20% of a start-up (at year 1) is worth much less than 20% of it 5 years later. If the company had their paperwork in order, the OP should have maybe 5%, due to vesting and dilution. Or the original investor should have bought him out for a few thousand, as he was walking out the door (but he didn't did he?). Imagine if you had worked on building your company for 6 years, only to have an early employee (who presumably quit in a huff) come back and demand 20% - which they were meant to actually work for, and asserted IP rights on everything they had worked on.
That said, the company is also behaving very badly, what with the extortion thing. They would be better off making a reasonable offer, and hitting themselves on the head for screwing up their ownership / IP assignment paperwork.
The extortion accusation is just legal hardball, I assume. Remember that the OP hit first with the cease and desist along with a demand for $12M. So they hit back (though perhaps overstepped what is legal themselves, I don't know the law). Certainly they don't get brownie points for niceness, but they're playing on the same field as the OP.
> If the company had their paperwork in order, the OP should have maybe 5%
Vesting usually happens over 4 years, so quitting after 1 year means 20%/4 = 5%. After accounting for dilution due to investors, other stock grants and employees grants, I doubt it can be bigger than 1-2%.
All of this assumes, of course, that there was a contract or signed, written agreement in place, with vesting as an explicitly stated term. What "usually" happens is, sadly, irrelevant unless it was stated in a contract in this case.
There are moral arguments to be made here, and there are standards and practices that can be applied for and against those moral arguments. But it all comes down to what was, or was not, signed on paper.
Founders should have written agreements in place, or else risk some very expensive lessons in due diligence.
What portion of what is given to who is likely up to a judge and lawyers to decide at this point. Unlike HN, they'll have most or all of the available facts, which is likely to aid them in coming to some sort of agreement that's fairer than 0, which doesn't seem a reasonable amount either.
That said, the company is also behaving very badly, what with the extortion thing. They would be better off making a reasonable offer, and hitting themselves on the head for screwing up their ownership / IP assignment paperwork.