If they counter offered, I might give up another 0.5% in return for "OK, you guys can have 1.5%, but in return the company rescinds your repurchase right with regards to 3%." (i.e. We accelerate vesting.)

This is a negotiation. Nothing you say results in you owning less than 6% of this newly valuable company, right? No need to agree to the proposal in front of you just because it is in front of you.

First, percentages are meaningless. The OP needs to quantify what's at stake in absolute terms. If he has justification to negotiate or otherwise take action to protect his interests, he should do so based on an understanding of the dollar amounts involved, not percentages. When you negotiate around percentages, it's very easy to win the negotiation but lose money.

Second, the scenario described is a huge red flag. The OP's company raised capital from investors. Ostensibly the options pool was addressed as part of the funding. The OP's post suggests that the options pool was way too small but instead of expanding it (and diluting everybody), which is typical, the company's founders and the OP are forfeiting a portion of their piece of the pie, which is not at all typical. Why?

The OP needs to understand the true state of his employer's equity structure. What you refer to as a "newly valuable company" could just as easily be a cap table disaster. If that is the case, negotiating around percentages won't save the OP from a bad outcome.

On this note, please recognize that figuring out what's at stake requires the OP to take an even bigger step back. The OP indicates that he was given a 10% equity stake in the company in the form of stock options when he was a contractor.

As a contractor, he would only be able to receive non-qualified stock options. The tax treatment of these is almost always less favorable to the recipient than incentive stock options, which can only be granted to employees. Now that the OP is an employee of the company, he may need to consider that the structure of his equity is sub-optimal. If there's justification for a negotiation here, the structure of the OP's equity could be just as important as equity amounts.

Further complicating matters is the OP's status, as it sounds like he's a nonresident alien. Cross-border tax issues can be very complicated and at a minimum, the OP should understand the implications of transactions involving his equity.

Bottom line: simply jumping into a negotiation over percentages is putting the cart way before the horse. The OP should seek the counsel of a qualified attorney and tax professional before he tries to address his concerns directly with the company.

"I agree we need more stock available to give new hires."

"It seems like you guys are giving up 10% of your total options which sounds fair to me. I'd like to contribute 10% of my options too. So that gives us a 9% options pool. If it makes more sense to have 12% options then maybe the two of you could each contribute 5.5 points."

You could also ask for a salary bump to compensate for the reduced equity.

::boggle::

From the description given, it sounds like there are two suits running the show with control of the business and the overwhelming majority of the financial interest. I'm assuming from context that the OP is the technical guy who dug the cofounders out of a mess when their initial outsourced product development was not of an adequate standard, and did so in return for only a 10% stake and poor immediate compensation. Apparently this got them to the point where they could start hiring more staff and taking serious investment.

It sounds like the OP was probably already shortchanged on both the equity and the direct compensation. I don't see any way a 4% offer is anything but a cheap shot/insult in this scenario.

I'm making fewer assumptions.

And more importantly, I've learned that in a negotiation, being "insulted" by the first offer doesn't help me in negotiating an ultimate agreement. I think a counter-offer will get you a lot further than righteous indignation.

That's not righteous indignation, it's just knowing who is sitting on the other side of the table when you're negotiating, and hopefully ensuring that you protect yourself accordingly in any final deal you agree on.

BTW OP, did you get a signed agreement? were there any clauses that might be relevant to this?

The trouble is, that probably isn't true. They might have had nothing without him before, but now they have 16 people left without him, and presumably by now some of those other people are technical as well.

So, his relative importance may already have been reduced from "indispensable" to "valuable technical leader", and his personal negotiating position is getting weaker all the time as the business grows. He may have to give up something of value now to consolidate his position for the long term, but if he's been suckered already then consolidation may be the best course of action that is still available to him. Of course even a somewhat reduced but secured stake in the business may still work out very lucrative if the company is successful at its new scale and funding. The real question is how much influence he has left to give up as little as possible while securing the rest.

Other than that, AFAIK what you mention is not typical. Option pool should not be created by "taking" options from employees, but rather by issuing new shares which dilutes everyone equally. You should bring it up and ask that they create the option pool by issuing new shares which will at least indicate to them that you know what you're talking about and perhaps reduce their inclination to screw you.

Also, what was your vesting schedule? If it was four years, you should have already vested 3.75%, which you can exercise anytime. If they take 4% of the remaining, you're left with just 2.25% to vest over next 2.5 years, which is just wrong.

Also: before you begin negotiation, do understand your BATNA - Best alternate to a negotiated agreement. In other words, what will you do/can do if there is no mutual agreement. This will tell you if you're overall in a strong position or weak. This will include any advice you get from the lawyers, your employee agreement, etc.

