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JBaxLaw
JBaxLaw, Attorney
Category: Business Law
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Experience:  Experienced in business formation and licensing issues
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Hello, Myself and a partner had co-founded a startup about

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Hello,

Myself and a partner had co-founded a startup about a year and a half ago. We split I was playing a CTO role and my partner was playing a CEO role. She was able to raise angel money last October but it was not enough to pay ourselves salaries. I have built a team and delivered the product, iterated on it while keeping a day job but there seems to be no success in raising VC money. I have decided to leave due to the level of commitment and the differences we have run into because of this situation. I have vested about 20% so far.

Is there something else should I be thinking about as I wrap up this stage besides vested shares.

Appreciate you help in advance!

BizAttorney :

Hello, I am a professional here to assist you. I appreciate your use of this service.

BizAttorney :

Hello

Customer:

Hi

BizAttorney :

I see that you were part of a startup company and now will be departing.

BizAttorney :

The company will continue?

Customer:

that is correct

Customer:

yes, the other founder will continue with it

BizAttorney :

I see that you were on a vesting schedule and have 20 percent up to this point.

BizAttorney :

I see.

Customer:

correct, we both had 45% or the company, the rest was a shared pool

BizAttorney :

One important consideration is that typically a departing partner will have a limited number of days to exercise those options.

Customer:

so I need to make sure it is covered in the contract

BizAttorney :

That is often a 90 day period. This forces the outgoing partner to return their stock back to the company.

BizAttorney :

That is important.

Customer:

what are the typical exercise period?

BizAttorney :

Yes.

BizAttorney :

90 days is typical

Customer:

is that based on current valuation of the company?

BizAttorney :

That would be based on the value when the vested stock is exercised.

Customer:

actually, I own shares not options

BizAttorney :

exercised.

BizAttorney :

Yes. The valuation would then be when the shares are exercised

BizAttorney :

Or sold back to the entity.

BizAttorney :

Does that make sense?

Customer:

let me make sure I understand

BizAttorney :

Sue

BizAttorney :

sure

BizAttorney :

Typically in these entities partners will earn stock overtime on a vesting schedule.

BizAttorney :

This prevents a partner from getting all of their stock upfront and just leaving.

BizAttorney :

When a partner does exist they are entitled to those vested shares.

Customer:

that makes sense.

BizAttorney :

Typically, the partner must sell back those shares within a specified period.

Customer:

what is not clear, is there a period over which I need to sell shares

Customer:

so I need to look into over what period of time I need to sell back the shares

BizAttorney :

That would depend on the stock purchase agreement

BizAttorney :

Yes.

Customer:

in case I decide to sell back now, how is the price determined

BizAttorney :

Check the stock purchase agreement, but that would typically be at current valuations.

Customer:

what if I decide to hold the stock

Customer:

is that possible at all?

Customer:

beyond the 90 day limit

BizAttorney :

That would depend on the stock purchase agreement.

Customer:

ok, i would have to review it

BizAttorney :

Those limitations would be there. These are important issues for a startup to consider. Some include these issues in these agreements and some do not.

BizAttorney :

Yes. Certainly.

BizAttorney :

These are the types of issues to look for in the agreement.

BizAttorney :

I hope that you will be so kind as to leave me a positive rating as this ensures I will receive credit for assisting you.

Customer:

how do the startuo typically determine the valuation?

Customer:

of course, but I just want to clarify the aspect of valuation

BizAttorney :

This was stock and not options?

Customer:

that is, what criteria would be used to determine the valuation of the company

Customer:

correct, I was the stock owner

BizAttorney :

Have there been any new investors?

Customer:

no, just the angels and that was a convetrable note deal

BizAttorney :

The valuation for a departing partner for vested common shares is typically fair market value.

Customer:

ok, thanks

Customer:

is there anything else I need to be concerned about?

Customer:

i have put in a lot of work for it and I don't want to end up with $20 as a result of it

BizAttorney :

Certainly, that valuation process can be contentious

BizAttorney :

In fact, these issues can result in litigation.

Customer:

when is this typically discussed?

Customer:

at the time of leaving or at the time of sell back?

BizAttorney :

You may consider having a CPA assist you in that process.

BizAttorney :

Normally such issues would want to be discussed, on good terms, prior to departure

BizAttorney :

A CPA would assist you with potential tax implications.

Customer:

ok, that is very helpful

BizAttorney :

Thank you

Customer:

thanks a lot!

BizAttorney :

The session will end once you leave a rating, but you can always follow-up later with me even after leaving a rating if you need.

BizAttorney :

Also, please let me know if you have any problem with the rating feature.

JBaxLaw and 2 other Business Law Specialists are ready to help you
Customer: replied 4 years ago.
Hi again,

A question on what will happen if valuation of the company is more than the company can afford to pay back in cash?


Also, the language used in the contract is 'fair market value', can I assume it is the same if not higher than what has been agreed to in the convertible note signed with angels last year?
Amounts paid by investors is strong evidence of fair market value and certainly a good starting point for negotiations. Where a company cannot afford to meet it's obligation to pay fair market value of stock, then the first one would look to the agreement for any pertinent language. If none is present, it is a matter of negotiation. That may involving promissory notes or retaining stock or receipt of company property, as examples.

Please let me know if you have any other questions.

Thank you again
Customer: replied 4 years ago.
Hi again,

I think I have finally clarified what you meant about the sell back. The contract is structured such that all unvested shares are available for a sell back to the company. As it stays in the contract, they can purchase it from me for the same price as I have paid for them, which was $1.


To be clear, I had 45% of the company, by now I have vested ~20%. So, these 20% I get to keep. Remaining unvested stock they will buy back. What do I need to do to ensure I have secured my 20% of stock?


Thanks a lot!
I see that you would like additional information regarding documentation of stock ownership.

Stock certificates can be issued. These forms of ownership are commonly available and widely used in startup entities.

Thank you
Thank you so much for allowing me to assist you.

Please let me know if you need any other assistance. Thank you for leaving me a positive rating and ensuring that I receive credit for assisting you.

Thank you again

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