5 ms·

A few years ago I started a company, then raised money through convertible notes. By the time the notes were due (2 years), we weren't ready to raise a round ye

A few years ago I started a company, then raised money through convertible notes. By the time the notes were due (2 years), we weren't ready to raise a round yet, so all investors extended their notes. All except one. The investor that didn't want to extend the note was also the CEO of the company that was our largest client, so not only did he call his note, he also ended his company's contract, making a huge hole in our revenue. After doing that, and knowing that the company would be struggling financially, he sued, forcing the company into bankruptcy. From the beginning we tried negotiating a payment plan or some other form of compensation, to no avail. Although at some point he did "offer" to completely take over the company and fire the founders (which we of course refused). During bankruptcy, he took over the assets of the company while also giving us and the trustee a hard time. Now, after having ruined the jobs of everyone that worked at our company plus the potential upside of all the other investors and shareholders, he is suing me and my cofounder personally. The company closed 2 years ago and it looks like this new lawsuit will take another 2 years. Also no one knows if this guy is going to stop at that. Be very careful about doing business with assholes, especially if they have a lot of money and you will be taking any type of potential liability (e.g. debt) in their favor, even if it's not personal liability, they might still try to go after you and make your life miserable.

swsieber 7y ago
Is it possible for you to name said investor such that people know to stay away from said investor?
- volkk 7y ago
  i'm going to guess that giving his name out in a public forum combined with the contextual knowledge we now have will make it very obvious who OP is. and then its possible for that asshole investor to further sue him for slander or whatever else
- ta1234567890 7y ago
  As user volkk said, unfortunately it would be legally risky for me to disclose the identity of the investor. Which is pretty frustrating, because then you realize that when someone does something bad to you (legally/morally), there are very few (legal) ways to remedy it, especially if they have a lot more money than you. I can say that he's not based in the Bay Area, so if you are raising money there it is very unlikely you will run into him. I can also say that our best investors were RightSide Capital, based out of SF. They supported us throughout the whole ordeal with the company and even offered to buy out the other guy. They also said that, out of 600+ investments they had done at the time, they had never seen another investor act the way ours did.
  - tgsovlerkhgsel 7y ago
    > even offered to buy out the other guy Why didn't this happen? That seems like an obvious outcome of the situation, unless losing the big client is enough to effectively destroy the company.
    - kelnos 7y ago
      From the tone of OP's story, it seems like the other guy probably wouldn't've agreed to the buyout; seems like he had an axe to grind.
      - yaur 7y ago
        and since people that would rather grind an ax than be made whole are probably rational actors, there is almost certainly more to this story.
      - tgsovlerkhgsel 7y ago
        But does that matter? The other guy didn't have shares, he was owed money. If the investor provides money, there's enough money to pay the other guy off...
AnatolyPetrova 7y ago
So did this backfire for this CEO? I assume that he never got the full amount of the note back but he possibly could have if he extended the note.
- ta1234567890 7y ago
  You are correct. He most likely would have gotten his money back, even without renewing the note, had he accepted a payment plan. Instead, he chose to start a (very costly) legal fight. So far he's probably out $100k+ in legal fees and looking to spend $100-200k more in the new personal lawsuit. The original note was for $250k. I don't think he's ever going to recover the full amount of money he's put into this (not to mention also his and everybody else's time as well as opportunity costs).
  - xwdv 7y ago
    Why would he make it so personal? What did you guys do to him?
    - JackFr 7y ago
      Is it possible that it wasn't personal? That the contract was cancelled because the product wasn't worth it? That the note wasn't extended because he thought the company was a money sink which would not be profitable? That he thought trying to liquidate the good bits was a better way to get his money, rather than a payment plan from a value destroying enterprise? That he sued personally because he felt they might be trying to hide assets of the firm? I could be wrong, but there are other angles to see the picture from.
      - ta1234567890 7y ago
        It is possible, and I'm hoping that's the case (that it is not a personal issue). Replied to another comment of yours with more detail on why it looks like a weird situation. To add a bit more: our investors, the lawyers that we've worked with so far and even the bankruptcy trustee's team, have all been surprised by the way this guy has been handling the situation and seem to agree that it doesn't make sense to proceed that way in terms of getting a return on his money.
ta1234567890 7y ago
As a side note. If you are considering raising money through convertible debt: 1) Make sure the contract protects you personally if the company cannot pay the note. For example, make it so the note automatically converts to equity instead, or so a certain % of note holders can force the conversion. 2) Make sure there is nothing in there saying that you or your company have to pay the legal fees of the investor. 3) Get legal services / liability insurance for the founders of the company. This will help ease the financial burden in case of legal issues. Usually, investors that lend you money have a lot more (legal) ways to go after you than equity investors (shareholders). With good actors this is usually not a problem, but when assholes are involved, you never know. Also, bankruptcy is expensive. There are 2 types of corporate bankruptcy, Chapter 7 and Chapter 11. Ch 7 will cost you about $20-50k in legal fees, depending on the complexity of the case - bear in mind that after the company files for Ch 7, you have to pay for your own legal fees. Ch 11 is about $100k+ - most lawyers will advise against it unless you have pretty deep pockets. You can also unwind a company outside of court, but it is a bit risky legally and something you definitely not want to do when there's a potential conflict or a bad actor involved.
JackFr 7y ago
Another way put this is that he lent you money to build your company and then paid you money every month as a customer. When the note came due, you couldn't pay. One possibility that they cancelled their contract not to screw you, but because they felt you were not getting the job done and the future wasn't there for your company. Given that, it would make little sense to extend the note or continue the contract. As both customer and investor, your vision is not their problem. Lest you think I'm being to hard on you, I've worked at one startup which went bankrupt in a similar situation (most of the engineering team ended up at working for our biggest customer) and another in which the board fired the CEO, liquidated the bad bits and sold the good bits to one of our customers. In both those cases the founders saw themselves as victims of unscrupulous sharp players, but the reality was that they took other peoples money and were seemingly oblivious to the obligations that entailed.
- ta1234567890 7y ago
  You are right. There are always multiple sides and stories for the same situation. It is perfectly possible that it could be that way, and I wish it was that way because then it would only be a money issue, which could (in theory) be rationally resolved. Things that somehow contradict that, is how unwilling to resolve the issue the investor has been. The company was profitable at the time he ended his contract and called the note. At that time he said he didn't care about his note, that he'd just write it off as a loss and he'd get 50% back in taxes. He could also have gotten his money back by taking a payment plan. Additionally we offered up the assets as payment so we could avoid bankruptcy, but he refused. Then he abandoned the assets after acquiring them in bankruptcy. To me it doesn't make any sense, but I hope you are right, that this is only about his money and that we can somehow reach an agreement that puts a definitive end to this mess.
  - unnouinceput 7y ago
    Ohh, if he was actively looking for a loss then he might've been on the hook with some bad people who were lending him the money and he was laundering them. You see, laundering is all about loss and looking bleak in the eyes of IRS (or equivalent). In the end he might not been an active asshole but just another victim.
csomar 7y ago
Isn't this a one-sided story, though? Maybe that person believes you didn't make good use of the money (i.e: diverted company funds for your own gain) which is way you weren't able to pay him back. He might be an evil ass-hole but also he might be thinking that he is the one getting screwed here.

