6 ms·

If you're a founder and looking to sell your company, is there anything you can do to guard yourself against these kinds of situations? I imagine it might be s

If you're a founder and looking to sell your company, is there anything you can do to guard yourself against these kinds of situations? I imagine it might be some particular part of a golden handcuff / golden parachute deal, but making it work for everyone involved sounds super hard...

rhizome 9y ago
The general idea is "poison pill," but generally no, there's nothing the seller can do.
- RangerScience 9y ago
  I mean, at the least, can't you make it a deal that you're OK walking away from if you find yourself in this kind of situation?
  - rhizome 9y ago
    Sure, you could sell the biz outright and wash your hands of the whole thing once the check clears.
    - jameskegel 9y ago
      I dream of that moment but can't help but feel I'd be doing something or someone wrong if I just disappeared to a small island somewhere expensive. Is it really possible to just disconnect after a sale? I'd be interested in hearing supporting anecdotes as well as to the contrary; I want to believe!
      - zanny 9y ago
        The company you sell to cannot legally bind you to working for them - that is indentured servitude. You can always leave any contract or job any time you want. The OP mentions "once the check clears" for good reason - because when making acquisitions your payout is usually contingent on staying around for the transition for a fixed amount of time - you don't get your payout until that deadline, and if you leave before then you void the obligation.
    - lmm 9y ago
      How practical is that? I guess more concretely, what kind of discount would you have to accept if you weren't willing to stay on for 2 years or whatever the standard practice is?
cortesoft 9y ago
If you sell your company, you lose control of it; that is kind of the definition of 'selling'. If you maintain control, than you at most have 'an investor', not a new owner.
- oh_sigh 9y ago
  No, there can be contractual terms which allow for the original owners to regain control under certain contingencies
  - r00fus 9y ago
    How often is this pursued by original owners and accepted by the prospective new owners?
    - DaiPlusPlus 9y ago
      An options clause, usually - giving the founder the right to buy back the company/brand at a fixed price - it's enticing to new owners too because it mitigates their risk (e.g. if they run it into th ground while the old owner is interested in it, then it will limit their losses) - the difficulty then is not making the buyback price too high that the original owner can't afford it, or if the new owner screws it up so badly that the original owner loses interest.
      - DINKDINK 9y ago
        >giving the founder the right to buy back the company/brand at a fixed price Selling a call does not allow the buyer to hedge. Buying a put would but not selling a call. You are describing selling a call.
  - enjo 9y ago
    This is light grey. I'm dissapointed in you HN. This is absolutely correct. One common version: Many sells come with some sort of earn-out. Meaning that the company has to perform at some level over some amount of time in order for the buyer to be on the hook for the full amount of the sell price (or some other bonus). It is not uncommon to attach a buy-back clause to the earn-out. If you fail to hit the earn out, you have some ability to buy back the company and/or it's assets (there are many different versions). It's a win-win clause. If the company fails to perform under its new leadership the buying company has some hedge against it. It gives the seller a chance to effectively hedge at least some of the risk that they won't be able to fully earn-out the purchase price due to management issues at the new company. I've been on the executive team for five company sales. Two of them had exactly this clause. Both during earlier stages. We never exercised them.
PhasmaFelis 9y ago
Sure. Don't sell your company. Don't take it public, either. Principled moral stands are not compatible with making as much money as possible.
- kijin 9y ago
