Entrepreneurship & Small Business

Left startup, founder wants shares back.

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  • Dec 5th, 2014 3:07 pm
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Newbie
Dec 1, 2014
6 posts
Toronto, ON

Left startup, founder wants shares back.

Hi there, I know this is my first post but I've been using rfd for some times now just never had the chance to use the forum feature.

Anyway, your opinion is very valuable if anyone can share some insights.

So two years ago I left a big company to join a really small startup and took a major pay cut for equity. Everything is documented on the shareholders agreement where it specifically states no repurchase right by the company and no dilution of my percentage.

The founder wants to raise fund and he wants to buy my shares back and he is basically saying that I no longer contribute that I should really sell my shares and the no dilution clause is a huge problem. The no dilution part I think I agree is a problem for future investors.

The revenue has gone up more than 10 times but we are still not at an ideal point yet, but I believe the company will be successfully.

Because i have the shareholders agreement, he can't force me into selling and the buy out amount he offered compared to my salary cut is not justifiable, if I really do the math, I'm still at loss.
11 replies
Sr. Member
May 29, 2012
624 posts
256 upvotes
Southern Ontario
I think he is asking where he can be forced to sell his shares even though he no longer "contributes"

If the shareholders agreement says no dilution of shares, it means that your % of ownership cannot change. The company can issue new shares to raise capital but it must also give you more shares to keep your ownership % the same as before.

You cannot be forced into selling the shares unless there is some mechanism in the shareholders agreement referring to forced sales. Also depending on your ownership %, you may have additional rights as a minority shareholder that prevents you from being "pushed out, taken for ride, screwed" but these right must be enforced though court action.

I am not a lawyer though, if this is about serious money I would talk to one of them before you take any actions.
Deal Addict
Mar 8, 2009
1420 posts
109 upvotes
Does your shareholder agreement not make any mention to what happens if you stop working for this company? I find it hard to believe that it wouldn't.
Deal Guru
Feb 9, 2006
13378 posts
8308 upvotes
Brampton
Look for a shotgun clause.
Deal Addict
May 12, 2014
3487 posts
3895 upvotes
Montreal
sgtoronto wrote: The founder wants to raise fund and he wants to buy my shares back and he is basically saying that I no longer contribute that I should really sell my shares and the no dilution clause is a huge problem. The no dilution part I think I agree is a problem for future investors.
The no dilution clause is not a problem at all, you can agree to waive it on a case by case basis (after getting your own legal advice first!). But if he's saying that you "no longer contribute" then it means he wants you out and that's a huge problem.

You need legal advice immediately, and you need to decide if your relationship to the founder can be salvaged.
Deal Addict
Nov 21, 2004
1705 posts
148 upvotes
The base fact is that the founder screwed up with the no dilution cause period. Even if you were still working there and busting your butt, his need to raise capital would force the exact same issue.

You can try to do the math and figure out what you think your lost value is by working there and see if you can work it out on the money end with him. At the end of the day, it doesn't sound like he can force you to sell or dilute. But that may stop needed capital from coming in and sink the business leaving you with nothing. Conversely, he could collapse the company, pay you your share of equity and form a new corp. without you and move on....
Deal Addict
Aug 19, 2013
2397 posts
1091 upvotes
He can't force you to sell. But like another poster has mentioned if that clause is impeding his ability to bring in new investors and new investors are needed to keep the company growing your shares could end up losing value. Do not consider what he is offering based on the pay cut you took. You need to base it on how much the company is worth.

If you still want to retain some ownership but also want to help the company by making if easier to get other investors, then you can always propose to exchange the shares you have now for another class of shares that do not have the same agreements attached to them. Again as others have mentioned you may want to consider consulting a corporate law lawyer.
Deal Addict
Aug 19, 2013
2397 posts
1091 upvotes
BobW wrote: The base fact is that the founder screwed up with the no dilution cause period. Even if you were still working there and busting your butt, his need to raise capital would force the exact same issue.

You can try to do the math and figure out what you think your lost value is by working there and see if you can work it out on the money end with him. At the end of the day, it doesn't sound like he can force you to sell or dilute. But that may stop needed capital from coming in and sink the business leaving you with nothing. Conversely, he could collapse the company, pay you your share of equity and form a new corp. without you and move on....

Very true. If the OP does not have a controlling interest in the corporation the owner could transfer all assets to another corporation. I'm sure there are many things that could be done. Again the op needs to discuss it with a lawyer
Jr. Member
Mar 8, 2014
134 posts
10 upvotes
Mississauga, ON
It sounds to me that OP was effectively kicked out of the company and they want his shares. He is not mentioning monthly salary issue. I say sell the shares to the rest of the shareholders. Simply ask for their best offer and get money. Maybe it's true and OP is really useless or ineffective. Maybe they just wanted his money for startup. By no means he can stay somewhere where he is unwanted and undermined. Nothing good will come out of lawyers and courts.
I would ask for shares buyback. If you believe that value is unfair ask for more or wait a bit until they increase the offer.
Deal Addict
User avatar
Nov 9, 2003
1528 posts
325 upvotes
Grimsby
JackReacher wrote: It sounds to me that OP was effectively kicked out of the company and they want his shares. He is not mentioning monthly salary issue. I say sell the shares to the rest of the shareholders. Simply ask for their best offer and get money. Maybe it's true and OP is really useless or ineffective. Maybe they just wanted his money for startup. By no means he can stay somewhere where he is unwanted and undermined. Nothing good will come out of lawyers and courts.
I would ask for shares buyback. If you believe that value is unfair ask for more or wait a bit until they increase the offer.
This makes sense. Why involve expensive lawyers to fight a seemingly losing cause? Time to move on.
Jr. Member
Feb 24, 2007
159 posts
109 upvotes
I tend to have the opposite opinion, I would hold on to the shares depending on what I believe the growth of the company will be and the future value. You do not owe anything to anyone here, both parties agreed to the contract. If they make you an offer in line with your predicted future growth then I would consider selling only if you want out.

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