The first institutional
investors wanted to have three Board seats. We decided to allow for seven seats
but only filled five at the start. The Board meets every two months and deals
with all the routine issues.
Business was growing and
we could see from the cash forecasts that we would need more money sometime
next year. We wanted to start raising money immediately so we wouldn’t run out
of money. The Board members from the investors objected. I thought about it as
a tactic that would make us more vulnerable to a lowball offer. The less cash
we have the less leverage we have.
A friend said he was
interested in investing in us. We met, agreed on terms, and then started the due
diligence. Everything went well and the offer was reasonable.
We agreed on a term sheet
and all that we needed was Board approval. The investors’ Board members voted
no even though we only have six months cash left and this was the right thing
to do for the company. We tried to appoint more Board members and the investors’
members rejected that too.
Two months before we ran
out of money, the investor offered a loan that would convert into equity 35%
below the offer we had from my friend.
Is this legal?