  Or to be more precise, making as much money for other people as soon as possible. Net neutrality is supposed to help small- to medium-sized internet companies do better. Taking a stand on net neutrality is therefore not incompabitible with maximizing profit in the long term. It is, however, usually incompatible with maxmimizing quarterly returns for myopic investors.
sausman 9y ago
This is my biggest qualm with building a company aimed to sell (either to public markets or another company). You are binding yourself to pursue as much profit as possible through whatever legal means possible. Even if those legal means go against everything you stand for, you have to pursue them because you have a fiduciary duty.
- phil21 9y ago
  > Even if those legal means go against everything you stand for, you have to pursue them because you have a fiduciary duty. This is not true, and never has been even a little bit true (in the US). It's a commonly misquoted trope. Assuming your company happens to be public (the only way this matters) - you still can do whatever you like as controlling CEO short of outright fraud or negligence. If you decide to switch your Fortune 500 company to it's sole goal being charity - you could definitely do that without going to jail or being liable for anything. You might lose your job though. If you own a private company you started yourself and own the equity? You can do everything up to and including burning the building down.
  - sausman 9y ago
    > You might lose your job though. That's what I was trying to get at. I didn't mean to make it sound like you'd go to jail.
  - db48x 9y ago
    Burning down a building that you actually for-real own might not be illegal, but be careful what you tell your insurer. The fire marshall might be annoyed as well, so warn him first. I wonder if the EPA would have questions as well...
- lumisota 9y ago
  "Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not.": http://caselaw.findlaw.com/us-supreme-court/13-354.html http://caselaw.findlaw.com/us-supreme-court/13-354.html
JumpCrisscross 9y ago
Make a tax-deductible donation to the EFF. Any influence you could have projected with a company you can likely outperform with its value in cash.
nickpsecurity 9y ago
Everyone is saying no. I'm going to speculate in opposite in case someone qualified reads the comment to tell us if it makes any sense. :) My idea is to, either as terms of the sale or in a contract with a 3rd party, guarantee the company will continue doing a specific thing. If it's a contract, the company should be able to do with without much cost and get benefit in return for consideration. After the sale, they're still obligated to do what they said they would do. At the least, they could be sued. Maybe put the amount in the contract to be whatever profit they made for every year they were in violation so controlling company knows ahead of time non-compliance might cost them a lot of money. So, this is a person that just took a college class in business law a long time ago brainstorming a solution. Needs peer review by more qualified people but that's how I'd at least attempt to do it. Probably in charter, contracts, and terms of sale altogether if I can get away with it.
- gm-conspiracy 9y ago
  So, you would sue the company you just sold, using the proceeds of the sale to pay attorneys?
  - nickpsecurity 9y ago
    The customers could sue it in that model.
- PeterisP 9y ago
  Yes, you can put all kinds of encumbering conditions on your sale. However, the hard part is getting the buyers/investors to agree to that - especially if they are VCs with an explicit goal of getting an exit, i.e., re-selling the company somehow. At best, adding such conditions will mean you getting less money for more dilution in every funding round. At worst, at some point near the end of a runway you'll get an ultimatum to drop the condition or not get the next funding round at all.
  - nickpsecurity 9y ago
    This is true. One would have to convince them the restriction would have minimal to no impact on their bottom line. An example of selling open software is Red Hat or SUSE where they continue to make lots of money off enterprise sales despite distros like CentOS.
dredmorbius 9y ago
B-Corp seems to be one option. https://en.m.wikipedia.org/wiki/Benefit_corporation https://en.m.wikipedia.org/wiki/Benefit_corporation

