I still don't have enough equity in my startup. Can we renegotiate again?

Assuming you and your cofounder CEO agree, you can still renegotiate your equity split, even if years pass.

How did we ever get here?

I told you the story of our first equity renegotiation, about a year into our confounding. You'll recall that after we reallocated the equity, we were 40/60.

What happened next? We demonstrated that we collectively have the worst timing ever.

We did raise a couple of small pressed rounds, got the vendors in place that we needed to launch our product, built out our UI/UX and our backend. We had one final (vital) contract we needed to launch. We found a corporate partner, and the last step in their due diligence was an onsite meeting with us. We were ready! We were prepared! They had plane tickets!

The VC markets were frothy. We planned to raise on the momentum of this final contract and our launch. It was a good plan.

The date that onsite meeting was scheduled was March 12, 2020.

It didn't happen. COVID sucks.

Stuck in the doldrums

The VC market immediately became...not frothy. There was no momentum to be had. None at all.

We limped through that summer, with several employees who we desperately wanted to keep and a declining bank account.

I took on more and more as my cofounder scratched the bottom of every barrel. I was now leading (and doing) product, engineering, design, regulatory, customer success as we pre-signed customers, and some of the marketing.

Finally, he found an investor that summer who would give us $1M on not great terms. They weren't unfair, given the market, but they weren't great either. This was not the proper seed round we had been planning, but it did let us pay our people and get to market.

A changed trajectory

The difference between another $1M in pressed and a $4-6M seed is a lot, especially when it wasn't clear how long the COVID market block on VC investment would continue. (Answer: far, far longer than we thought).

A $1M round meant continuing to get paid far too little (we'd upgraded ourselves from minimum wage, but we were still well below six figures). It meant doing a lot of grunt work that we could have outsourced to professionals, or paid for expensive software to do, or hired team members thrilled to do the work (and there is SO MUCH grunt work at an early stage startup. The bookkeeping alone makes me want to stab my eyeballs.).

So, what happened?

I am pretty sure my cofounder thought I might leave. It had become increasingly clear that with my operational background, I had a lot of relevant experience actually getting things built through a team. His preference was to be more visionary and less brass tacks. Me leaving would have meant a lot of brass tacks for him (see prior comment on grunt work...).

So, he called me up one hot August day. Offered to resplit the equity more evenly, because the velocity of the business was different from what we both expected. He was looking at us more as business partners now. That's how I ended up with 49%.

The mechanism had to be different this time. Because we had raised some money and built our product, the fair market value from our 409A was a lot higher. Any shares transferred to me were taxable as ordinary income at the 409A valuation. We'd been paying ourselves peanuts for so long - that wasn't going to work.

Because all of our investors were still on SAFEs, my cofounder canceled enough of his shares to bring him to 51%. These went back to the treasury as authorized but not issued shares, with no tax impact to me. It did concentrate the ownership of our employees and advisors a small amount, but because their grants were so small relative to ours, it really didn't matter.

We did not have a board beyond my cofounder at this point, so there was no agreement to gather. He did tell our most recent investor, who really didn't care. And our lawyer didn't blink. He'd seen this a million times before.

So, the answer is yes, you can resplit equity, even relatively late in the startup game. We actually ended up reallocating yet again, but that's a story for another post.

I'm not your lawyer, your therapist, your advisor, or your accountant. We're just internet friends, and these are just my experiences and personal opinions. Consult professionals for advice before you make any sudden moves in your startup.

You will see the occasional affiliate link. I do earn a commission if you buy the products I recommend. I appreciate you buying through the links if you're going to buy. This is a labor of love for my fellow cofounders, and I do love receiving a few coins to pay hosting costs if you like my work.