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.

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.