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I was recently terminated from a startup without cause, where I was one of several founders owning a decent percentage of stock. We also had an angel investor (incubator) in with us for a small percentage. All of our percentages are fully vested.

I feel totally cheated, but I'd like to hold on to my stock because I believe the startup will be very successful. But, the remaining members have been trying all sorts of games to get my percentage back. I am aware that dilution will happen as new investors come in, and I'm not really concerned about that as long as it's done 'fairly' i.e. everyone is diluted by the same amount.

  1. Is it legal/likely/defensible in court for the other founders/Angel to collude and allocate a ton of shares and then offering everyone the option of buying them back?

  2. Do new investors get turned off from investing in a startup such as this one, where one of the members (me) is out with a percentage, even though they have enough remaining for a majority? i..e 'the cap table is screwed up'

  3. What other moves should I be aware of?

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Do you have any insight as to why you were fired? I'm just wondering if there is/will be any significant hostility between them and you going forward... or was this purely a business thing (e.g. we can afford everyone's salary and still get this thing out the door... sorry, you pulled the short straw) – scunliffe Jul 13 '12 at 12:20
I was taking no pay, only equity, to develop the prototype which got us into an incubator/angel program. Worked on it for several months until it was ready to show off, then got fired. – Startup Monster Jul 13 '12 at 17:30
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Were you the only developer? What sort of IP assignment agreement regarding code was in place? – jimg Jul 13 '12 at 17:48
There were other developers - we were all summarily fired when the prototype was finished. The IP was assigned to the company. We also have two patent applications, also assigned to the company. Together we own just under 50% of the company. – Startup Monster Jul 13 '12 at 20:17

2 Answers

up vote 7 down vote accepted

Sorry to hear of your situation.

I'd be concerned about the company flipping its assets into a newco and wiping the slate clean - difficult with a pre-existing investor, but theoretically possible.

I'd also review the shareholders agreements regarding drag along / tag along rights - they could be used for not so favorable purposes.

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Thank you for your reply. While in the incubator program, we got a ton of traction and hype from investors, so it was pretty shocking for all of us to have been fired like this. Right now I'm trying to figure out our best course of action. – Startup Monster Jul 13 '12 at 20:22
My thought is: I don't want to sell today, only to have the remaining team raise a round tomorrow at a decent valuation. They've been hounding us to diminish/sell our stake; I've heard the 'big piece of nothing vs small piece of a big pie' story over and over, now (their argument is that the 'cap table is screwed up' because of this, hence my question #2) My goal is to see if I can reasonably expect to be able to hold until a semi-profitable exit sometime in the future. – Startup Monster Jul 13 '12 at 20:35
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Problem is - you (+ other devs) likely don't want to work with them anymore (trust?), and they don't want ~49% vested shares out there without day to day interaction. Counsel is definitely recommended here... arbitrate or Lawyering up seems the next step forward. Could theoretically sell back shares with a timed clause that protects against the "buyback then raise" scenario you describe. Or royalties / percentage of sales for a finite time. – jimg Jul 13 '12 at 20:55
Isn't that illegal (bypassing shareholders by reforming the company)? If that option were readily available, it seems like the fabric of business in this country would dissolve. – Startup Monster Jul 15 '12 at 18:19
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Whether something is legal or not doesn't really matter - companies can "dissolve" and sell the assets / ip to another company. Sure, there are legal ramifications, and disclosure requirements, but certain elements may not care about that - or bet that the affected party will not have the financial resources to counter it. Make enough noise about minority shareholder rights and you may be able to come to some agreement. But IANAL - get real counsel. – jimg Jul 17 '12 at 1:48
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up vote 4 down vote

Where are you from? In many countries, there are lot of laws to protect shareholders from that kind of situations.

From there, you have three kind of strategies and much more if your are creative.

The first one is doing nothing. Put your energy is something more creative, why not by creating a new company.

The second one is the most common to my opinion: get your rights back. As I mentionned earlier, there are laws that can help you.

Finally, one action that I personally never saw in action is forcing the other shareholders to buy your shares. Again, law can help you in many countries. Be aware that there will be a valuation of the company. So you can win or lose, depending on how you will manage the case.

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Following along this trend of thought - answers.onstartups.com/questions/34913/… – jimg Jul 13 '12 at 17:56
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I am in the US. Luckily, the other developers and I have full-time jobs or startups on the side, so we aren't starving.. – Startup Monster Jul 13 '12 at 20:19

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