How Can You Renegotiate Founder Equity?

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“I want to cut the equity of my co-founder from 45 percent to twenty percent,” “Oren” said to me. “He’s not performing very well. What do you think?”

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“I don’t think that’s going to go over very well,” I said. “You certainly can try, but I don’t think it’s going to work.”

“Why don’t you think it will work?” Oren asked me.

“Easy. No one likes having something taken away. It’s just human nature.”

Right or wrong. Once you’ve made your equity decisions, they are very hard to reverse.


I continued with my comments. “People will fight to keep what they think is theirs, whether they’ve earned it or not.”

“Well, I’m going to try it,” Oren said to me.

Oren called me back a few days later. “I tried to renegotiate with my co-founder, and he was having none of it. You were right,” he said.

“I’m not surprised. It’s just so tough to do. Okay, let me ask you a tough question,” I said.


I asked Oren, “Do you believe your co-founder is valuable to the company? In other words, knowing what you know now, would you hire him again?”


The way most equity redistributions happen is with one co-founder leaving the startup.


“No, I wouldn’t (work with the co-founder again),” Oren said.

“Then, you know what you need to do,” I said. “You need to fire your co-founder.”

“I was hoping to find a way to keep him around,” Oren said.

“I know, but that never works. How much equity will he own if you terminate his employment?”

“A little under nine percent,” Oren said. “I was hoping to reduce that down and give him cash and some equity.”


You can negotiate with your co-founders about a separation package.


“You can do that,” I said. “That nine percent number might be too high for investors to swallow.”

“I thought so,” Oren said. “My investors are saying that’s too much dead equity to have.”

“They’re right,” I said. “That’s why a combination of cash and equity will work well. Here are a couple tips for you. First, whatever cash you give him can’t put the company in financial danger.

“That’s wrong for the company and your board will not likely approve it.”

Oren nodded his head. “What’s the second piece of advice.”

“Use your lawyer to do the negotiating instead of you doing it. That will remove the emotion from the discussion,” I said.

“Sounds good,” Oren said. “Any other tips?”


You can negotiate financial payments to be paid out over time.


“Yeah,” I said. “Pay off your co-founder in tranches. And make the payments contingent on him being a model citizen. Your lawyer will no how to write that in legalese.”

Two weeks later during our next conversation, Oren told me that his co-founder agreed to a separation agreement. “Three percent equity and $100,000 paid off over two years,” Oren said.

“That’s great,” I said. “Now you can focus on running your company.”


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