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RE: Was I ripped off by my so-called partners?

Dr. VC — Sun, 02 Jul 2006 17:36:56 GMT

Hire an attorney to help with the negotiation with the VC. In a general sense, of course they could fire you, but if you have an employment agreement, you have some protection. But, why would someone want to buy a piece of a company then purposefully "run it into the ground"? That makes no sense.

You're beginning to ask some very specific deal questions, and it is difficult for me to give you advice when I don't know the details. Unless you want to pay me, please don't give me the details! Hire an attorney.

RE: Was I ripped off by my so-called partners?

tical — Fri, 30 Jun 2006 11:43:37 GMT

Forgot to mention I come up with 20k because I figured it would take a that much to get something like that done from a consulting company..

RE: Was I ripped off by my so-called partners?

tical — Fri, 30 Jun 2006 11:39:16 GMT

Again, so awesome to be able to talk to someone who doesnt have a vested interest, as painfully obvious as it must seem, this is my first experience in dealing with VC and I am trying to get as educated as possible..The comments on 40% are dead on and I really appreciate the advice..

As much as I would like to think the IP is the reason for the company and the VC it really isnt, it is the icing on the cake, what is the real value to the company is my previous experience and my name being commited to this project. The VC said outright, "whatever the idea was, I would be stupid to pass this team up".. I am not sure if this fits into the IP moniker.

I am currently waiting for a response back as they negotiate. One more question, if you say only talk about % before dilution, is there no merit to the argument of VC will have a controlling stake? for example if we end up splitting it at 33-33-33 and we sell 35% of the company to VC, would the idea that then XYZ's board members could fire all of us and run the company into the ground have any merit?

I do know if it was a small company where no money was involved just 3 guys working at night time, trying to get this thing off the ground I would definatly not settle for less that 33%. When the math gets complicated after the VC dilution non-sense this is where I fall into an unfamiliar line of math and it becomes difficult to rebute the CEO's arguments about after VC %'s blah blah..

Thanks sooo much for the advice..

RE: Was I ripped off by my so-called partners?

Dr. VC — Fri, 30 Jun 2006 09:27:06 GMT

Good for you! Looks like you're moving things along. How did you come with $20K as a price for the IP? Instead of taking cash, tell them that you'll transfer your IP and then sign an employment agreement with the company in exchange for a substantial part of the company. I came up with 40% by thinking, "hmmm....what's an amount larger than one third?" There is no basis for my 40%, it just allows you some wiggle room. If you start the negotiation at 33%, you'll likely end up with less than 33%, probably a quarter of the company. If you start higher than 33%, you have a chance at ending up at one third. It's just a negotiating tactic.

And don't short sell yourself. It sounds like if you pull your IP out, they don't have a company! Fine, they set up the meetings and paid some expenses, but it sounds like without your IP, they wouldn't have had the meetings in the first place. Big deal, they made a few phone calls. A secretary can make calls. You have the "secret sauce" and that's the most valuable thing in this entity.

You guys need to divvy up the pie before the VC takes his piece. Whatever amount the VC buys will dilute all three of you by the same amount. Hold your ground. Ask for 40%, and be willing to settle for 33%. I wouldn't take less than that. Heck, why don't you search out other business people who would willing to make a better deal with you? Maybe you should tell that to your erstwhile partners.

RE: Was I ripped off by my so-called partners?

tical — Fri, 30 Jun 2006 04:20:31 GMT

Forgot to mention and it wont let me edit:

I have not signed any paperwork with them..

RE: Was I ripped off by my so-called partners?

tical — Fri, 30 Jun 2006 04:15:08 GMT

Thanks for the great advice.. And you are right, I did alot of things wrong.. The one thing I did I think somewhat correctly is that although I did do work for free, I did it as a proof of concept and I did it all on my property and in my posession (my hardware, my bandwith). I kept all the code and didnt share the technical details with the partners so they have no claim, no access and can not use the IP. They have offered to buy it from me for whatever price I wanted ~ 20k ( It took me a few days to create)

