Personally, I would never have agreed to this based on my understanding of the situation. It's clear from the article that Ecquire evolved from Dropcard, even if it is an entirely different product now:

"Ecquire was getting further and further conceptually (and technologically) from Dropcard"

Almost every tech company evolves dramatically, and rarely resembles its former self after four years. If one contributes substantially in the founding stages of a company, I believe one should end up with something, even if it is a reduced stake. The company would not have made it where it is without Ariel and Anton's participation in early failed ideas or admission and participation in the incubator.

It's safe to assume their contribution exceeds zero percent, which is what the Tal pushed for and Ariel and Anton agreed to. No investor would have agreed to this, why is it right for Ariel and Anton?

Because they agreed to it. It's not like they were swindled -- They had an offer to discuss the price and be bought out for a fair price. But they decided that it wasn't worth the effort, and perhaps they felt like giving the startup that they helped found a gift. If you ask for something nicely, and people are willing to give it to you without being browbeaten, I don't see anything wrong.

In short, it's the right thing because they decided it was the right thing.

What does that even mean, really? If they have nothing in common (and they might in this case, I don't really know), then the evolution is irrelevant. You can't stake a claim on all my future ideas because we once shared an idea together.

>"If one contributes substantially in the founding stages of a company, I believe one should end up with something, even if it is a reduced stake."

This has to be determined case by case, which is why I think the early equity split is meaningless. What did they contribute? Money? Code that is still being used? Other ideas that got implemented? It's pretty easy to put a price on these things. If you can't point to tangible contributions to the new business you don't deserve anything. I think the courts would agree.

Sweat equity, most likely, for which they were rewarded with an ownership stake.

>I think the courts would agree.

Courts would side with Arel and Anton, should they decided to retain their shares.

Sweat equity doesn't occur in a vacuum; something is created from that effort. If they wrote code and that code earns money, they are entitled to a portion of those earnings. That's inarguable.

It is my understanding that the original "idea" (I have trouble calling it a company) didn't take hold. If nothing is created and the company never amounts to anything...what are you getting an "ownership stake" in?

Had Zuckerberg and a friend opened a candy store on the Harvard campus in 2002, and it had failed, that friend is not entitled to anything Zuck does with Facebook because he put in labour on the candy store. Now, if Zuck was operating Facebook under the same legal entity as the candy store in which his partner had equity, said partner might have a claim, though it would be hard to establish if the partner produced no work for the new idea. That said, if this is analogous to the situation in the article, what on earth are these guys doing getting bogged down with convoluted equity agreements when they should be working on the product?

I'll repeat: if the other co-founders provided something tangible --be it an idea, code, money, whatever-- to the new project, they deserve "their share". If they can't point to something tangible, they deserve nothing.

Now, IANAL, but to my knowledge this is just patently false and represents a complete mischaracterization of the purpose and legal implications of a corporation.

In this case, Facebook would be owned by the flower shop entity, not Zuck. Regardless of what work his partner put in, Facebook is still owned by the flower shop entity, and each has ownership stakes as contractually or legally established. Neither Zuckerberg nor his partner would have any personal claim to Facebook, only to their equity in the owning entity. Zuck would not suddenly get more equity in the entity because of the work he did.

This is one of the most basic functions of equity and the reason for investing time or dollars in exchange for equity - so that your wealth increases disproportionately from the work of others. If ownership was determined by judges proportioning by sweat equity, those who left Facebook after 2 years and now have $10M+ would be in trouble.

There are numerous legal complications if Zuckerberg claimed that Facebook was NOT under the flower shop entity, however given your statement that he explicitly placed it under the flower shop, the case is quite simple. Zuck would not have been able to extract Facebook without buying out his partner.

I am way over my head in trying to get into this part, but depending on state law, I understand there are de facto partnership agreements in the absence of a written one (generally an equal split) and sometimes ways of getting rid of "dead weight" partnerships. These are not things you want to happen.

This sort of situation occurs all the time in small businesses and often leads to their demise. You are doing a great disservice to anyone who takes your advice.

So, these guys filed the paperwork and were running a corporation, rather than just a business partnership (you realize there's a difference)? Before they even had a business model? Again, that's ridiculous and a complete waste of resources at an early stage start up.

>"This sort of situation occurs all the time in small businesses and often leads to their demise."

Really? Do you have source for this assertion?

>"You are doing a great disservice to anyone who takes your advice."

