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 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.

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.

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.