LLC breakup

Anoop Kansupada Startup Business Development and Partnerships Manager, Operations, Entrepreneur, and Travel Enthusiast

December 17th, 2012

I wanted to get advice on how other people would handle this.

Here is the situation:

Founder 1 - Me, invested 10k, wants out
Founder 2 - V, invested 10k, wants to continue with startup

I tried working on this project but it is far more time consuming then I
originally realized. It\'s not a sexy or interesting business, and my
business partner is not very interested in the tech side of things, which
is where I came in. But we don\'t see eye to eye on very much. We made
countless mistakes and now he wants to continue but requires me to be full
time or not at all.

Initial Cash: 20k
Gross Revenue: 7k
Cash on hand: $900
Operating Costs:
Office Space ($750 x 9) = 6750
Website: $12k
Assets: 5k
Failed SEO: 2k

These are numbers off the top of my head, but they are pretty spot on.

He is offering 0% equity and a buyout for 3500 spread out over the duration
of 2013 (with no guarantee)

How would you guys/girls handle this?

Anoop Kansupada
Founder & CEO, Dapprly <http://www.dapprly.com/>

Facebook: Dapprly <http://www.facebook.com/dapprly>
Twitter: @Noop212 <http://dapprly.tumblr.com/>
My Skillshare Class: Living Like a rockstar while backpacking around the

William Grosso CEO, Scientific Revenue

December 17th, 2012

What percent do you own? And is there a formal operating Agreement?

On Dec 17, 2012 9:05 PM, "Anoop Kansupada" <an...@dapprly.com> wrote:

Shane Robinson Entrepreneur, Army veteran, MBA/MPA joint degree student

December 17th, 2012

what industry is it? diff industries have different revenue multiples for

do you guys have any debt?

did you raise any prior funding that put a value on the company? his buyout
of 3500 is putting a valuation on the company of 7500 which is roughly 1x
revenue, assuming you are split 50/50 on ownership.

i don\'t like payout over one year either. if you both invested a lot of
time and money into this and if you aren\'t getting to retain any equity
stake, whatever you do try to push for lump sum payment and to retain at
least 5%-10% post buy out.

Shane Robinson Entrepreneur, Army veteran, MBA/MPA joint degree student

December 17th, 2012

id also ask yourself what your partner\'s motivations are behind wanting you
out. if you think he\'s got another offer on the table for a greater value
than what he is offering you (which sounds unlikely given the lack of
operational traction), then you could put something in the buyout agreement
stating that if a buyout of the company happens within the next 6 months to
a year AFTER you leave, then you\'d be entitled to proceeds under that
valuation. if he agrees, this ensures you get to share in any upside based
on your current share.

Richard Shank Software Engineer at PICR

December 18th, 2012

The thing that caught my eye was he wants all or nothing from you. Is that
in an established agreement or a new term of the partnership? If its new, I
would think the burden of changing that is on him and he would need to buy
you out.

On Mon, Dec 17, 2012 at 11:20 PM, Alan Peters <morefroma...@gmail.com>wrote:

Vishal Parikh Co-Founder at HealthEquity Labs

December 17th, 2012

First of all, you should really talk to a lawyer about this. Corporate
lawyers specialize in this sort of thing, and often will work with startups
for a reduced or even completely deferred fee (though, coming in at this
stage of the company, it may be a different story).

My experience is with C corps, so I\'m not sure how much this will apply to
an LLC, but here goes: In general as others have said, stock is subject to
a vesting schedule that you would have laid out when you incorporated. Any
unvested stock, the company can buy back (whether you like it or not) at
the lower of the price you paid for it and the "fair market value" of the
stock. However, if the stock is vested (and if you didn\'t have an
agreement, then it is vested), the company cannot force you to sell them
the stock. Typically if an employee leaves early on with a significant
amount of stock, they are bought out. However, in that situation, the
employee basically holds all the cards. As I said he cannot force you to
sell the stock, and he will not be able to raise money if someone outside
the company has a huge share of the company. Of course, it is not in your
interest to refuse to sell because that will prevent the company from
progressing and then your stock will be worthless.

If it was me, I would ask for all $10k back and 0 equity (or maybe 9k and a
small amount of equity). Trying to value the company on its present
revenue doesn\'t make sense for a consumer web company (I assume you\'re
talking about dapprly and not like a dry cleaning business or something).
He could raise a million dollars tomorrow if he meets the right investor.
If he doesn\'t have $10k on hand, then agree to sell him the equity back
over the next year prorated to $10k. If he finds another founder or raises
money or finds a better revenue model, that money can be used to buy you
out. You can (and should) put this in writing, which should make him feel
better. If he doesn\'t get any of those things, well, then this is all moot
isn\'t it?

The most important thing, however, is that both of you part ways as
amicably as possible. The valley is a small place and you don\'t want to
burn any bridges. He could land a partnership at a VC firm and 2 years
from now you may be begging him for an investment (Yes, I am speaking from
experience). Hope that helps. Happy to talk more offline.


On Mon, Dec 17, 2012 at 9:45 PM, Shane Robinson <sprobinson1...@gmail.com>wrote:

Stefan Brunner Cofunder and COO at TheTechMap, Inc

December 18th, 2012

Hi Anoop,

Unless you have some assets built up such as useful software, a brand or the like, why do you not just shut it down and the party who wants to continue, starts a new business? Any office equipment can be sold and you guys split the proceeds.

