From a purely legal perspective, this is incorrect.
He's on a vesting schedule, and currently has 0% (his cofounder also has 0% currently, assuming they started at the sam time). They both entered this agreement to only get ~40% if they work there for 4 years (and at that point, they'll likely have to revest).
Vesting schedules were created for this exact situation.
I mean, maybe. But that is not a reason to follow your advice and just "give up".
If the choice is between "giving up" or getting as much equity as possible, for example by stalling for a month until he vests, but also causing those other problems that you mentioned, then the choice should be clear.
Stall, and get the larger amount of equity. He's got nothing to lose, right? If you have nothing to lose, then there is no reason to not take as much as you can.
I don't think it is some costly effort to simply stall for a month, and refuse any deal. He doesn't need a lawyer or anything. He can simply refuse a deal, and continue "negotiating" until he vests and gets his guaranteed 10%.
This is a partner we all agree is ruthless enough to terminate a productive partner prior to a cliff, but somehow either lacks enough clue or holds on to just enough ruth not to be able to simply fire the partner before the cliff elapses. They probably don't have to accept a deal in order to be terminated.
Ok, but he already has nothing to lose, right? I had the choice between accepting a pittance, or forcing the other person to take actions that would make them possibly legally liable, then I'd choose to force the other guy to take on the legal liability.
Because if they were to fire him, then they'd basically have to fire them like a week or 2 before his vesting cliff, with an establish history of an attempted negotiation.
Firing someone a week before they vest, in order to claw back the shares, because the other person refused your offer, is likely illegal, and not "good faith".
If he is already in a situation where he has nothing to lose, you may as well force the other person to engage in the possibly illegal action against you.
Or, at the very least, get them to make the illegal threat in a way that you can document it.
Even the bluff, or threat of legal action, against a questionable practice, is a huge problem for a company, that most founders do not want to have to deal with. And he doesn't have anything to lose anyway...
That doesn't mean you have to sue them right now. Even the threat of mentioning that this might be illegal, and that you are at least considering legal action, could force the other person to give in, and not do the possibly illegal thing.
Or even beyond that, if there is a documented evidence of these illegal actions, what you can do is simply not sue now, and only sue later on, if the company is actually worth something in the future, and it makes sense to do so. All upside, and no downside. Don't pay the court costs, unless there is something to gain.
* The 3% he's been offered, which while paltry compared to the 40% he had if things had gone better is still not a small amount of equity to hold in a successful company.
* Many thousands of dollars in legal fees.
* Many months of effort and stress.
People on message boards have weird ideas of what does and doesn't constitute lawful termination. Hiring in the US (I'm assuming this is the US, because there was a $100k investor) is at-will, most especially so in companies documented carefully enough to have 4/1 vesting. There is likely no such thing as a "bad faith" termination; there is only termination authorized by contracts establishing who manages the company, and termination that isn't.
Again, by all means, pay a small amount of money to get a competent lawyer to verify that's the case. Everybody on this thread will likely say "go ahead and fight" if it turns out this person can't be fired, so you can just stick a pin in that thought and we can continue to discuss the more realistic scenario.
Threatening to sue: also often a bad idea! If it's not credible, and everyone knows you don't have the resources to litigate, and that even if you did it would be economically irrational to do so, then the threat does the opposite of gain you leverage; meanwhile, threats can trigger other legal problems for you. Advice I'm pretty confident in giving: don't trust a message board post that tells you to threaten legal action.
Yeah. Probably neither the 3% nor the 10% is worth anything--especially if this turns into some nasty litigation. And, as you say, in the eventuality that this company actually has a successful exit, 3% is less than 10% but it could still be a decent sum of money.
> There is likely no such thing as a "bad faith" termination
Sorry but this is simply not true regarding vesting specifically. There are laws that prevent someone from being fired 1 day before vesting for the purpose of clawback.
EX:
This source is about retirement vesting. Not exactly the same, but close.
This source says the following "assuming this termination is made for good-faith reasons, such as business downsizing or poor work performance.", implying that if it is not for good faith reasons, and just for getting back the shares, that this is illegal.
Also from this source: " In general, to avoid costly lawsuits, companies consider future vesting dates when terminating employees. They may delay the termination date, extend it by using "paid time off" days, or accelerate the upcoming vesting to avoid appearing to terminate an employee merely to forfeit soon-to-be vested shares."
So companies specifically try to avoid this situation, because they know it is illegal.
"These cases provide very powerful ammunition to employees who are either negotiating for additional severance or engaged in litigation with their employer.
First, Kelly and Newberger provide an employee who was wrongfully terminated with a legal basis to become fully vested in any options that were previously granted."
And here are a bunch of lawyers agreeing with me that this is illegal:
"AT will is one thing, this is quite another. This is an obvious scam by the employer to avoid having your stock vest, which is not only not fair, its illegal in my view"
"In Mass., if an employer terminates an employee for the purpose of preventing a right to compensation to vest, the employee has a claim for the compensation. "
"There are certain kinds of showings that you need to make in order to be able to collect in this circumstance. The short answer is that you may very well be entitled to the stock."
Thats why I am saying that this threat needs to be documented. It is quite clear, that there are many cases where terminating someone, for the purpose of getting back shares or retirement or bonuses, is very illegal.
Some of these cases are based on unlawful terminations --- for instance, Kelly was pregnant when she was fired. If this person is a member of a protected class or has other reasons to believe that they've been fired for a statutorily invalid reason, by all means, pursue that.
Here's a Santa Clara Law Review article (take that for whatever it's worth) on almost exactly this scenario, in the context of Zynga, citing Newberger, and suggesting that "company determines employee is not worth the equity they were originally allocated" is a valid reason to terminate an at-will employee (even if it is, as I'm sure we all agree, bad business):
But look, I'm not saying that this person shouldn't talk to a lawyer; in fact, I'm saying the opposite. Find out if the termination is valid. But be clear-eyed: when you get a straightforward answer to whether you can be terminated, and it confirms that the termination is valid, stop there, and don't spend a fortune in money and time fighting a foregone conclusion.
He's on a vesting schedule, and currently has 0% (his cofounder also has 0% currently, assuming they started at the sam time). They both entered this agreement to only get ~40% if they work there for 4 years (and at that point, they'll likely have to revest).
Vesting schedules were created for this exact situation.