I should have educated myself about the legal documents

I never paid much attention to the legal work that was done when we formed the company. There was so much detail it was overwhelming. I assumed the lawyer knew what she was doing so I just signed things.

The first problem arose when the Board couldn’t agree on the terms of an employment contact for our new CFO. Eventually we had to vote and it was two in favor and two against. The issue was the options package.  It turned out that we needed a super majority to appoint a director and distribute options.

We only had four directors so there was no way to break the tie. We finally hired an arbitrator. We appointed the CFO, but two Director harbored deep resentment.

The next problem was when our senior sales manager resigned. The Directors did not want him to keep his options, but the incentive scheme granted them to him after 18 months. The Directors wanted to change the scheme but couldn’t make it retrospective.

The next problem was when we needed 95% of all shareholders to approve a new investment. Three small shareholders responsible for 5.2% of the shares refused. We had to buy them out at a premium.

It seemed like an advisor wanted to take over the business

Andrew has always been my advisor and friend. He had a long career in business and retired three years ago. He seemed to enjoy helping us and always had good advice. He was on the board of several companies and also travelled a lot. But, one day he said he would like to be more involved in the business. He had some free time and wanted to help us.

Andrew started coming into the office three days a week. He spent a lot of time to talking to everyone and began to get involved in day-to-day decision-making. He wanted a desk in the office. He had business cards printed showing him as an Advisor to our business.

One day Andrew sat down and said he wanted to join the Board. What he said that day and the way that he said it scared me. He seemed to me he wanted to run the business, to take it over.

I talked to other people in the team and they said Andrew was questioning my ability to run the business. He was inserting himself in the day-to-day operations. Everyone said they felt uncomfortable around him. Some said he was just bored and wanted to get back into the action. Rather that offering Andrew a Board seat, I asked him not to come into the company any more. We appreciated his contribution but we were growing up. Andrew was shocked and very angry. He walked out the door and I never saw him again.

I wish we hadn't issued voting shares to all our employees

We issued share options to everyone who worked for us when the company was 1 year old. We did the same in years two and three. We had over 150 individual shareholders who lived all over the world. We had to make sure we kept track of them because we needed them to vote on company matters and approve the annual report. This was time consuming and we had already lost track of 12 people who held 7% of the shares.

We were approached by a large institutional investor who wanted to buy a majority share of the company. To approve this investment, we needed 95% acceptance from our shareholders. The investor wants to buy out all small shareholders (under 1%).

It took us three months and we had to hire investigators to locate everyone. There was nearly 2% we never found so it was a close vote to approve the investment.

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?

My co-founder was arrested for drunk driving for the fourth time. What can I do?

This was the fourth time my co-founder was arrested for drunk driving. This time his license was taken away and his picture was in the local paper. He was responsible for sales and this meant he did a lot of entertaining and tended to drink too much. We discussed this many times and each time he promised to stop. I am now at the stage where I don’t trust him any more.

There are only two of us on the Board, but I had our lawyer write him a letter saying any repetition of this behavior would result in instant dismissal and forfeiture of all his stock options and incentives. We barely talk to each other now but what else could I have done?

Should I wait to make my advisory board until I can attract more accomplished people?

I wanted to appoint an Advisory Board. I thought it would be great to make introductions and provide us with advice. I thought one of my professors would be helpful but I didn’t know who else to ask. I talked with my brother who suggested that I write down the type of advice I needed and then find the right people. I followed his advice and thought I needed at least four people- finance, strategy, retail/wholesale, and government relations.

We are a startup and when I approached well known people in each area, they said they didn’t have enough time but they liked the idea and I could contact them in the future to keep them updated. I took this as code for we aren’t big or exciting enough for now.

I followed up with others who said they would be happy to help but they had limited contacts and access. I realized if I appointed them now, there wouldn’t be room for the people I really wanted in the future. Should I delay appointing an Advisory Board?

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.

Our friend's father took advantage of us

Our board was made up of friends and the two co-founders. We need to recruit some others people before we raised money and wanted someone with fundraising experience.

We interviewed several people and couldn’t find the right person. Then a friend introduced us to his father, a retired banker looking for something interesting to do. We all liked him and offered him the position and some share options. He attended the first board meeting and had some good ideas. He used his network to find us three potential investors. They all seemed nice knew one another. One had a teach background, which would be good for us.

Development work on our app went quickly and there was great market feedback. We needed more money to continue development. Our four new Directors said they would match any institutional investor.

Two days later they introduced us to Dragon Investments. After a lot of hassle they agreed to buy 40% of the company at a $10M valuation. This seemed good since we were only two years old. Once the investment was made, Dragon and the four directors owned 80% of the company.

At the first board meeting they said they wanted a new CEO; I was voted off the board and fired. They paid me six months salary and I kept my options. At the next meeting they fired two more from the original team. They announced that Sunrise Technologies offered to buy the company based on a $12M valuation. The two companies merged.

Six months later we found out that our friend’s father and two of the Directors were also directors of Sunrise. We also learned the merged companies were sold to a third party for $35M.


My Board called me stupid and weak

I am the founder, CEO, and majority shareholder of my business. At 18 months, the business was growing and all of us were getting a salary of some sort. We worked well together, but we had major decisions to make.

The first decision was about hiring –w e needed more people. I wanted to wait, but others said we need people now and should take the risk of the added cost. I knew they were wrong but didn’t have the courage to stand up to them.

The second was moving offices. We didn’t have enough room, but the office was okay and rent was low. The others wanted to move. Again, I knew they were wrong, but I caved in. I couldn’t bring myself to exert my authority and say, “I’m the boss, this is my company, this is what we’re doing.”

Within a few months, our revenue growth slowed and we were operating at a loss. We had to let our new hire go, which cost us more money. Our Board was angry with me and our prime investor called me stupid and weak.