Do you actually have a contract for your ESOP? It's common to not have one in the early stages since they are expensive to create.

Maybe your founders don't really know what they are doing wrt to options - many don't.

Get on a call with them ASAP. Tell them you think that pro-rata is both what's FAIR and WHAT IS DONE 99.999% of the time in these circumstances-- and mention that you've done a lot of research. Say, "Guys, obviously any two of us can impose a decision on the third, but I trust you guys, so I'm assuming you're doing this because you think it's normal/fair. How about this: I pay for a few hours of a high-end startup lawyer's time and we can get a sense of what's standard-operation-procedure here is? It seems like we might have different opinions about what's fair. I'd propose we appeal to a knowledgeable 3rd party. Is that cool?" If they agree, add: "If this experienced startup lawyer says that pro-rata is what's done virtually all the time in these circumstances, can we agree to go that route?" And see what they say. Just keep saying you trust them and ask questions along these lines. Eventually they'll either agree or it'll come out that they feel that you haven't earned your 10%.

Understand: If things get ugly, they can fire you (wait-- are you vesting? If they fire you after 1.5 years, you lose most of your options). Once they fire you, they can dilute you and other people who are not with the company somewhat easily. Your job here is to be friends and to maintain/earn trust (and to not get taken advantage of!). NEVER THREATEN until there's nothing left to salvage. If you're a fabulous negotiator, you can HINT that you're willing (and financially able) to lawyer up.

In fact I bet the other parties have done the same already.

I would say this is EXACTLY the time to have an attorney get involved to take a look at the documentation and render an opinion. If the situation is ugly, they may fire him if he protests, but that also gives rise to a reason to question the cause for termination. Given the contractual agreement between the parties, a termination event may provide an avenue to compensation for unfair termination, especially when seeking legal council could be shown as the reason for termination.

When in doubt, lawyer up and be cautious of making blaming statements that aggravate the other party. You may want to end up working with them in the future. Or not, depending.

Talking to a lawyer: good.

Bringing a lawyer into the discussion with the founders: bad.

If you really can be fired without cause or notice and at the loss of most/all of your interest in the business, you have no cards and anything you do is a bluff.

If you really are dealing with cofounders who are are willing to push you out of 40% of your interests without offering much of anything in return as soon as the going gets good, then you have no reason to trust they won't push you out of the remaining 60% the day before any lock-up expires.

In that case, your best options may be either to lever the practical value that keeping you on board has right now to get a better, more secure deal immediately -- one where you won't be vulnerable to being kicked out arbitrarily and without proper compensation in the future -- or to assume you're going to get screwed when your lock-up ends and leave now.

It's a good idea to negotiate at this point rather than caving to the (probably very bad) deal being offered as an opening gambit by the cofounders, but the bottom line is that if they can fire you whenever they feel like it and you have no airtight contractual right to compensation if they do, nothing else you negotiate now actually has any value at all.

(Edit: Obviously if you opt for the "apply leverage" option then you do it nicely. I'm not talking about lawyers-at-dawn and threatening to walk if they don't meet your every outrageous demand or anything silly and confrontational like that. But I think it would be perfectly reasonable to expect solid guarantees that your remaining interests will retain meaningful value in exchange for whatever you are willing to give up here, such as accelerated vesting and a condition that if they let you go early then there's something in it for you.)

That's true of any good employee, whether or not they were on board early and received a stake in the business.

However, the value of that card will progressively decrease to near zero over time whatever you do. Like any good poker player, you want them to pay to stay in the game before they know what your hand will be worth if they call you.

Put another way: Two years down the line, with 100 people on board and another funding round in the bank, any one senior technical person will almost certainly be expendable to the business and everyone will know exactly how much his options/diluted options/low preference shares are worth if he doesn't have proper safeguards to guarantee his position.

If so, it might not be so easy. I don't know labor law across the EU, but here our labor courts don't like companies who fire people for exercising their rights.

That is certainly the general attitude around Europe, encoded in law to various degrees depending on where you are.

However, it's worth keeping in mind that most of those laws are meant to protect the little guy from being fired unreasonably and winding up with no income but still rent to pay.

The maximum levels of compensation available for wrongful dismissal tend to be relatively low compared to the levels you're talking about as a founder/early employee/investor in a company that becomes successful. It seems to be implicitly assumed that anyone dealing with bigger numbers will know enough to make suitable contractual arrangements that protect their own position explicitly.

And they ended up agreeing with us. While the offer they first came up with was not fair to us, they honestly hadn't realized it (they had a lot on their minds, it was the first solution that came to them, and they simply proposed it).

