Hello,

A friend of mine started a mobile app startup in 2014 and I was the first investor in september 2016 (love money). They have been part of an incubator (him and his co-founder) since the beginning where they get free coaching. When I invested, my "friend" made me do all the paper work for the contract and I chose a Simple Agreement for Future Equity (S.A.F.E.) from Y-combinator's website (it's like a convertible note).

This "friend" can no longer be part of my life as he is controlling and condescending and it's making me anxious and depressed.

They have been cash-flow positive since year 2 and are now expending from my current city in Canada to a city in the U.S. where they already managed to find a partner. I think that year 4+ is when things will start to get very interesting.

They never do board meetings so if I end the friendship I'm afraid that I'll be cutting myself from the startup as the only updates I get is when I chill with my "friend". I know that ending this relationship is what is best for me but I don't want to sabotage my investment. Any thoughts?

I own the original copy of our SAFE agreement, which turns my investment into equity as soon as they get funding from a real investor, but I'm not sure if that's enough to protect myself if things gets nasty (Who can I talk to for that?).

Are they any protective measure I should take? Should I talk to a lawyer to see if my contract is credible enough?

Sorry for the long post, thanks a lot for reading.

EDIT: Link to my contract: http://www.ycombinator.com/documents/
I have the one with discount and cap.

Its interesting, you and I must have different personalities. If I was uncertain enough about the situation to post about it I would probably just deal with the social issues.

I realize that may not be very helpful advice. Perhaps you could just minimize your social interactions then sell out once there is a valuation?

It doesn't feel like there is a clear solution as the only strategic action I could see you taking would lead to questions from your "friend."

What happens if there is never an investment? They are just successful by reinvesting profits? Does your contract account for this scenario?

Sorry, I don't feel like reading the contract now.

Deal with it. There is really almost nothing you can do. (Well you can sue the company, try to bleed it into oblivion so you lose your entire investment.)

lol @ choosing a SAFE btw. That was a horrific decision.

@ rand

I see.

I'm afraid that the contract does not account for the situation you mentioned. This sucks.

Only equity, liquidity, dissolution and termination events are mentioned in the contract.

@ Mihkel05

Why? I have a valuation cap that is pretty low, isn't that good?

For the suing part, that would be when exactly? Let say my ''friend'' stops comunicating with me so I don't have updates on my investment. Can I sue in this scenario?

Assuming they ever raise or exit.

Basically you have no way to force them to raise or exit. Just talk to the guy like a normal person and ask him for e-mails every quarter. They shouldn't have board meetings because they have no board (wtf?).

If **** starts popping in year 4, they'll raise a growth round and you'll have a major VC you can sell to in a secondary (maybe) or who'll be vigorously defending your rights if you hold the same shares they do.

In the case rand mentioned, you can just simply ask them to cash you out for x amount. Or you can sue them in the future. I assume you have some minority shareholder rights and it'd be hard for them to get away with a vast sum in personal salaries/expenses/etc. Not to mention if they're making infinite, paying you off is pretty simple.

Did you talk to a lawyer before btw? Is anyone else on the SAFE agreement? (If so, w/e don't even sweat it.)

Ok. Thanks for the info.

No I have not talked to a lawyer before and I feel vulnerable because of that.

Yes the other co-founder is on the SAFE as well.

Why did you sign a SAFE if you're a cofounder?

Oh no I meant both co-founders signed my SAFE.

I meant are there any other investors with SAFE agreements? If I'm understanding correctly, you're the only investor?

Oh well there's another friend that invested with the same SAFE as mine and he works for the company from time to time. We are the only two who ever invested in this company, both with the same contract that I proposed for me in the first place.

Sounds like the beginning of American Greed that i was watching the other day, GL.

Lawyer lawyer lawyer

+1000

what's the defintion of a "real investor"? does a father or brother-in-law count?

i understand you may have just used the "real investor" phrase to simplify here.

so in theory if the business is really successful and highly scalable right off they might not need any more capital. just reinvest profits and scrimp on salary??

one worry i'd have is a secret agreement with a relative. company never raises money but your friend doesn't get paid by company. gets paid by relative who quietly takes some the friend's equity........

a tangential thought...

i think professors at ubc (vancouver) and maybe stanford did a paper that said unicorns were overvalued because of all the complex instruments they've sold. apparently some have 10 different classes of equity with different upside/downside participation schemes.