rhizome 9y ago

The general idea is "poison pill," but generally no, there's nothing the seller can do.

RangerScience 9y ago
I mean, at the least, can't you make it a deal that you're OK walking away from if you find yourself in this kind of situation?
- rhizome 9y ago
  Sure, you could sell the biz outright and wash your hands of the whole thing once the check clears.
  - jameskegel 9y ago
    I dream of that moment but can't help but feel I'd be doing something or someone wrong if I just disappeared to a small island somewhere expensive. Is it really possible to just disconnect after a sale? I'd be interested in hearing supporting anecdotes as well as to the contrary; I want to believe!
    - zanny 9y ago
      The company you sell to cannot legally bind you to working for them - that is indentured servitude. You can always leave any contract or job any time you want. The OP mentions "once the check clears" for good reason - because when making acquisitions your payout is usually contingent on staying around for the transition for a fixed amount of time - you don't get your payout until that deadline, and if you leave before then you void the obligation.
  - lmm 9y ago
    How practical is that? I guess more concretely, what kind of discount would you have to accept if you weren't willing to stay on for 2 years or whatever the standard practice is?

cortesoft 9y ago

If you sell your company, you lose control of it; that is kind of the definition of 'selling'. If you maintain control, than you at most have 'an investor', not a new owner.

oh_sigh 9y ago
No, there can be contractual terms which allow for the original owners to regain control under certain contingencies
- r00fus 9y ago
  How often is this pursued by original owners and accepted by the prospective new owners?
  - DaiPlusPlus 9y ago
    An options clause, usually - giving the founder the right to buy back the company/brand at a fixed price - it's enticing to new owners too because it mitigates their risk (e.g. if they run it into th ground while the old owner is interested in it, then it will limit their losses) - the difficulty then is not making the buyback price too high that the original owner can't afford it, or if the new owner screws it up so badly that the original owner loses interest.
    - DINKDINK 9y ago
      >giving the founder the right to buy back the company/brand at a fixed price Selling a call does not allow the buyer to hedge. Buying a put would but not selling a call. You are describing selling a call.
- enjo 9y ago
  This is light grey. I'm dissapointed in you HN. This is absolutely correct. One common version: Many sells come with some sort of earn-out. Meaning that the company has to perform at some level over some amount of time in order for the buyer to be on the hook for the full amount of the sell price (or some other bonus). It is not uncommon to attach a buy-back clause to the earn-out. If you fail to hit the earn out, you have some ability to buy back the company and/or it's assets (there are many different versions). It's a win-win clause. If the company fails to perform under its new leadership the buying company has some hedge against it. It gives the seller a chance to effectively hedge at least some of the risk that they won't be able to fully earn-out the purchase price due to management issues at the new company. I've been on the executive team for five company sales. Two of them had exactly this clause. Both during earlier stages. We never exercised them.

PhasmaFelis 9y ago

Sure. Don't sell your company. Don't take it public, either. Principled moral stands are not compatible with making as much money as possible.

kijin 9y ago
Or to be more precise, making as much money for other people as soon as possible. Net neutrality is supposed to help small- to medium-sized internet companies do better. Taking a stand on net neutrality is therefore not incompabitible with maximizing profit in the long term. It is, however, usually incompatible with maxmimizing quarterly returns for myopic investors.

sausman 9y ago

This is my biggest qualm with building a company aimed to sell (either to public markets or another company). You are binding yourself to pursue as much profit as possible through whatever legal means possible. Even if those legal means go against everything you stand for, you have to pursue them because you have a fiduciary duty.

phil21 9y ago
> Even if those legal means go against everything you stand for, you have to pursue them because you have a fiduciary duty. This is not true, and never has been even a little bit true (in the US). It's a commonly misquoted trope. Assuming your company happens to be public (the only way this matters) - you still can do whatever you like as controlling CEO short of outright fraud or negligence. If you decide to switch your Fortune 500 company to it's sole goal being charity - you could definitely do that without going to jail or being liable for anything. You might lose your job though. If you own a private company you started yourself and own the equity? You can do everything up to and including burning the building down.
- sausman 9y ago
  > You might lose your job though. That's what I was trying to get at. I didn't mean to make it sound like you'd go to jail.
- db48x 9y ago
  Burning down a building that you actually for-real own might not be illegal, but be careful what you tell your insurer. The fire marshall might be annoyed as well, so warn him first. I wonder if the EPA would have questions as well...
lumisota 9y ago
"Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not.": http://caselaw.findlaw.com/us-supreme-court/13-354.html http://caselaw.findlaw.com/us-supreme-court/13-354.html

JumpCrisscross 9y ago

Make a tax-deductible donation to the EFF. Any influence you could have projected with a company you can likely outperform with its value in cash.

nickpsecurity 9y ago

Everyone is saying no. I'm going to speculate in opposite in case someone qualified reads the comment to tell us if it makes any sense. :) My idea is to, either as terms of the sale or in a contract with a 3rd party, guarantee the company will continue doing a specific thing. If it's a contract, the company should be able to do with without much cost and get benefit in return for consideration. After the sale, they're still obligated to do what they said they would do. At the least, they could be sued. Maybe put the amount in the contract to be whatever profit they made for every year they were in violation so controlling company knows ahead of time non-compliance might cost them a lot of money. So, this is a person that just took a college class in business law a long time ago brainstorming a solution. Needs peer review by more qualified people but that's how I'd at least attempt to do it. Probably in charter, contracts, and terms of sale altogether if I can get away with it.

gm-conspiracy 9y ago
So, you would sue the company you just sold, using the proceeds of the sale to pay attorneys?
- nickpsecurity 9y ago
  The customers could sue it in that model.
PeterisP 9y ago
Yes, you can put all kinds of encumbering conditions on your sale. However, the hard part is getting the buyers/investors to agree to that - especially if they are VCs with an explicit goal of getting an exit, i.e., re-selling the company somehow. At best, adding such conditions will mean you getting less money for more dilution in every funding round. At worst, at some point near the end of a runway you'll get an ultimatum to drop the condition or not get the next funding round at all.
- nickpsecurity 9y ago
  This is true. One would have to convince them the restriction would have minimal to no impact on their bottom line. An example of selling open software is Red Hat or SUSE where they continue to make lots of money off enterprise sales despite distros like CentOS.

dredmorbius 9y ago

B-Corp seems to be one option. https://en.m.wikipedia.org/wiki/Benefit_corporation https://en.m.wikipedia.org/wiki/Benefit_corporation