Oh, spare me. You realize that these guys essentially followed what you recommend doing, and if it wasn't for the co-operation from minority shareholders would have been stuck with dead weight partners owning part of a business in which they did not participate. Establishing an equity arrangement before they knew what they hell was going on in the business was the cause of this problem. If there was no formal agreement, no partnership and in the end no business, none of this would have happened. The two founders would have moved from Dropcard to Ecquire, and the old co-founders would have no claim on the new product. Just as a reasonable person would expect.

But by all means, have people heed your advice, and form corporations before there's a business model, so that the shareholders have a claim on anything you do in the future. That's spectacular advice.

Had these founders not had an agreement, corporation or not, the founders who left would continue to have a very substantive claim on the business as part of the partnership.

You can read here about what happened in one case when this went wrong:

http://www.milwaukee-business-lawyer.com/what-happens-when-o...

Courts hold that a partner who leaves a business lacking an agreement does not lose rights to their portion of the business. If it can be proven that there is absolutely no relationship between the old and new product, perhaps it could be shown that a new partnership was created. This is not a lawsuit you want to deal with.

That is why pretty much anyone giving competent advice instructs partners to decide how they should split equity and on a vesting agreement ASAP. That doesn't mean these agreements can't be changed as commitments and roles evolve, but the existence of an agreement makes those conversations necessary. Without one, fundamental disagreements often lurk.

Over and out.

So what is the big worry?

That is exactly what I have said throughout this thread: you don't need to have a formal agreement to protect your stake in the company. The courts will protect you from being screwed out of something you're entitled to. Which is why I disagree that it is so vital to get an agreement in writing as soon as possible, before you even know what the business is. That's what happened in the original article, and that's what my hangup is, and that's what I've been commenting on.

Yes, I agree, you don't want to be in a lawsuit, but having a formal agreement does not prevent a lawsuit if you have an equity dispute, nor will it supersede reason or rationale in a judgement if you end up in court.

>"Had these founders not had an agreement, corporation or not, the founders who left would continue to have a very substantive claim on the business as part of the partnership."

As they should! If they produced work or contributed money, and the business grew and provided income they have a claim on that income.

>"That is why pretty much anyone giving competent advice instructs partners to decide how they should split equity and on a vesting agreement ASAP."

Well, that's nice. It's also why there are 2 person shops running around the Valley, with someone titled "CEO" (but no board), calling themselves "businesses", taking in investment money but not producing a nickel worth of value, ever: priorities are often out of whack.

Agree to disagree, I guess. I'm not here to offer anyone advice. Nor do I care that while I'm working on solving problems and investing in others that are doing the same, competitors are in-fighting about their equity.

And it was probably a series of pivots along the way that individually didn't look at big, but over time transformed immensely.

To compare, think of it like a personal resume. If you're a developer applying for a development role but you took two years out of the last five to go teach English to kids in an emerging market nation where you coded on the side (and could show Github / other public repos) anyone taking the time would commend you for the activity. Someone rushing through reviewing resumes may toss yours on the floor.

You can structure your corporation in many ways. If the old co-founders were cool enough to give up their shares, they would be cool enough to, say, give the current founders proxy rights.

>"Why aren't they with you any longer?"

It's a 3 second answer if it actually comes up (and it wouldn't). Lots start-ups have "lingering" shareholders/founders who may or may not be part of the company. It just isn't a big deal.

A possibility, but certainly this is much simpler?

It prevents a minority shareholder from holding up or killing a deal.

It doesn't dilute investors. It dilutes you.

I'm not as understanding of your motives as others may be. You're lucky the other founders were really cool. The reality is that Ariel and Anton took on risk by being in the startup originally, and presumably put in a lot of work and effort towards your company - so it's completely fair and reasonable that they have something to show for it - no? Whether or not the current product looks like the original is immaterial.

...but why on earth is there a stringent corporate structure and equity doled out years before there is even a concrete idea or tangible business?

When you start working with others on a company, structure and ownership needs to be sorted out before, not after.

Yes, it ended up being a bit of a pain for this guy and his startup, but it's not nearly as painful as the conflicts over IP and equity that result when you don't hammer this stuff out before building.

Huh? They split up equity in a non-existent business that ended upcoming back to bite them on what amounts to a completely different project that the other co-founders did not participate in whatsoever. It was only through the honesty of these other co-founders that they were able to steer away from real trouble. Those co-founders could have given up nothing had they so chosen.

That's the correct way to do things? Looks to me like this is a lesson in the exact wrong way to do it.

We have laws in this country to prevent people from getting screwed. Work with people you like and trust, and focus on building a product, not on what your "stake" is.

  > Work with people you like and trust, and focus on
  > building a product, not on what your "stake" is.

  > We have laws in this country to prevent people
  > from getting screwed.