We did not poison our relationship. They agreed that our solution was more fair (it involved each of them getting less equity and each of us getting more, by the way). And, in the end, the company had a (modestly) successful exit.

We are all friends to this day.

OP: If it's unfair: write down why it is unfair and what you would propose as a more fair agreement. Only if and when they reject that should you involve an attorney. But there is absolutely a chance that they will realize your solution is better.

That would mean they'd go down to 39.6% and you would go down to 8.8%.

Since you're remote and the company is growing, I would personally expect real problems on the horizon.

Finally, exercising your options is most likely a good plan; options often expire after someone leaves.

It's a little harder for them to screw you out of ownership than out of unexercised options. But just a little.

Let them know that you think it's unfair because you're diluting much more than them proportionately.

Help them understand that you're in this for the long run (even if you're not sure, founders want to hear that: stability in senior team is something they value) and you want to be incentivised. Many founders tend towards underestimation of problems and overestimation of their own abilities, and they may interpret seed money as an opportunity to replace you. You were a guy who joined when they didn't have access to the hiring market. Now they have money they will have a bit more access.

Let's say they negotiate and his equity stake is cut back to 8.5% while the others give up 5.25% each. His narrative of the negotiation could be, "They tried to screw me again and I barely held on" or it could be "They gave up more money, I gave up a bigger proportion." Even though the finances don't change, the first response maintains the status quo while second response starts the process of reclaiming the relationship.

(Sorry for the male pronouns if you're not a male, OP. Writing he/she is annoying and I'm lazy.)

Hmm. You could assume intentions, but since you don't know their intentions, it shouldn't affect your decisions much.

I believe the best advice for you is to find a lawyer in the state where the company is incorporated and hire them.

It sounds to me like you've already gotten a raw deal on your ownership, and they think they can just walk all over you. Dilution at the time of funding should affect everyone the same, and if they want 12 percent for an option pool, then everyone should get diluted fairly (every share should lose %12 of its ownership). I believe anything else might be considered fraud, depending on the terms of the agreement.

You can exercise your vested shares whenever you like (under most agreements) and the only legalities I can think of are the tax implications.

NB: I'm not disagreeing with your arguments for why anti-dilution clauses are bad. But minority shareholders are otherwise relying on the trust from the board, which has every incentive to screw them over, so it's a no-win situation.

All of the "advice" I've seen from Venture Capitalists have been self serving rationalizations that almost never are really "standard" terms as much as they would like them to be.

For example, in one company I worked with, every employee had an anti-dilution clause. This didn't keep the VCs away.

The value of this advice depends on the value of the options; but I agree. You need a lawyer to represent your interests separately from the company. It sounds like there are a few different stakeholders here: OP, the other employee shareholders, and the investors. If there are other employees who are being similarly diluted, maybe try to join up with them.

The biggest reason for this is that retaining a lawyer allows you to remove yourself from the situation and continue to be effective in your job. Let your lawyer have the nasty arguments and keep yourself out of it.

(I say this as someone who listened to those horror stories, refused to execute options, and lost a low six figure return as a result. I don't regret the decision though; on the other hand, if I had ponied up thousands of dollars and gotten zeroed out, I probably wouldn't be able to live with it.)

I myself exercised a (small!) amount in a company that got acquired and my shares all went to $0 because other shareholders got preferential treatment. (This company earlier made a point of the fact that there were no investors with preferential treatment, but either lied about that or somewhere along the line they got desperate and gave preferential treatment. In either case, the stakes were too small to bother suing.) At least I could claim a capital loss.

That $5m is not split evenly, it's distributed to the highest priority share classes first (after potentially paying off certain debts, notes, etc). So your Seed, Series A, etc will get paid out of the $5m – nothing is left for common.

Common is the last to earn money, and options are part of the common class.

Otherwise it should be prorated, and you shouldn't give more than 1%, otherwise you'll be contributing more than the founders and that doesn't make any sense.

I've experienced shitty moves like that from people who usually wants you to contribute and behave like a founder with a majority share without giving you such a share. I can understand the idea, some people fall for this, but it has no rational justification and the real issue is that the work/trust relationship may end up being damaged beyond repair.

Once you've settled that, have them explain what they're trying to do and have a lawyer interpret it for you. Normally employee option pools (and any kind of dilution) are expanded by issuing more shares. That would dilute everyone equally. To dilute people at different rates, the company would actually need to issue a bunch more shares (diluting everyone even more) and then grant options to the other guys. As far as I know, judges look on that very unfavorably. The startup's lawyers should be advising against that.

Despite what other commenters are saying, this probably isn't a negotiation. It's likely just incompetence on their part. Your first priority should be understanding precisely what position you and the company are in, and then evaluating from there.