swsieber 7y ago

Is it possible for you to name said investor such that people know to stay away from said investor?

volkk 7y ago
i'm going to guess that giving his name out in a public forum combined with the contextual knowledge we now have will make it very obvious who OP is. and then its possible for that asshole investor to further sue him for slander or whatever else
ta1234567890 7y ago
As user volkk said, unfortunately it would be legally risky for me to disclose the identity of the investor. Which is pretty frustrating, because then you realize that when someone does something bad to you (legally/morally), there are very few (legal) ways to remedy it, especially if they have a lot more money than you. I can say that he's not based in the Bay Area, so if you are raising money there it is very unlikely you will run into him. I can also say that our best investors were RightSide Capital, based out of SF. They supported us throughout the whole ordeal with the company and even offered to buy out the other guy. They also said that, out of 600+ investments they had done at the time, they had never seen another investor act the way ours did.
- tgsovlerkhgsel 7y ago
  > even offered to buy out the other guy Why didn't this happen? That seems like an obvious outcome of the situation, unless losing the big client is enough to effectively destroy the company.
  - kelnos 7y ago
    From the tone of OP's story, it seems like the other guy probably wouldn't've agreed to the buyout; seems like he had an axe to grind.
    - yaur 7y ago
      and since people that would rather grind an ax than be made whole are probably rational actors, there is almost certainly more to this story.
    - tgsovlerkhgsel 7y ago
      But does that matter? The other guy didn't have shares, he was owed money. If the investor provides money, there's enough money to pay the other guy off...