  > It was only through the honesty of these other
  > co-founders that they were able to steer away from
  > real trouble.

  > Those co-founders could have given up nothing
  > had they so chosen.

It's not just my financing; it's your financing as well. I suppose you're more than welcome to have a stake in something worth nothing, of your own volition.

>"but let's not hassle with it now"

You're going to have a hell of time proving your case then, aren't you? Unless, of course, you can prove to the arbiter that you've done the work that is deemed sufficient for the stake you're claiming you deserve. In which case, I guess I shouldn't really have an issue giving you that share. Working as intended?

I'll throw one at you: we agree you take a "little equity", say, 2%. You do an assload of work for me, and I imply on occasion that I'll up your stake, but never actually do. Then I sell the company for billions. You're going to be pretty happy that you just might have a case that you deserve more than you got, in spite of our contract.

It's the obligation of the company, not the contractor/employee, to show that it has secured the rights to the work that is included their product.

If you have someone work on your product, and you don't put down in writing what their agreed upon compensation is (and/or you don't pay that compensation), you're not going to be in a good spot when someone starts doing due diligence for a financing or a sale.

Not being explicit about ownership / comp before a financing deal is on the table is a recipe for heartache.

hint: it's the "proving your case" part. in this scenario, the parties rarely go to trial or arbitration.

i don't really need a basis for a case, just a basis for a threat. 'rattling the sabres', so to speak. it's sad, but true.

By "this sort of thing", do you mean an equity dispute? No, I haven't.

But as someone part of running a mid-size company, I have been party to being threatened by baseless accusations. Guess what happens when there is "no basis for a case"? Nothing. Nada. Zip. Business as usual.

So, judging by your comment that you "don't really need a basis for a case", I can assume that you haven't been through this, either. But, if you're curious, go ahead and try to sue someone with no basis for a case, and see how the system deals with you.

The most important reason to negotiate equity early is not to avoid people getting screwed, but to avoid fundamental equity disagreements from screwing everyone.

Even if you like and trust someone, this does not mean you have compatible beliefs on equity or vesting.

If founder B joins founder A, and they move forward with founder A's idea, it's quite possible that years later, when they decide to raise money, founder A will insist that he deserves 90% of the equity, while founder B will want 40%. You'd also be surprised how much people's attitudes and allegiances can change when heavy hitters enter the picture and large amounts of money are at stake.

Laws will not prevent you from getting screwed if you don't have any contractually established rights. If you sign an assignment of IP for your work to a company, you can't later sue for equity to avoid getting "screwed."

>"If you sign an assignment of IP for your work to a company, you can't later sue for equity to avoid getting "screwed."

You most certainly can. But you will lose, because IP assignment is clearly defined. Equity in a business with no IP, no assets and no income, before any work is done, is not.

I've done government procurement in the construction industry. I understand the value and importance of contracts. You guys are talking like this is a multi-million dollar enterprise undergoing a complicated equity dispute. It's not. It was four young guys (sexist assumption!) in a dorm room with an idea. There was no business, and not a single dollar (as far as I can tell) was made based on that idea. They complicated the situation themselves.

You are cynical about the legal industry, yet you think that whatever these guys scribbled down on a piece of paper with regards to an equity split, even if notarized, will have the utmost legal standing? That if they had split the equity equally among four, and one had done all the work and decided to dispute it, that the court wouldn't look at the case objectively to determine fairness? That's simply not true.

So, yeah, I'll stick with my advice: if you're a fledgling startup, don't waste intellectual, physical, emotional and economic resources on your "stake". Earn it. Having a contract will not prevent disputes; I can speak from experience on that. Get to work and build a product. When there is something actually at stake, then worry about your share of it.

Nevertheless, this is terrible advice. Disputes over equity are often company-killers.

You are doing anyone who listens to you a real disservice.

> So, yeah, I'll stick with my advice: if you're a fledgling startup, don't waste intellectual, physical, emotional and economic resources on your "stake". Earn it. Having a contract will not prevent disputes; I can speak from experience on that. Get to work and build a product. When there is something actually at stake, then worry about your share of it.

I think this is bad advice, and goes against both my personal experience and almost every bit of startup advice on the internet.

Sure, you don't need a formal contract, but you do need to make sure you are on the same page equity-wise, while being open to renegotiation. Generally, that "same page" conversation should be documented somewhere, even as a simple email. While that email IS legally relevant and possibly enforceable, the point is to get keep everyone's memory honest and provide clarity.

