This is the first in a new Sifted series, where we ask you, our readers, to send us your startup problems, before rounding up some top notch advice from industry experts. Need some sage wisdom? Submit your startup problems here. You can do this anonymously if you prefer.
“My cofounder recently left quite suddenly just ahead of us raising an investment round. They took a bonus before leaving which reduced our runway, so we need to raise soon.
"The relationship is amicable but there can be tension around certain topics. They own over 25% of the company and all their shares are vested. Some investors have flagged any non-operative founder ownership above 10% as a concern.
"We’re thinking of doing a buyback or dilution ahead of the round. What’s the best mechanism to reduce the shareholding to under 10%?”
The founder perspective: Toby Mather, founder & CEO at edtech Lingumi
Mather split from his cofounder Adit Trivedi back in 2020, and they remain close friends. You can read about it from Trivedi’s perspective here.
“You're both humans, and this is painful. The very best case is you come out as friends, and don't lose sight of that. Be empathetic and kind.
"A smaller slice of a bigger pie is better than a big slice of a tiny pie. You both need to have a discussion about equity ahead of a round to make sure you're aligned on how you'll work together to incentivise the remaining founders and team, and de-risk the cap table for the next phase of growth and investment. There's no right answer or golden rules, though.
"Your situation is probably quite unique based on your relationship, the hiring needs, vesting schedules and so on, so think of the solution together from first principles. Avoid using 'he said, she said' tactics to present each other with solutions.
"If you're the departing cofounder, consider putting options or shares back into the company, if you can, to incentivise future hires. They'll do the hard work to lift the value of your remaining slice.”
The VC perspective: Jan Miczaika, partner at HV Capital
Miczaika sits on the board of a number of startups, from seed to growth-stage, and has experience helping founders manage splits and transfer shares.
“Sounds like a tricky situation — but one which happens relatively often. When VCs like ourselves push for vesting clauses, often founders feel like we're trying to take something away. I try and explain, however, that vesting clauses protect the remaining founders. A cap table with a non-operative founder holding a very significant stake, especially in an early business, is a red flag.
"Resolving a situation like this comes down to communication, in my opinion. The exited founder needs to understand the startup — and their 25% share — is essentially worthless if a round doesn't happen. Pending litigation it would be even worse.
"A compromise, for example, with the remaining founders earning additional shares over time, needs to be found. Mechanical buy-backs or dilutions can have tax implications a lawyer can help with.”
The lawyer perspective: Jas Bhogal, corporate partner at Harper James
Bhogal is a lawyer with experience helping startups manage investments and share capital from seed-stage and beyond.
“It makes sense to reduce the existing cofounder’s percentage shareholding. Holding over 25% means they can prevent the passing of a special resolution which could become disruptive, and is perhaps why it was flagged by potential investors.
"There are a number of ways to reduce the percentage shareholding:
- Buyback and cancellation of shares;
- Transfer of shares from the exiting cofounder to another party;
- Issuing new shares ahead of the investment round to dilute the cofounder;
- Reclassification of the shares so they do not carry voting or distribution rights.
"Before proceeding with any route, it’s important you understand the implications of each and what the position is of the existing cofounder. You will need their consent to proceed with any option so it’s important to negotiate a way forward which is acceptable to all parties.”
Keen to get the expert opinion on a disagreement with a cofounder, the best ways to deal with pushy VCs, how to support struggling employees or anything else? Submit your startup problems to us in this survey below — totally anonymously if you prefer — and we’ll get the experts’ perspective on what you should do.