AnatolyPetrova 7y ago

So did this backfire for this CEO? I assume that he never got the full amount of the note back but he possibly could have if he extended the note.

ta1234567890 7y ago
You are correct. He most likely would have gotten his money back, even without renewing the note, had he accepted a payment plan. Instead, he chose to start a (very costly) legal fight. So far he's probably out $100k+ in legal fees and looking to spend $100-200k more in the new personal lawsuit. The original note was for $250k. I don't think he's ever going to recover the full amount of money he's put into this (not to mention also his and everybody else's time as well as opportunity costs).
- xwdv 7y ago
  Why would he make it so personal? What did you guys do to him?
  - JackFr 7y ago
    Is it possible that it wasn't personal? That the contract was cancelled because the product wasn't worth it? That the note wasn't extended because he thought the company was a money sink which would not be profitable? That he thought trying to liquidate the good bits was a better way to get his money, rather than a payment plan from a value destroying enterprise? That he sued personally because he felt they might be trying to hide assets of the firm? I could be wrong, but there are other angles to see the picture from.
    - ta1234567890 7y ago
      It is possible, and I'm hoping that's the case (that it is not a personal issue). Replied to another comment of yours with more detail on why it looks like a weird situation. To add a bit more: our investors, the lawyers that we've worked with so far and even the bankruptcy trustee's team, have all been surprised by the way this guy has been handling the situation and seem to agree that it doesn't make sense to proceed that way in terms of getting a return on his money.

ta1234567890 7y ago

As a side note. If you are considering raising money through convertible debt: 1) Make sure the contract protects you personally if the company cannot pay the note. For example, make it so the note automatically converts to equity instead, or so a certain % of note holders can force the conversion. 2) Make sure there is nothing in there saying that you or your company have to pay the legal fees of the investor. 3) Get legal services / liability insurance for the founders of the company. This will help ease the financial burden in case of legal issues. Usually, investors that lend you money have a lot more (legal) ways to go after you than equity investors (shareholders). With good actors this is usually not a problem, but when assholes are involved, you never know. Also, bankruptcy is expensive. There are 2 types of corporate bankruptcy, Chapter 7 and Chapter 11. Ch 7 will cost you about $20-50k in legal fees, depending on the complexity of the case - bear in mind that after the company files for Ch 7, you have to pay for your own legal fees. Ch 11 is about $100k+ - most lawyers will advise against it unless you have pretty deep pockets. You can also unwind a company outside of court, but it is a bit risky legally and something you definitely not want to do when there's a potential conflict or a bad actor involved.

JackFr 7y ago

Another way put this is that he lent you money to build your company and then paid you money every month as a customer. When the note came due, you couldn't pay. One possibility that they cancelled their contract not to screw you, but because they felt you were not getting the job done and the future wasn't there for your company. Given that, it would make little sense to extend the note or continue the contract. As both customer and investor, your vision is not their problem. Lest you think I'm being to hard on you, I've worked at one startup which went bankrupt in a similar situation (most of the engineering team ended up at working for our biggest customer) and another in which the board fired the CEO, liquidated the bad bits and sold the good bits to one of our customers. In both those cases the founders saw themselves as victims of unscrupulous sharp players, but the reality was that they took other peoples money and were seemingly oblivious to the obligations that entailed.

ta1234567890 7y ago
You are right. There are always multiple sides and stories for the same situation. It is perfectly possible that it could be that way, and I wish it was that way because then it would only be a money issue, which could (in theory) be rationally resolved. Things that somehow contradict that, is how unwilling to resolve the issue the investor has been. The company was profitable at the time he ended his contract and called the note. At that time he said he didn't care about his note, that he'd just write it off as a loss and he'd get 50% back in taxes. He could also have gotten his money back by taking a payment plan. Additionally we offered up the assets as payment so we could avoid bankruptcy, but he refused. Then he abandoned the assets after acquiring them in bankruptcy. To me it doesn't make any sense, but I hope you are right, that this is only about his money and that we can somehow reach an agreement that puts a definitive end to this mess.
- unnouinceput 7y ago
  Ohh, if he was actively looking for a loss then he might've been on the hook with some bad people who were lending him the money and he was laundering them. You see, laundering is all about loss and looking bleak in the eyes of IRS (or equivalent). In the end he might not been an active asshole but just another victim.

csomar 7y ago

Isn't this a one-sided story, though? Maybe that person believes you didn't make good use of the money (i.e: diverted company funds for your own gain) which is way you weren't able to pay him back. He might be an evil ass-hole but also he might be thinking that he is the one getting screwed here.