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.

The landlord wanted to increase the rent due to improvements we made to the property

The owner of the warehouse was not a very nice person but the rent and location were right. Six months after we moved in, we asked about the repairs he was supposed to carry out according to the lease. He told us he wasn’t going to make the repairs. He said we’d have to pay for any improvements we wanted. I didn’t understand how he could do this when these were included in the lease and there was certain work he had agreed to do before we moved in and these were yet to be done.

When I took this to our lawyer, he said it could take up to a year and would cost more to take legal action than to fix things. Even then the outcome wasn’t certain.

We had to make some repairs in order to use the loading bay. We got the doors and broken windows fixed. At the end of the year, the landlord came and said he wanted to raise the rent next year even though no rent increase was due until the following year. He cited all the repairs and improvements as one of the reasons for the increase.

Foreign Corrupt Practices Act affects US registered businesses

I was doing business in Nigeria and incorporated my company in Delaware. I was then told that certain normal business practices in Nigeria are considered corruption and would put me in violation of US law.

Read more about the Foreign Corrupt Practices Act

Our supermajority of 80% made it so that all four directors have to agree

We were drafting the shareholders agreement and people started talking about majority and supermajority votes. I was too embarrassed to ask what they meant and why they mattered. I get intimidated with all the legal stuff and don’t want to slow things down or show my ignorance.

When we needed to raise funds, the agreement said the board of directors could make the decision, but a supermajority was required. Ours was a threshold of 80%. We have four Directors and one refused to vote for the investment because one of the investors had turned him down previously. It was simply bad blood, but there was no way around it for us; we were deadlocked.

The investor wouldn't let me take my loan back

When the business had been in operation for nine months, some customers didn’t pay on time and the business was running short of cash. I knew they would eventually pay, so I loaned the company $10K. I didn’t make any formal documentation because I was going to get the money back at the end of the month.

At the end of the month, we had to order more inventory because sales were growing faster than expected. With my track record, I raised a seed round from friends and family and one outside investor. I wanted to get my loan back because I don’t take a big salary. The independent investor said there was no legal agreement in place and that if I took the money out, he wouldn’t invest.

Corruption: He told me to send 25% of the material cost to his personal account

I have a business based in my home country in Africa that currently imports materials from China, but I wanted to begin sourcing from the continent. I went to a neighboring country to negotiate a supply contract.

The owner was very friendly; he took me on a factory tour and for a wonderful dinner. We met again for breakfast and he talked about price and minimum orders. His price was 15% higher but the shipping cost was less; when I ran the figures through my head, there was still enough margin for my business. I told him we had a deal and we shook hands.

Then he told me how to submit the payment. He said to send 25% of the material cost to his personal account in the UK and not to show that on the invoice. I had no idea what to say or do! All I could think to say was that I needed to talk to my accountant to see if that was possible.

I knew what he is asking is illegal. I also know this is how business is done. I want to keep my business on the continent when possible. I’ve never encountered this before though and don’t know what to do. What will happen to me if anyone finds out?

How did I lose control of my business when it was my idea?

I had a great business idea but knew I could not do it on my own. I found someone to work with on the proposal; her skills complemented mine and we worked well together. We decided to start a business together and that we would each own 50%. Things moved slower than expected, as sometimes happens with a startup. My co-founder then decided that she wanted to concentrate on her full-time job and family. She stopped working on the business and ended up moving to another part of the country for her partner’s job.

I continued to work on the business and brought on someone new as a business partner. We developed a website and started to sell products. We’re doing well and my new partner wants a share of the business, but my original co-founder objects to that. Now she’s not talking to me and my new partner doesn’t want to put in all the work without getting a fair share of equity. This was my idea and now someone who’s not even working on the business is keeping me from going forward. What do I do?

We didn't realize 1% a year would cost us so much down the line

We did not have any money to pay people so we decided to use share options. We offered options that vested over three years to three people. Each would get 1% of the company’s voting shares each year for three years. If they did not complete the year then they got nothing for that year. We solved the problem of getting people to work for us but we did not understand the implications of giving away 9% of the company at the time.

All three people stayed for three years and left during year 4. When they left they took their voting shares. Our shareholders agreement said that it took a super majority to approve issuing new funds. The other shares were distributed as such that people who left held enough shares to block the new fundraising.

We eventually arrived at a compromise but it meant the people who were actively managing the company got a bad deal. It also meant that this situation would recur with future fundraisings unless the Shareholders Agreement was changed. To change the document required the agreement of all shareholders (100%). The founders and future shareholders would be at a disadvantage every time funds were raised.

We didn't want to spend any money on legal fees and documents

We entered three business plan competitions and launched a business from the winnings. We did not want to spend any money on legal fees and documents, so we did not register our business. The business started to grow but it could not support two people so my cofounder went to work for a company in our industry while I worked on our business full-time. My cofounder contributed a few hours of work per month while I spent at least 60 hours/week on it. As the business grew, we had to raise money to finance expansion. The investor did due diligence and found that there was no documentation regarding shareholders. We cofounders did not agree on the holdings. I assumed I’d have much more for running the business full-time and my cofounder assumed since we started the business together, it would be 50/50. The investor withdrew their offer. 

I should have paid better attention to the formation documents and shareholder agreements

I thought startup documents were just necessary and standard paperwork. The four of us co-founders went to lawyer who helped us incorporate and gave us a Shareholder’s Agreement and Option Plan. I read all of it but didn’t really understand what it meant and didn’t think it was that important. We each got 25% of the company. These were Restricted Shares, which vested over time – 6.25% for each of us each year for 4 years.

After six months one of the cofounders decided to leave the company and move away. He wanted to take his share of the company, which he thought was 25%. He was told that he did not have any shares as the stock did not vest until after the first year. The situation turned nasty and interpersonal. He hired a lawyer who threatened to sue the company. They claimed that the shareholder agreement was not adequately explained to him and that it was the company’s responsibility to do so. The company did not have any money to meet legal cost and settled by giving him his first year’s shares, 6.25% of the company.

In year 2, at the first fundraising, the absent cofounder refused to agree to the terms. He was able to do this because decision-making called for unanimous approval by shareholders. So, even though the rest of us, who owned 93.75% of the company agreed to the terms, the deal was held up and our investor moved on because of this one guy.