An email thread like: "Based on our conversation, we plan to split this company equally three ways. Is that everyone's understanding?" "Yes, sounds good" "Yep"

Can be very helpful to avoid misunderstandings both presently and in the future. The point is not to get into a lawsuit, but to avoid one.

I agree with this. But equity is a sticky thing, and at the stage we're talking, no contract will be so air-tight as to avoid disputes.

In my experience, sometimes it doesn't matter what you've written and signed. In those cases what matters is the spirit of the contract (written, verbal or implied), intent and good faith. Call me an optimist, but if you're working with honourable people (as in the article), disputes can be managed objectively, even if you violently disagree about things. I believe our system is efficient in that matter.

Best to have a genuine agreement up front, and keep it fresh.

Seems to me that's what happened in this situation, and they ended depending on the good will of co-founders.

Where as, had they simply dissolved the relationship with the first business and started anew, we wouldn't talking about this.

You asked:

  " ... why on earth is there a stringent corporate structure
  and equity doled out years before there is even a concrete
  idea or tangible business?"

As much as everyone is stating how gracious this is this would actually be a warning sign for me to invest any amount of money into this company.

Two previous co-founders willing to throw away a combined 1% of the company for less than an hour of effort. Puts the real valuation of this startup into view when you have two previous co-founders literally throw their equity away.

Consider this startup marked to avoid in the future of any round...

For example, getting invited as audience to a live TV show and yelling something of interest/funny.

You can do one yourself (note: talk to your CFO first -- you have someone handling that if you've closed a convertible note, right?), or pay a third party (usually a bank) to do it. They're relatively inexpensive.

You'll have to do one if you ever want to grant options (or RSUs) to potential employees. How else do you set the options' strike price?

The only issue with scaling, however, is the music licenses as there's value being exchanged. Napster meets reverse Angellist, well played.

I would also have agreed to investors putting in more money, combined with issuing additional shares to the founders to keep their stakes the same, or to the investors reducing their stake. The thing is, investors to my knowledge will never be as "gracious" as Arel and Anton.

There is a lot of grey area between pivot and new company where ethics and legalities come into play, and I don't know the right answers. I'd love for someone like pg to expound on this.

If those early founders actually did not contribute much in those early days, I would revise this opinion. However as it stands, it seems akin to asking an early financial investor to return his equity. If I give you $50,000 and you pivot ten times, I should still own a piece of your company. Same goes for early founders.

The early founders had already agreed to diminish their share to 1% combined. Pressuring them to go any lower seems greedy and unnecessary assuming they invested significant time and energy over a long period of time, even if it was for an earlier idea.

Unlike most of the comments here, I'm not sure this was a class act. Given that the early founders voluntarily gave up their equity, I suppose the continuing founders deserve some benefit of the doubt.

I don't think I would have agreed to give up my last bit of equity as I would feel 0.5% was fair simply for being a part of the early team formation, ideation, and apparently discarded product development work. I would probably be annoyed by the offer and ignore it.

Also - Paul and Tal are awesome guys who have been hard at work for 4 years without any input from me. I think Ecquire will be a great success, and the divestment of my shares has nothing to do with my perception of the company's potential.

I don't know how long and hard you worked, how related your work was to the ultimate direction, whether you participated in early fundraising, advised the continuing founders, etc. All of those could impact my thoughts on this. Going on the assumption that you worked long and hard - you contributed to the ultimate direction and team and you earned something.

"Pivots" are all the rage in startups these days. Why is it any more acceptable to ask for vested founder shares to be returned than to ask for shares to be returned from early cash investors or advisors? Does YC return shares to founders who pivot after leaving YC?

I think it can be fair to renegotiate stakes according to impact, as it appears you did to get down to 0.5%, but eliminating clearly earned stakes entirely seems rarely justified. Re-incorporation makes sense in many cases, but in others will open the new company to accusations of fiduciary violations largely for the same reasons.

All else equal, you want less people on your cap table for each round. Big cap tables increase complexity.

I wouldn't be suprised if the current CEO were to pay them on the backend regardless of his dance.

[edit] I shouldn't guess what the CEO that I do not know would do, but I would expect myself to reward them later, just not contractually. This is really relationship/person dependent.

I could be off a bit, but I don't think "extra" shareholders become an issue unless their stake is large (>5%) or there are a large number. Regardless, two minor former cofounders hardly seems a significant burden, and eliminating their stake for minor convenience is suspect.

If this was the justification used by the continuing founders, they were either ignorant or taking advantage of their former partners' ignorance.

> I wouldn't be suprised if the current CEO were to pay them on the backend regardless of his dance.

I wouldn't count on it. This is not generally human nature, nor is it compatible with the behavior reflected in this article.