The board member wanted us to buy machines from his company

We need a new machine for the factory. It costs more than $250K. We looked at all the alternatives and decided on the Northeastern-10. As the expenditure was over $200K, it needed Board approval. One member of the Board was associated with a local company that sold a competitor to Northeastern. He asked if we had looked at his machine and we said we had.

He insisted that we buy his company’s machine even though it wasn’t the best for what we want to do. Our shareholder agreement said we needed 80% approval for expenditures of this level. He blocked all approvals.

It takes a unanimous vote of the Board to change the shareholders agreement.

The investors' board members prevented us from taking outside investment then gave a lowball offer

The first institutional investors wanted to have three Board seats. We decided to allow for seven seats but only filled five at the start. The Board meets every two months and deals with all the routine issues.

Business was growing and we could see from the cash forecasts that we would need more money sometime next year. We wanted to start raising money immediately so we wouldn’t run out of money. The Board members from the investors objected. I thought about it as a tactic that would make us more vulnerable to a lowball offer. The less cash we have the less leverage we have.

A friend said he was interested in investing in us. We met, agreed on terms, and then started the due diligence. Everything went well and the offer was reasonable.

We agreed on a term sheet and all that we needed was Board approval. The investors’ Board members voted no even though we only have six months cash left and this was the right thing to do for the company. We tried to appoint more Board members and the investors’ members rejected that too.

Two months before we ran out of money, the investor offered a loan that would convert into equity 35% below the offer we had from my friend.

Is this legal?

As my public profile grew, I had less responsibility running the business

Our business was featured in a major newspaper and then our products won a international award for the best educational platform. We were all proud of our achievements. Speaking invitations started to come in and I thought this would be great for publicity.

The next thing I knew, I was travelling four months a year to speak at conferences and universities. I really enjoyed all the new people I was meeting and I thought I was doing a lot of good for the business. The more I travelled, the easier it was to raise money. We recruited over 40 new people and won two major government contracts. When I was home, I still acted as the CEO, but I had more and more trouble inserting myself back into the business. So much was happening when I was away that it took a lot of time to catch up. There were new people in the company I hadn’t met and new customers I didn’t know.

The COO was now running the company and I was distant from the day to-day operations. At one of the quarterly Board Meetings I was asked to step down as CEO and become Chairman. I don’t know how I feel about this but I wish it had been my choice to make.

The CEO was setting unrealistic expectation with the board and investors

No matter how much time and effort we put into controlling our project costs everything always cost more and takes longer than we expect. We’re not dumb – we just can’t get it right.

We tried to figure out what was going on. After a lot of discussion, we focused on what the CEO expected. It emerged that the CEO made promises to the board and investors that he knew he couldn’t keep. He then tried to impose these targets on us and the projects. He just thought it was easier to manage the board this way.

We told him this wasn’t the way we wanted work. We needed honesty and transparency and it was better to face reality than to create expectations that we knew were unrealistic from the start. He and we couldn’t rely on this type of behavior as the business grew.