[tptacek]

Apart from the good background here about how the wrong lawyers can mess up your company:

Operating without vesting is the most common and probably most harmful company formation mistake you can make. It is amazingly dangerous to do, and will very likely end up costing you something.

Any lawyer who doesn't spot that and totally freak out at you is probably not the right lawyer for the kind of work we all do.

[jarrett]

On the flip side: Is there ever a situation in which cofounders legitimately want to make it impossible to oust a cofounder without his/her consent? Or should that always be possible for any sane company?

[tptacek]

No, I don't think there is. In a serious dispute between founders, for the company to survive, there must be some mechanism to conclusively resolve the controversy. A blood pact not to remove cofounders disrupts those mechanisms.

One way or another, a grave and unresolvable dispute between founders will leave you with some performing partners and some nonperforming partners. It's hard to imagine operating a company with a nonperforming partner on the books; not only do they have dramatically less of a stake in the company than everyone else, but they also have a gun to the heads of the rest of the company.

It's worth adding that wanting to be on the books as a full partner/director/founder of a company that wants you ousted is, for a cofounder operating in good faith, irrational.

When you start a company with other people, you have to decide first whether you're starting a company or a club. A club can disintegrate as a result of conflict and that's not a big deal. But if you're building a company, then the welfare of the company needs to be among the most important factors in resolving disputes.

[joshu]

If you are the partner who is bringing some substantial asset to the partnership (perhaps code or whatever) the ownership from this asset should be un-vesting.

If it is a pre-existing product or business this can be substantial.

[jarrett]

You've convinced me. This seems true for all companies.

[ottocoder]

I have never heard the "club" vs "company" comparison before, but that seems like a great way to describe the mindset of founders.

Is it possible to establish a company that is run like a club and are there any examples? Or am I extending the analogy too far? Perhaps some research organizations are set up along those lines?

[tptacek]

A lot of private law practices are run that way.

[wpietri]

As tptacek says, the answer is basically: no.

When I started a company long ago, a consulting partnership, my cofounder and I picked the simplest dispute resolution mechanism: if we really couldn't agree on something, one person could name a price and the other could decide to buy or sell at that price, giving the purchaser sole control. It's basically the equivalent of how you teach two kids to cut cake in half.

I was skeptical that we even needed that; after all, it was a partnership. With a friend! What could go wrong? But our lawyer insisted.

Turned out he was right. I learned two lessons: 1) get a good lawyer at the start, and 2) it's worth thinking through the common bad outcomes and agreeing on how to handle them before the bad situation hits. Because once you're in a dispute, it is way too late to try to get agreement on how to resolve disputes.

[worldvoyageur]

Traditional shotgun clauses have edge cases that can produce bad outcomes.

A better model for a shotgun clause is one in which each partner names the price they would pay for the company. The partner who names the higher price then buys the company at the price half way between the two prices. Both partners win. The buyer gets the company at a discount to what they were prepared to pay, while the seller gets a premium to what the company was worth to them.

[csense]

With this approach, the first partner who reveals their offer will be at a disadvantage. If they want to buy, they can offer (otherguy + epsilon), and if they want to sell, they can offer (otherguy - epsilon). (Where "otherguy" is the other cofounder's price, and epsilon is a small number like $0.01.)

To fix this, you need to have both parties commit to their prices before anyone learns anyone else's price. For example, you could require both parties to mail their offers to the company lawyer, who is only allowed to reveal them when both offers have arrived.

Of course, with the above solution, you have to trust a human being (the lawyer) to be impartial and not collude with one of the cofounders against the other. For the paranoid, you can instead use a protocol that trusts cryptography instead of humans. You could have each person choose a random nonce, publish H(price + "#" + nonce). When everybody's published a hash, everyone then reveals their price and their nonce -- you know the price was chosen without knowledge of the other party's offer. (Of course each person needs a public key to sign the hash as well, to make sure a participant can't legitimately claim "I didn't send that.")

[TheCapn]

Seems overly complicated... couldn't you just meet with the lawyer, each sit at one end of the table then write your price down and hand it to the lawyer all in person?

[ronaldx]

Slightly easier fix that doesn't immediately require a trusted middleman: swap pieces of paper after committing that anyone who doesn't reveal loses his stake in the company for 0.

[jacquesm]

> The partner who names the higher price then buys the company at the price half way between the two prices.

That's a nice twist. I used 'person that quotes highest buys out the other parties at that price', but yours is even better I think. Thanks!

[ronaldx]

IMHO your way is better because the bids will be more genuine.

The parent way can be gamed: the loser may benefit from deliberately bidding a bit higher than they would otherwise to force the winner to pay more.

(Although you can argue this both ways, and auction theory does, I feel like this quirk could create animosity)

[blazespin]

Shotgun clause is very typical, that's what they used here I suspect.

[kevinbracken]

It's a good question - we had wondered, will there be a situation in which a cofounder and investor could collude to get more equity for themselves? That sounds like the stuff of conspiracy theories more than young startups with very little money, though

[kevinbracken]

Completely agree. They seemed clueless about the fact that they could issue a restricted stock agreement and still allow us control of the company without having vested. It was awful.

[thom]

It's also important to check what the provisions actually are when a founder leaves with unvested shares. In the UK it's standard to require them to offer back the unvested shares at their nominal or par value (pennies, or fractions of). However, at least once I've seen lawyers use _market value_ as the phrase, which basically defeats the entire purpose.

[at-fates-hands]

>>> It's also important to check what the provisions actually are when a founder leaves with unvested shares.

THIS.

One of the most important things my attorney did for me is when I wanted to bring on a partner, we sat down for a few hours and hammered out every possible scenario that could happen. Where he would leave the company, if he dies and his wife thinks his shares are worth a million dollars. If the company is doing great and BAM! my partner decided to just up and leave the company, if the company gets bought out, how much does he get, etc.

Now every time I see these stories, I think my attorney for watching my back and protecting my interests as well as my company. It's this due diligence I never would have thought to do, but am glad I hired a good attorney.