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.

I don't really understand dilution and how different forms of fundraising and employee compensation work

I don’t really understand dilution and how different forms of fundraising and compensation for employees work. I’ve heard people say equity is the most expensive money, but I’m not really sure what that means. I started the company, so I should own it. I understand that investors want equity, but if I give them too much, it won’t be my company anymore. Even if I never give any investor more than 50%, f I keep needing more money, it won’t be long before I have less than 50%.

I don’t have a ton of cash, so I’d like to pay people with options. How do options dilute me?

My lawyer told me that 20% is usually set aside for options. That means I only own 80% before I get other investors. If I give investors 31% for their investment, I lost control, right?

Compensation for short-term and part-time workers

I hired an undergraduate software developer part-time to do some development work on our new platform. He was very good and inexpensive and had another year of studies before he graduated.

One day, he came to me and said he’d been offered other work by a major corporation for three times what we were paying him. We had just completed a seed round of funding and did not have a lot of cash to offer him more salary.

I didn’t know what to do. I thought about offering him options, but he likely wouldn’t stay long-term. I wondered if I should just go ahead and find someone new.

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.