Seems people here are talking about lawyering up too fast, without knowing whether a proportional dilution has even been discussed.

I worked with Scott Walker to incorporate my startup. He's very helpful and takes calls without charging (if you listen to This Week in Startups or Mark Suster's Both Sides podcast you'll hear them talk about him in the ads):

http://walkercorporatelaw.com/

You must have some sort of contract between yourself and the company or the founders. If there isn't a contract, or it's a bad one, then it becomes interesting from the standpoint of IP ownership. How your shares are tied to the IP ownership is what you want to concentrate on as it is your lever to get what you want. If you find the founders are being unreasonable, use any and all means to defend your dilution up to the point it equals an equitable dilution of all shares by all stake holders.

Don't make blaming statements to the founders, clearly state what you want for yourself in terms of ownership, then go get an attorney and have them look at the documentation. After they give you an opinion on it, prepare yourself for the worst outcome and then restate what you want for yourself again to the founders. If they don't agree, be prepared to make the hard decision.

Best of luck to you!

Also, aren't share option pools handled by (potentially) issuing new shares (in UK terms the difference between issued and authorized share capital) rather than shuffling around existing shareholdings/options?

[NB UK experience]

I'm not familiar with EU tax rates on short term capital gains in a US market, and would highly recommend spending some of the money you might have spent on a lawyer talking to a reputable financial accountant from your country with experience in this area. In the US you have to set aside a chunk of the proceeds if you do a same day sale when you exercise your options, and are frequently penalized by your state if you don't give them their share at the end of that financial quarter.

There's a lot going on there and I don't think HN is going to give you complete enough advice to rest your mind.

This is not the case where you can use 'shit happens' and write this off like it's not a big deal.

When you work mostly for options (which is already pretty much a scam) and receive little to no pay, this is not 'shit happens' this is 'I need to feed my self and my family' type of situation.

They cannot simply take away from you that's your.. Unless they have stated otherwise somewhere.

So just talk with them and maybe you misunderstood something.

Obviously, you could just propose an equal dilution of everybody in the pool. Or come to them with an outside offer and see what happens.

If you feel there is a lot of potential in the stock, don't skimp on legal fees. I was involved in a bit of a complicated shares (not option) situation and $1500+USD was certainly worth it in the end.

A good lawyer will present things as they stand, but also let you know where the line exists between asking for what is fair and pressing your case more strongly / becoming more adversarial. They will leave the choices to you, but they will inform you well of the spectrum of choices that you have.

When you know your legal situation, keep an open mind about what is best for you rather than what is "fair". If investors want to dilute you more than other founders, going along with the investors may ultimately be the most lucrative option for you.

All the people saying "pro rata" don't seem to be distinguishing between options and actual equity. If you have options, you are offered the opportunity to buy equity in the company at discounted rates. Investor coupons. Your equity in the company is the number of shares you have removed from the option pool by exercising vested options.

The founders, who have actual equity in the company, are adding 8% of their company to the option pool, which is already at least 10% of the company, less whatever OP exercised out.

I assume the freelancer was paid in cash. That makes the current structure 40% Founder A, 40% Founder B, and 20% option pool, currently 10% allocated to Employee 1, and 10% distributed among employees 2-15. The proposal puts each founder at 36% each, grows the option pool to 28%, with 6% for employee 1 and 10% for 2-15, and 12% for new blood.

Until someone starts exercising those options out of the pool and into actual ownership shares, the founders are still 50-50 in control of the company. Those options remain just investor discount coupons. They have some value, which can be calculated.

Unvested options are worth less than vested options, because you have to apply a discount rate representing the time you have to wait to use them. The 4% given up are essentially the 4% from the end of the vesting schedule. What the founders could do is take the current value of that 4%, and pay that to OP as cash, or apply that amount towards exercise of vested options. It would replace a larger amount of future options with a smaller amount of current equity, but the current value of the assets remains the same.

You don't need to consult with a lawyer. The founders can do the right thing and pay you what they promised to pay you when you agreed to work for them, or they can reneg. If they don't at least pay you for the work you have already done for them, that's when you hire the lawyer and jump straight into the lawsuit.

If they're receptive, you've helped to forge a better relationship. If not, at least you know bailing is the right choice.

Consider having a mental (or physical) flow chart of all of the possibilities before you talk with them so your action can be predetermined based upon their feedback/reaction.

Your real problem though is why didn't they ask for that in the first place. It looks like they want to squeeze you out and you should have a transparent discussion about that first.

Or has that changed in the last 1.5 years?

> Fast forward to today, we got seed funding

ugh.