In my experience if someone wants to screw you, this is a situation where it is very easy to do that. Your shares are completely illiquid and basically infinitely dilutable (even if the contract is very strong and he owns the same share class as you whats to stop him from transferring assets or creating a shell company or millions of other ways he can marginalize your stake? (this is why board seats are more important then strength of contracts). Yes legally almost all of these are indefensible but in practice it's very hard to protect your equity and a losing proposition for you). You have no leverage except over the principle loan and any agreed upon interest for like 99% of these contracts. It's best to stay on good terms with him or get him/an investor to buy you out

Valuations aren't the value of the common stock. They are for a portion of the company at the specific terms attached to that tranche. It is like saying a payday loan is "overpriced" compared to a home loan. Sounds totally fumb tbh.

OP doesn't own shares btw. Having some idea of what he actually owns would help people offering "advice". Unsure what a lawyer would help with. He doesn't own shares. There is no reason to file suit. He is just qq because he won't get updates (which make no sense for him to receive). Unsure the whole issue with "working" there as well. Was he volunteering? On the payroll?

Basically don't choose and sign legal documents without any idea wtf they are.

I'm going to ask him if he wants to buy my shares and that I really need money at the moment. What if he says no?

Second of all, am I entitled to more money that my investment due to inflation? Thanks again.

I would just say I have another opportunity that requires more capital then I currently have liquid would you be willing to make an offer to buy out my agreement with you. (If he presses say you have a NDA and can't/don't really want to discuss it but will tell him about it after it goes through) If his company is doing well and he has no intentions of cheating you he will probably be surprised but say yes and you negotiate over price (I'd expect significantly more then my initial investment unless there is something negative about the company you are omitting.... 1/10 of startups like these succeed.... your expected return on the ones that do needs to be at least 10x or you shouldn't get involved in the industry). He should offer the price since he has better knowledge of the value of your equity... if it's low I'd ask is there something wrong with the company I don't know about but I'm more confrontational and blunt then most. If he says no not interested or it's not a good time then red flag get a lawyer and expect a bad situation. Why would he value his company so little to not buy you out unless there's something going on you don't know about (the companies in bad shape or he's planning on cheating you). If he says let's work out an agreement but we need to structure it so he can buy you out over a period of time I'd expect to be able to work something out... he's just not liquid at the moment.

You are not entitled to any more under a safe but convertible notes you are. Typically even though you are not entitled to more they are worth more to both parties so the amount they are sold for is significantly more (unless something wrong with the company or it was a very short time frame)

Thanks for the tips smoothcriminal99.

So I asked and he said that if I was serious we could probably work something out. I said I had another opportunity and then asked when will he get back to me on that, and he starting asking what's the hurry and I did not answer. What could I reply to that in order that he takes me more seriously, without sabotaging my negotiating powers?

Should I just bypass him and talk to the other co-founder? However that might make my ''controlling friend'' more angry.

Idk anything so I'm just throwing a thought out.

When you originally invested, what was the company 'worth'? How much did you contribute? What did $ get you?

Now (today): what is the company 'worth'?

If you went to whoever and asked to somehow be bought out of all contract, what $ figure is offered? What $ figure would you accept?

If the friendship is OVER, is it as straightforward as calculating whatever you own and getting out at a $ figure close to what you have calculated?

Obviously, them possibly being successful in 2 years time should be built into calculations but wasn't them being successful (at some point) built into the original valuation when the contracts were originally drawn up?

What is the hurry?

I appreciate you want him out your life but the process has to progress accordingly.

(Without trying to be an a$$hole) Please be patient!

In relation to your post here and my previous post, when it comes to negotiating a) what part are you trying to negotiate on? b) what info do you have that gives you clarity on what you are thinking about negotiating on? You were only given very generalised details about the company in passing unless I misinterpreted.

haha he said what I probably would have said. More then likely this will not be the last question/pry to get information from you. You got two good options in my opinion one being to keep your answers vague and make up something. I would personally say "I know it's a lot to ask but can you do me a favor and help me get this done quickly... The other party in the business opportunity I am pursing is nervous and I'm worried this might slip away if I don't act quickly... If I give him a reasonable timetable and follow through on it I think it will suffice."

I think the better option is to be stretch the truth a bit and blame a reason to exit irrelevant from him like "I didn't think it was going to happen but this investment is causing me a lot of stress and I'd like to be done with it so that I don't have to worry about it anymore. It's having negative impact on other aspects of my life that I care more about then money. I don't know how you're able to run a company without it getting to you but it is not for me." Even though he is acting poorly he is probably still a friend and sees himself that way so will try to help you out. I'd imagine it's relatable to him as well so he will be more inclined to accept it. This approach will probably end all other questioning as well. More then likely he already knows somethings up by your demeanor as stuff like this is hard to hide so this would be the most innocuous reason for you to want to exit. Also it pads his ego that he can handle something you couldn't which people like.

Both of those are terrible. Don't begin negotiations showing desperation.