How I left my own startup
It is always tough to change course, you create inertia when embarking on any endeavor: starting a PhD dissertation, putting coins on a bet in poker, or, well, starting a company. Even though you feel a strong pull towards continuing on your path, sometimes you have to stop everything and venture into a new direction into unknown territory.
In this article, I want to share how I left the company I co-founded in terms of how the decision was made, what was done to ensure a smooth transition, and the legalities necessary for the company to function in the years to come, despite my leave. Luckily, the board setup was rather simple at the time of my leaving: We were only two co-founders and had one investor involved.
Decision Making
I have yet to meet a person who started a company who hasn’t at least thought about dropping everything. I think it’s important not to ignore these thoughts even if they feel scary or wrong to have. The essential action is to find out if the urges to stop are arising because you need to push through a temporarily bad situation or because you are fundamentally working on the wrong thing (wrong for you, not for anyone else). What helped me a lot to find out what was true for my case was the million-dollar question phrased in this article: “How would you feel about your business if you closed a $1,000,000 deal or investment tomorrow? How would you be feeling about the purpose of business then?” — if your answer doesn’t contain positive excitement, I would urge you to re-think what you are doing.
In my case, I realized I wouldn’t be excited no matter what financial or other success we would achieve with our company and that the main reason for me to stay was not to let our team and clients down. I think this works for a while, but in the long-term, it was clear I had to stop and needed a serious time-out to rethink my next steps.
To reflect further on this decision, I employed the regret minimization framework and envisioned how I would feel about the decision to have left in the coming months and years. Feelings of excitement and relief were predominant in these visions, which made the decision quite obvious at the end.
Leaving Process
When I made the decision to leave, I first thought about my communication with my co-founder and what the framework of my leave would be. I had to figure out:
- What I would have to achieve until I can leave, how the responsibilities are taken care of
- How we would communicate my leave and when: To our investor, the team, and customers
- What to do with my shares/ownership of the company
I prepared some thoughts on these points and decided to share my decision with my co-founder right away in our next weekly call. After a first understandable shock and going further into my reasons to leave, I wanted to make sure I understand his motivations to move on. It became evident that he didn’t see himself stopping and shutting the company down, so we moved on to crafting a concrete plan on how to make sure the company would continue to thrive without my involvement.
First, we decided on certain time points when we would reflect on the situation and when I would hand in my official notice. We decided on a couple of milestones to be reached before I would leave the company such as finalizing projects and hiring a replacement for some aspects of the job — for others, we would ask people internally if they would like to step up in their roles.
Second, we talked about our communication strategy and timelines. We found it to be important to always have a clear plan forward when presenting my decision to leave. We first crafted a presentation for our investor for the next board meeting, decided to communicate my leave 4 months later to the team when the financial impact should be clear, and talk to clients towards the end of my tenure when the responsibility migrations are put into effect.
Lastly, we talked about the structurally most complicated matter: my ownership in the company. It was very clear to both my co-founder and me that it was necessary for me to let go of my shares, as otherwise, the company wouldn’t be investable anymore with such a large shareholder not being in any operational role.
We agreed on the following targets:
- The company would buy some shares to be distributed to future key employees
- My co-founder would get majority control to ensure some “dilution leeway” for future financing rounds
- The investor would buy most of my shares at an agreed selling price
- I would retain some non-voting shares
The solution to meet these targets turned out to be much more complex than I imagined and is described in the following chapter. Keep in mind that our company was located in Switzerland and some aspects might be highly country-specific.
Share Sale & Restructuring
Originally we thought we could just have the company buy back some shares and sell the rest of the shares at different prices to my co-founder and investor. As with most things legal, of course, this isn’t so simple, because any price difference in a share sale would be treated as “hidden profit distribution” and would lead to income taxes rendering my co-founder basically broke.
We, therefore, had to come up with a different solution, which turned out to involve the following steps:
- I sell the maximum amount (10% of the company shareholding) of my shares back to the company. This requires so-called “free reserves” and needs to be checked against the financials of the company
- I convert the maximum possible shares into “participation rights”, which are shares without voting rights. In Switzerland, this is easily possible (reference) but 100'000 CHF nominal share capital has to remain
- I sell a combination of shares and participation rights to the investor
- A capital increase is executed where “employee shares” are created that my co-founder can buy at a lower price to keep control of the company
In our setup, it was relatively easy to agree on the outcome, but finding these intermediate steps was the result of many hours of discussions. The legal work to execute these steps included:
Tax ruling: To make sure this would indeed not create big tax burdens, we had to file a so-called “tax ruling” that gives proper reasoning for the various price differences in the different transactions. This only worked though because my co-founder would get shares in different transactions than our investor.
Creation of participation rights: A change in the articles of association to allow for the creation and conversion of participation rights. Public deeds and circular resolutions to agree on this change. Also, amendments to the shareholder agreement were necessary.
Capital increase: The creation of shares for my co-founder involved the usual capital increase procedure, such as commercial registry application and board documents.
Share sale: The actual sale of my shares was quite trivial as it’s just the usual share purchase agreement as well as updated share ledgers and subscription waivers.
Closing
It is always challenging to go against perceived expectations and following one’s intuition in the face of letting people down.
They were willing of letting go of who they think they should be, in order to be who they were — Brené Brown
During this process, I decided to be as open, vulnerable, and honest as possible and was awestruck by the understanding and compassion of the board, our employees, and customers. In particular, I want to thank my co-founder Oskari Vinko for keeping a cool head and focusing on the best possible outcome for everyone involved.
I also want to encourage everyone not to be afraid to be vulnerable during a time of tough decisions; you might be surprised by people’s reactions!
Personally, I decided to start a “sabbatical” (fancy for volitional unemployment) and take proper time for personal projects and planning my next steps. I will also write some articles about my experience managing a small software start-up that I will share in the coming days and weeks.
