neglected and making them look useless. If they weren't crazy before they sure will be in a few months when the pressure to meet deadlines builds and they are unable to do anything about it.
IANAL but that would make it even worse, and likely lead to a lawsuit. Hostile work environment, or discrimination based on medical condition would be actionable.
The whole concept of co-founder as a "title" is a bit ridiculous. In the beginning, when companies are small and things are literally getting built from the ground up, when customer relations are KEY, every single employee who contributes is, for all practical purposes, a founder. Things get dicey when the people with "founder" in their title start getting big egos, start getting cocky, and think that they have the sole authority to go around getting rid of people they don't "like" in order to intentionally screw them out of their equity and thus keep their positions of power intact.
This is a long-running problem in management science: CEOs surround themselves with "yes men" (or "yes women") -- people who worship the ground the CEO walks on, people who tell the the CEO how "great" he is, etc. The CEO assures that these "yes men" are paid handsomely to keep the CEO in his role. See also: http://www.cbsnews.com/8301-505125_162-57533674/the-evils-of...
Early-stage employees who _don't_ have the "founder" word in their title, but who still contribute(d) pivotally to the team are oftentimes "let go" right before their stock vests. These early stage employees are often paid _far_ below market rate for their experience and education, but promised equity with a slightly accelerated vesting period. Early stage employees work themselves to the bone, and right before they are able to realize their ROI, they are "let go." This is a slimy, insidious thing that anybody working for a startup should be keenly attuned to.
I convey this knowledge from firsthand experience. I am absolutely certain that the CEO who manufactured falsehoods in order to screw me out of my fair pay and equity is an unethical scumbag who lacks the maturity and the moral fortitude to be running a company.
If you're an early-stage employee in such situation, here's what I did, glad I did:
(A) Don't sign _anything_. If you are an employee of an early stage company, think of yourself as an employee founder, even if you don't have the word "founder" in your title. You built or helped build the company where it is today; you have a legal stake in the company
(B) Request an extension of time to review your "termination" paperwork. They usually try to make you sign something within 7 days. Ask for 30 - 45 -- or just ignore the deadline. Especially if the severance they offer you is insultingly low and doesn't contain any equity
(C) File for unemployment insurance IMMEDIATELY. If they're firing you without due cause ( almost always the case when their motivation behind firing you is to screw you out of your equity ) you are entitled to collect UI -- you paid for it, you deserve it. File for unpaid overtime as well. http://www.dir.ca.gov/dlse/faq_overtime.htm Think about it like overtime is OK, as accumulates in stock, if they screw you out of your stock, they're screwing you out of your overtime, which is illegal
(D) Don't worry about what people think. If you were fired because the company is trying to screw you out of your equity, there is no reason to be ashamed that you were fired. It happens WAY more than people realize -- the slimy underbelly of greedy people and shoddy ethics
(E) Don't give up hope! There ARE good people and good companies in the Valley -- there are companies that hold on to their early stage employees and let them realize the fruits of their hard work, companies and execs who don't try to screw the worker bees out of their efforts. I've interviewed with a couple of them, and am not giving up. When I first started working at the company that I used to work at, I would arrive at ~7 AM sometimes. Another employee (@mjallday) would also, and I remember telling him: "I'd still want to be working, even if I was a millionaire." This is _so_ true, and why I haven't and won't let one bad experience ruin my faith in humanity
Early-stage employees who _don't_ have the "founder" word in their title, but who still contribute(d) pivotally to the team are oftentimes "let go" right before their stock vests. These early stage employees are often paid _far_ below market rate for their experience and education, but promised equity with a slightly accelerated vesting period. Early stage employees work themselves to the bone, and right before they are able to realize their ROI, they are "let go." This is a slimy, insidious thing that anybody working for a startup should be keenly attuned to.
I know this has happened in the past, but I find the idea that it's a common practice to be dubious. You used the word "oftentimes". I take issue. I don't think this happens often. How many data points do you have to share on this?
You were let go before your cliff, that is, at the end of year one, for no reason other than to deny you one year's vested options that you'd have to pay to exercise?
Yeah, it seems odd that there are startups who know enough to do 4/1 vesting with a cliff, but also don't know enough to not abuse it this way.
The most unpleasant "founder disputes" I've ever seen have been in partnerships, not silicon valley style startups with vesting, and usually result from not having anything documented.
I'd be willing to say most "valley style" startups don't do this cliff-fighting options thing, which is why it's so astounding when it happens. Even what Zynga and Skype are said to have done wasn't outright "take stock away from someone right before a cliff since it has appreciated".
Quick question. Let's say you both own equity on a 35-35 basis (with the investors owning the remaining 30%). I don't know if this is the exact right number. Anyway, your cofounder decides to can you and the board is on his side. You still own 35% of the company, right? Is there any way for the other founder to screw you out of that without screwing himself too?
That depends on vesting. You own whatever portion of the 35% that has vested based on your contract and have legal rights to it, although your contract could have repurchase clauses that allow the company to buy back shares at a price you may not like. Vesting clauses are common for cofounders as well as employees, and this is usually a good thing to avoid the possibility of a cofounder working for a couple of months and then leaving with full ownership.
Then there's nothing to worry about (if proper vesting clauses are in place), since you'll have vested (and thus, would keep on your way out) the proper amount of your 35%.
I founded my startup with two cofounders. We all agreed, with the benefit of hindsight about eight months in, that we were the wrong guys to be working on this together and that we should step back and look at the situation. I started that process but they could see it too.
We analysed the problem (their skills were more ephemeral than executional… networking/introductions/ideas) and it led to us occasionally overindulging in "taking the idea for a walk". I was frustrated because I felt very strongly that we should be building and dedicating all our time to shipping software and speaking to our users.
The conversations were entirely amicable. They had both invested cash and time, and had received equity + founder's round equity as a result. They kept their bought equity and we reduced the founder's round equity by 50% each, and I reallocated it later on to two fantastic directors who have been, for near enough a year, surrogate cofounders. Both of my original cofounders dip in with advice as we need it and have since been really helpful.
Nobody was fired and I appreciate that sometimes it's necessary to have a sterner conversation (and indeed sometimes it's probably appealing in the heat of the moment). The thing to remember is that everyone has an emotional attachment to the company, and that makes it a very tricky conversation to have.