This is one way to think about it. Another is how much it would cost that partner to restart which might be higher as he has to rebuy things on the market, perhaps new which impacts cash flow. He might be willing to offer more to you than under the first option.

An accountant might tell you that the value of your company are the discounted profits of the future. Of course this is difficult to determine for any startup and might change dramatically as value is added to the business.

I mean, 3 and half grand is better than nothing. Important is just that you get out of the liability. In an LLC situation, landlords often have you sign privately, too, and you may stay liable.

--- Stefan

On Dec 18, 2012, at 12:05 AM, Anoop Kansupada <an...@dapprly.com> wrote:

Diego Fonstad Co-Founder at Imagination Supply Co

December 18th, 2012

Be honest with yourself: you want out, he wants to go forward with this�

The cold reality of startups is that value is created in a step function: value is not a linear relationship to effort and money� but rather created by achieving milestones

Unless you\'ve achieved critical, business transforming milestones, the real value of the venture is yet to be realized and will only be created by those who stay with it.

So unless you think he\'s sandbagging you, walk away and wish him luck (and if you\'re walking away from potential upside, you have every right to demand he release you of any liabilities associated with the venture).

I also don\'t understand the logic of taking $$ over stock. If there\'s something worth holding onto, call your joint investments a convertible note and let someone else value it at a later date or put an automatic conversion at a later date� if you\'re taking money out of a cash strapped business, don\'t expect any stock for the money, just be happy with the money� sweat equity is usually linked to a clear vesting agreement and in the absence of that, it is hard to go back post-facto and claim it there, especially if he wants you out.

My $0.02

From: Alex Neth <a...@liivid.com<mailto:a...@liivid.com>>
Date: Mon, 17 Dec 2012 21:34:35 -0800
To: Anoop Kansupada <an...@dapprly.com<mailto:an...@dapprly.com>>
Cc: "founderdating@googlegroups.com<mailto:founderdating@googlegroups.com>" <founderdating@googlegroups.com<mailto:founderdating@googlegroups.com>>
Subject: Re: [FD Members] LLC breakup

Your partner probably doesn\'t want to deal with you as a shareholder, which is understandable, though it seems it would benefit him to leave you with a token stake so that you are motivated to provide help in the future.

Given that you want out, you don\'t have much leverage and should allow your partner to move forward. If you want equity, you might ask for 5% which even if he is successful may be heavily diluted or worthless, and the amount depends on your tenure and contribution. If you want cash, it doesn\'t sound like there is much value in the business, both with little revenue and having lost its tech founder. Asking for both is of contrary purposes as it is talking money out of a broke company you want a stake in.

As for the cash amount, you are owed nothing. He is buying from you the right to proceed with the business unencumbered by your equity. A payout over time probably unreasonable as you are taking the risk of an investor with none of the upside. He should give you a lump sum or a small chunk of equity.

Or you should just walk away.

My thoughts anyhow.

On Monday, December 17, 2012, Anoop Kansupada wrote:

Craig Green

December 18th, 2012

I\'d take 10% and let him keep the cash.

$3500 is going to be detrimental to ongoing success of the idea. So, you take equity (pick a number, really), and leave.
On the flip side -- 3500 over 12 months is essentially an offer by him to never pay you back.

Cash is the only thing of real value right now, and only really worth while RIGHT now -- the NPV of "A burger for which I will repay you on Thursday" is essentially nil. Equity won\'t kill his potential, while cash will.

On Dec 18, 2012, at 3:13 PM, Seth Kaplan wrote:

Anoop Kansupada Startup Business Development and Partnerships Manager, Operations, Entrepreneur, and Travel Enthusiast

December 18th, 2012

Again, thank you for all the great advice.

The area that makes this more difficult is that he has never worked with a
lawyer. I\'ve been the one who structured everything.

I didn\'t mention that I brought on a new partner that would effectively
multiple the growth of the company by many multiples. He would be an
equity holder who is focusing on all marketing efforts. He has been in
this industry before, but just not worked with us.

What I am going to try and do is come back at him with 9k (based on the
above reason) and an upfront payment (which he has.) Otherwise it would be
a piecemeal buyback over time.

In response to everyone saying 3500 means nil, I agree with most people it
does mean nothing over the long tail of things. But right now, I need
money. I need as much money as I can get. I emailed out before about
having the terrible dev shop, so I have to build up resources because this
year has been my masters of entrepreunership failure. I couldn\'t have
learned more if I tried. But I know I\'ll never make these sorts of
mistakes again.

Anoop Kansupada
Founder & CEO, Dapprly <http://www.dapprly.com/>

Facebook: Dapprly <http://www.facebook.com/dapprly>
Twitter: @Noop212 <http://dapprly.tumblr.com/>
My Skillshare Class: Living Like a rockstar while backpacking around the

Stefan Brunner Cofunder and COO at TheTechMap, Inc

December 18th, 2012

But not for $3k. The attorney will gladly accept this amount just to shake your hand.

Important is to be released of all liabilities, specifically in third party contracts. (Be careful, your partner may not be able to do this, just the creditor with a changed contract.) Unless you have the feeling that your partner wants to screw you and there is value you do not realize, I would take whatever he offers you and walk.

Book the rest under lessons learned. Going ahead, you will loose more money on other projects, and hopefully win a lot more back. And yeah - never worth burning any bridges.

--- Stefan

On Dec 18, 2012, at 1:17 AM, Vishal Parikh <vis...@trypico.com> wrote: