Can we raise funds and sign a term sheet without a shareholders agreement?

My co-founder refuses to complete our shareholders agreement. He has always tried to avoid conflict. Every time we come to a contentious issue in the agreement, he doesn’t want to discuss it. We can’t resolve key issues. The lawyer hasn’t been able to persuade him that this needs to be done.

We now have firm offers for $750K seed investment and we need to sign the term sheet. Can we raise funds and sign a term sheet without a shareholders agreement?

My cofounder and I were gone for three days and everything fell apart

My business was 8 months old and it’s been a roller coaster. One day I thought we had the next Google. The next I thought we would fail by the end of the year. Whenever both of us cofounders were away, chaos seemed to erupt.

I had to go to China to place the orders for next year. My cofounder wanted to go to NYC to see potential investors. We both wanted to go at the same time.

I said the business was too volatile and the employees too inexperienced for both of us to be away for two weeks. He said we weren’t married to the business needed to trust our employees.

We both ended up going away at the same time. Three days after we left, I got a text saying our merchandise manager decided to join our competitor and just walked out. The accountant didn’t come into work and never told anyone. He was supposed to run payroll so no one got paid. Finally, there was a robbery at our newly opened shop. They took all the money and a lot of merchandise. They also broke the door and the glass in front.

My partner got on the next plane back from NYC.

I signed off on a contract without realizing costs had increased

I ran the farming operations and production facilities in Ghana while my cofounder and partner did sales and marketing from Washington DC. When we started the business, we shared all the decision-making and everything worked well.

As the business grew we were making more decisions and making them faster. The flow of information was just enough to get by, but things started falling between the cracks.  Our roles and responsibilities were getting blurred. The worst example was when our largest customer visited Ghana. They wanted to talk about a long-term contract and wanted a quick decision. If we did not do business with them they would find someone else while they were there.

They laid out terms that seemed reasonable to me. They were higher than we were getting and it was for a year. I did not see any problem with signing there. That night, I updated my cofounder. She was shocked because it was way too low and didn’t  include the cost of customs clearance. Now we would lose money on every delivery. I told her I thought we were making money from them and she said we were, but that the cost of clearance was going up and we needed a 2% increase to cover the cost of currency movements.

After a lot of heated discussion we agreed we needed to meet face-to-face. We needed to set out our role and responsibilities and who makes what decisions. We needed to talk more often.

I couldn't do it all myself but I couldn't give up any control

I am alone and do nothing but work. To save money, I moved back home and feel like a child again. I fight to get out of bed everyday because the amount of things I have to do is overwhelming. My sales were over $150K, but I don’t want to hire anyone else; no one could do things better than me.

As sales continued to grow, I simply couldn’t cope. I hired a fulfillment company to handle the packaging and delivery. I visited them twice a week. Sales were then over $225k and I couldn’t keep track of everything. My accounts were months behind and emails went unanswered, so I decided to hire a part-time assistant.

She was a new mom so it could have been ideal. As soon as we started working together, I became critical of almost everything she was doing. I didn’t want to do things her way and I told her so. Sometimes she was late for meetings and sometimes she did things without asking me first. After six months, she quit. She felt she could never do anything right and that I didn’t trust her.

By this time, sales had grown again, invoices were in boxes, and it took me a week to fulfill an order. The website looked old and I had to update the product catalogue at least once a week as items sold out. This month, 35% of the products have a “sold out” tag on them.

My parents suggested I move out and that I needed an office.  I found a place that was big enough to act as an office and to live in. I moved all my things there.

I tried to hire someone to work with me but couldn’t find anyone good enough. Some people didn’t want to work where I lived. Others wanted too much money. I needed help but I also couldn’t let go. I had to control everything.

The business was in chaos and service levels were really poor. The repeat purchases began to fall away. For the first time in three years sales stopped growing. I had become the problem.

Our new admin assistant was paying invoices to a fake company

During the first three years of operation, I signed every check and reviewed every bill. The volume increased beyond what I could handle so we hired a full-time administrative assistant. She was a friend of one of our employees and came from a large company located in the city. I was so glad to get rid of this task.

We got our accounts within 10 days of the end of the month. Everything looked OK. One day I was in our bank and ran into the local bank manager who asked how things were going. I told him things were good and we were profitable and growing. I told him we had a new admin assistant who had come from XYZ company. He asked her name and when I told him, he was very concerned.

He asked if we had asked for references. I told him we had and he advised that I start looking at all the invoices and making sure I knew how we were paying. I wasn’t sure why he said this, but it sounded like good advice with no downside.

I spoke to the admin assistant when I got back from the bank and asked to see the invoices from the last month. Right away, I noticed several new names and that one new supplier had sent in four invoices that month. I got suspicious when I asked our operations people about the company and they had never heard of it.

When I went to the admin assistant, she said she just paid the bills managers signed. I took three invoices to the responsible managers. They knew nothing about them. When I confronted the admin assistant, she denied anything was wrong. I called phone number on the invoice and it went to voicemail. The voice on the message was the admin assistant’s.

My co-founder benefits from my hard work without doing any himself!!

We co-founded the business and were committed to it, but it didn’t produce enough revenue to support even one of us. We decided to both work part-time on the business until could pay the salary of one person. The other would join when the business could afford it.

It took 18 months for us to get enough volume to support one of us. I quit my job and started working full-time on the business. My co-founder got a promotion, which meant moving to another city and more travel. He was no longer contributing to the business part-time.

Over the next six months, I hardly heard from him and we grew apart. He didn’t really know what was going on with the business and said he couldn’t do both jobs and was going to focus on his career. He wanted to sell his shares but I couldn’t afford them and there wasn’t enough cash in the business to buy them.

I had a real dilemma. The harder I worked and the better the business did, the more he would want for his shares. I tried to get a friend to reason with my co-founder, but he refused to listen. This isn’t fair!!

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?

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.