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How We Secretly Lose Control of Our Startups
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Assume Everyone Will Leave in Year One
Stop Listening to Investors
Was Mortgaging My Life Worth it?
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When Our Ambition is Our Enemy
Are Startups in a "Silent Recession"?
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Michelle Glauser on Diversity and Inclusion
The Utter STUPIDITY of "Risking it All"
Committees Are Where Progress Goes to Die
More Money (Really Means) More Problems
Why Most Founders Don't Get Rich
Investors will be Obsolete
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We Can't Grow by Saying "No"
Do People Really Want Me to Succeed?
Is the Problem the Player or the Coach?
Will Investors Bail Me Out?
The Value of Actually Getting Paid
Why do Founders Suck at Asking for Help?
Wait a Minute before Giving Away Equity
You Only Think You Work Hard
SMALL is the New Big — Embracing Efficiency in the Age of AI
The 9 Best Growth Agencies for Startups
This is BOOTSTRAPPED — 3 Strategies to Build Your Startup Without Funding
Never Share Your Net Worth
A Steady Hand in the Middle of the Storm
Risk it All vs Steady Paycheck
How About a Startup that Just Makes Money?
How to Recruit a Rockstar Advisor
Why Having Zero Experience is a Huge Asset
My Competitor Got Funded — Am I Screwed?
The Hidden Treasure of Failed Startups
If It Makes Money, It Makes Sense
Why do VCs Keep Giving Failed Founders Money?
$10K Per Month isn't Just Revenue — It's Life Support
The Ridiculous Spectrum of Investor Feedback
Startup CEOs Aren't Really CEOs
Series A, B, C, D, and E Funding: How It Works
Best Pitch Decks Ever: The Most Successful Fundraising Pitches You Need to Know
When to Raise Funds
Why Aren't Investors Responding to Me?
Should I Regret Not Raising Capital?
Unemployment Cases — Why I LOOOOOVE To Win Them So Much.
How Much to Pay Yourself
Heat-Seeking Missile: WePay’s Journey to Product-Market Fit — Interview with Rich Aberman, Co-Founder of Wepay
The R&D technique for startups: Rip off & Duplicate
Why Some Startups Win.
Chapter #1: First Steps To Validate Your Business Idea
Product Users, Not Ideas, Will Determine Your Startup’s Fate
Drop Your Free Tier
Your Advisors Are Probably Wrong
Growth Isn't Always Good
How to Shut Down Gracefully
How Does My Startup Get Acquired?
Can Entrepreneurship Be Taught?
How to Pick the Wrong Co-Founder
Staying Small While Going Big
Investors are NOT on Our Side of the Table
Who am I Really Competing Against?
Why Can't Founders Replace Themselves?
Actually, We Have Plenty of Time
Quitting vs Letting Go
How Startups Actually Get Bought
What if I'm Building the Wrong Product?
Are Founders Driven by Fear or Greed?
Why I'm Either Working or Feeling Guilty
Startup Financial Assumptions
Why Every Kid Should be a Startup Founder
We Only Have to be Right Once
If a Startup Sinks, Founders Go Down With it
Founder Success: We Need a Strict Definition of Personal Success
Is Quiet Quitting a Problem at Startup Companies?
Founder Exits are Hard Work and Good Fortune, Not "Good Luck"
Finalizing Startup Projections
All Founders are Beloved In Good Times
Our Startup Culture of Entitlement
The Bullshit Case for Raising Capital
How do We Manage Our Founder Flaws?
What If my plan for retirement is "never retire"?
Startup Failure is just One Chapter in Founder Life
6 Similarities between Startup Founders and Pro Athletes
All Founders Make Bad Decisions — and That's OK
Startup Board Negotiations: How do I tell the board I need a new deal?
Founder Sacrifice — At What Point Have I Gone Too Far?
Youth Entrepreneurship: Can Middle Schoolers be Founders?
Living the Founder Legend Isn't so Fun
Why Do VC Funded Startups Love "Fake Growth?"
How Should I Share My Wealth with Family?
How Many Deaths Can a Startup Survive?
This is Probably Your Last Success
Why Do We Still Have Full-Time Employees?
The Case Against Full Transparency
Should I Feel Guilty for Failing?
Always Take Money off the Table

How Do I "Buy Out" An Equity Holder Fairly?

Wil Schroter

How Do I "Buy Out" An Equity Holder Fairly?

Getting equity back from an existing stakeholder isn't easy — but it is possible.

It's a situation that very few Founders have ever been through before, so no one really knows how to go about it. Let's talk a bit about how the situation develops and what we can do to get some of that precious equity back into our coffers.

Remember, Equity is a Promise of Payment

More than anything, equity isn't just a stock issuance. It's a promise that at some future point that stock will be worth cash money — maybe.

When we think about pulling the equity back, we have to think in terms of how to redeem that promise of payment in some capacity. It's not just a matter of "taking it away" per se, it's a matter of trading the terms of the initial agreement with new terms that work for both parties.

Convert to Cash Over Time

The easiest way to approach this is to work out a way to convert the equity into some sort of cash equivalent, paid out over a set period of time.

We're going to assume we don't have a bunch of payout money sitting in the bank somewhere (why would we?) so we're going to need to use time as a factor for payout. This could be a period of 1-4 years, depending on what feels reasonable to both parties.

Remember that "Plan B" for our departed equity holder is $0, so a cash payout for a liquid stock is super rare.

Create a Payout Aligned with Growth

It may be the case that both parties have a hard time agreeing on price (what a shocker) so we need to develop a more dynamic approach to payout.

One solution could be to pay out on a scaling basis, based on the performance of the business each year. We could tie that payout to net income (to protect against paying in a profit-losing mode) or on gross sales (so that we can forecast the payout as part of our "cost of goods sold," so to speak).

Getting Paid Now Equals Taking a Discount

Regardless of how we structure the payment, the receiving party has to understand that getting paid out early and before any liquidity is assured comes at a steep discount.

The cash payment has more to do with the value of cash, not necessarily the value of the company. Yes, the company might be worth $50 million, but that 5% stake isn't going to yield a $2.5 million payout because it's not liquid whatsoever.

Instead, we may settle on a $250K payout over 4 years. If the recipient feels like that's leaving opportunity on the table, we can split the payout to pay $250K for 4% of the stock and leave the 1% as remaining equity "just in case."

In Case You Missed It

What’s a Cap Table and Why Should I Care? As we're wading into the waters of our first startup, especially when we start talking to investors, we're going to get asked about our "cap table" — a lot. For many of us who have no idea what that means, here's a quick primer.

Should I Pay People With Equity? (podcast). Paying people with equity is a time-honored tradition in cash-starved startup land. However, have you ever stopped to consider the real cost? Join Wil and Ryan as they break it down.

Startup Equity 101: Who Gets What Slice of the Pie? If you’re starting to freak out a bit about who gets what slice of your startup pie, take a deep breath, calm down, and get ready for Startup Equity 101.

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konveksi surabaya

nice

Reply5 years ago

jacques bouzoubaa

Hi
Perhaps you can shed some light on something like this if your time permits... Serie A investors, per contrat, failed to put in additional funds that they have agreed to do. This occurrence has created financial hardship for the company and the founders are scrambling around to find for additional capital to finance the completion of the 510K with the FDA, and fund manufacturing, sales and marketing efforts. The contract is null and void due to non performance by Serie A investor, and the founders are upset and want to find a solution to replacing Serie A investors. I would appreciate some insights to this particular situation. Thank you.

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