I actually spoke with them tonight and they are trying to "run after" me.. I think the main reason that they are doing whatever they can to get me to play along is that they cant or at least dont want to face the VC and tell them that I dont want to be a partner. I think they know they will lose face and valuation. Of course that would negate alot of talk about the value I bring, but also it looks bad because they couldnt even convince a partner to stay, bad sign for a management team so early.. So I do think I somewhat have the ball in my court.. I told them I want 30% and they said that was very far off and an impossibility.. They had mentioned that even if they broke the company 25%-25%-50%, or something like that, then when VC came and took 35% or 40% then VC would have close to a controlling share of the company and that wasnt good.. Also he just kept stressing how much each little 1 and 1/2 percent are worth and that I am not understanding the value 3-4% of the company..

I stood my ground and told him that was not acceptable and wished him luck.. But he still was very upset and continued to press and beg and try to come up with something that I would agree to..

I am sorry if I didnt mention but that 2-4% of the company he was talking about is after VC takes their %'s (after dilution)..

Also, Dr you mention 40%, why do you think 40%? sure I bring a name and technology to the table, but they also bring good names, solid experience and they have been planning / talking about the company and the idea(altough not really starting) for about a year now.. Also they set up all the meetings with VC and they also paid for all my expenses to go to VC with them.. I thought 33-33-33 would be fair.. or 50-25-25 ... What about something like 10% after VC takes 35%.. if VC's 10 million dollare getthem 35% does 10% sound better?

Thanks for all the help!

RE: Was I ripped off by my so-called partners?

Dr. VC — Thu, 29 Jun 2006 22:16:16 GMT

You have just experienced one of the harsh lessons of entrepreneurship and placing trust in other people. You've been ripped off. You only have yourself to blame for situation, because the time to negotiate your fees, your ownership, your salary, is BEFORE you do anything. You set the market for the use of your name, your IP, your efforts, and so on, and the price you set was "little or nothing."

If a person does work for someone and doesn't charge for the work, it becomes very difficult to say, "hey, I know I didn't charge you, and we had no agreement for my work, but now that the work is done, how about paying me something?" Well, you can ask, but what incentive does anyone have to pay for something already rendered? After all, you did the work for free!

The next lesson is negotiating 101. Tell these guys that 2% of the company and a below market salary does not get it done. Given the fact your name, your IP, and your time was instrumental in getting this VC deal, you are expecting 40% of the equity and a market rate compensation package. Do your homework and be specific about what you want in terms of salary and bonus, I don't know what you could command in the open market.

Tell these guys that you will have your attorney draft the necessary agreement, and that you'd really like to avoid an ugly situation, but unless your go-forward package is more substantial, you will pull your IP from the enterprise and you will have nothing to do with the company.

Have you signed any agreements? Have you assigned ownership of your IP to this entity? If not, then you have a barginning chip. Tell these guys that you will sell your IP to the entity for better package, and if they balk, tell them, "good luck, guys" and walk away.

Assuming they don't have claim to your IP, assuming your IP (and your name) are really as important as you say, and assuming they have some brains, they'll come running after you.

Was I ripped off by my so-called partners?

tical — Thu, 29 Jun 2006 12:17:11 GMT

I am a technical person with some past decorated experience.. In other words my name associated with a company is worth a good amount of money. I have been offered a position/partnership in a new, not yet formed company that is soon to receive series A funding from VC.

I am currently well employed and after being contacted by the CEO of the new venture, and being told I would be "taken care" of if I joined. There was thought that developing some key technologies would add to valuations, so I developed some unique cutting edge technology for the new venture, using my own time and my own hardware and the code is still only seen by me..

The 2 partners (boyhood friends) asked me to join them on a trip to meet with VC. The three of us did excellent in the meetings and the company has received a commitment of funding. My experience and this technology of course was mentioned to VC and immensly helped in the valuation.. When we get back into town I decided it was time to talk to the partners about my % of the company and I realized that the % they wanted to give me is much lower than I anticipated.. They are offering me a fairly low market salary and about 2% of the company.. Since I helped bring the idea to VC, and since the technology I developed and my name add so much value to the project, I expected something in the neighborhood of 25-33%.. I am already thinking of other options I have with other ideas / partners and other VC's..What do you guys think? What are my options?