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I was chatting with a company who sold a large minority stake in their company to a well known private equity group (think 49%) with the explicit purpose of ret
by cj 3y ago
I was chatting with a company who sold a large minority stake in their company to a well known private equity group (think 49%) with the explicit purpose of retaining control.
Soon after the transaction closed, the PE firm was able to covertly buy another 2% of voting shares from a pre-existing investor in the company, which resulted in the PE firm gaining full majority control over the company, kicked out the CEO, replaced the board of directors, the whole works.
The unfortunate part about these kinds of things is that 1) they happen all the time, and 2) founders rarely talk about it because doing so can so often destroy your ability to get funding for future endevors, etc.
I really wish there were an anonymous but vetted "yelp" type of site for people/firms who do bad business. So much business is done in bad faith and the people on the losing end rarely have the ability to warn others of their experience without killing their own reputation.
- JohnFen 3y agoThey call it "swimming with the sharks" for a reason.
- deleted 3y ago[deleted]
- lotsofpulp 3y agoThe above situation seems like swimming with goldfish. If you have less than 50% yourself, why would you bank on someone else not being able to get more than 50%?
- JohnFen 3y agoIt was misplaced trust. That's a really easy mistake to make until you've been burned by it. I'll bet that person won't make that mistake a second time. But better is to avoid swimming with the sharks at all. I have a wonderful horror story about a business deal I made where I was cheated out of about $5 mil. I didn't trust the party I was doing the deal with, so the contract negotiations took most of a year and the contract ended up being very thick as my attorney and I tried to anticipate and block every possible way that I could get screwed. But we missed one rather obscure method. That's what happens when you swim with sharks. (Don't shed tears for me, though. I did very well through that deal -- just not as well as I should have.)
- takinola 3y agoI feel like the story of the scorpion and the frog applies here. My solution is to try very, very hard not to engage with people I do not trust. My mantra is "good people do good things, bad people do bad things". If you don't want bad things to happen to you, stay away from people you know to be bad regardless of how tempting it may be to associate with them.
- JohnFen 3y agoIndeed. It was poor decisionmaking on my part. I was blinded by the $$. My attorney tried to warn me off of doing the deal at all. He had done his due diligence and looked into the company, and told me outright that the company was shady. That was another thing I learned: if you respect someone's expertise enough to pay them for it, you should probably take what they have to say very seriously.
- dustingetz 3y agodo you want the money or not?
- hgsgm 3y agoMoney is pretty famous for turning good people bad.
- JohnFen 3y agoI heard someone say a wonderfully relevant thing this morning: Money doesn't change people, it reveals them.
- nickfromseattle 3y ago> But we missed one rather obscure method. Please share.
- JohnFen 3y agoIt was related to international distribution. I had negotiated royalties for international sales, but had neglected to cover the sale of the rights to sell internationally. So the company just sold the rights, of which I didn't get a piece, and the companies that bought the rights had no obligation to pay me anything.
- deleted 3y ago[deleted]
- deleted 3y ago[deleted]
- nobrains 3y agoThere seem to be 2 problems here: 1. Giving another party 49% doesn't guarantee you will have retaining control. You having 51% shares does guarantee that. So, their strategy was flawed. 2. Not sure if regulations allow this, but to make it bullet proof they should have made a contract that the PR group will not go beyond 49%. Without either of the above, the company just did not do good diligence.
- arcticbull 3y agoI believe the usual path in this type of situation is to dual-class shares, so you can retain voting control while selling beneficial ownership to others. I suspect the PE group would have, you know, rejected this arrangement given their plan.
- bonestamp2 3y agoIf they reject it because of their plan then the strategy worked, although it might not seem like a win to the Founder at the time.
- worik 3y ago> the usual path in this type of situation is to dual-class shares Is that still tolerated by investors? Is it still legal? "Having your cake and eating it" is a really bad attitude
- mediaman 3y agoStories like this are bizarre. There are a million ways to ensure rights for a founder-owner that do not depend on 51% ownership, such as requiring supermajority votes for replacing the CEO, or right of first refusals granted to the founder-owner for share transfers. If they throw a fit about those terms, then don't do the deal! If you are selling shares to a PE firm with the explicit goal of retaining control, and you have less than 50% of shares, why would you make it so easy for them to get control?
- wmf 3y agoPeople just don't know about this stuff. It was even worse decades ago when there wasn't so much startup content online.
- i_am_jl 3y agoLawyers have always known about this kind of stuff. Blows my mind that business owners are negotiating contracts like "I know what all these words mean, why would I need a lawyer to review this?".
- piecerough 3y agoThis. Always get a lawyer.
- wmf 3y agoBe sure to use a startup lawyer not a general small business lawyer or you might end up incorporated in Florida with no founder vesting or shotgun clause.
- jrumbut 3y agoAs the sibling comment points out, it's not like you can hire any lawyer off Craigslist and expect to be bulletproof. Lawyers can be an expensive rubber stamp on a deal that is absolutely not in your interest or be a chaos agent that makes you impossible to do business with. They can also make executing complex deals very simple (for you) or ward off sophisticated scammers. At least in my experience, it can be very hard to know which is which before it's too late.
- hammock 3y agoWhat was the name of the PE firm?
- Simon_O_Rourke 3y agoFrom a control point of view, and maybe a salary or job viewpoint, this isn't too good. But enlighten me how a 40% odd share distribution of a now PE-owned and operated company would be a bad thing? Surely they're going to try and increase the company's value for their own self interest?
- cj 3y agoPE and Founder interests are not as aligned as many would assume at face value. Founders often care about doing good by their customers, vendors, employees... while the average PE firm will happily screw everyone over the moment there's a monetary incentive to do so. If a founder has the same time horizon for an exit as the PE/VC and if the founder is emotionally detached from the business/product/customers/employees, then all incentives are aligned. But that's usually not the case which is why you often see CEO's ousted and replaced by a "professional CEO" to "take the company to the next level". In reality founder-CEOs are ousted most often because their passion for the business gets in the way of maximizing profit.
- hgsgm 3y agoFree Market Capitalism interprets good doers as damage and routes around them.
- Simon_O_Rourke 3y ago> In reality founder-CEOs are ousted most often because their passion for the business gets in the way of maximizing profit. In this scenario then, it might be a kick to the ego, but if the original founder retained a large minority stake in the company, this profit-driven approach should result in an increased share price (over time) right?
- deleted 3y ago[deleted]
- redbell 3y agoI don’t know exactly how the CEO got kicked out but I know that Zuckerberg owns just about 13% of Meta and not only they cannot replace him but he still have superior power in decision making over the board of directors.
- wongarsu 3y agoZuckerberg (and a small group of other Meta shareholders) hold shares that have 10x as much voting power as normal shares. He has about 90% of those special shares, giving him a solid majority in most matters. Some other companies like Lyft or Alphabet have similar structures, but it is very unusual.
- Spivak 3y agoI'm actually surprised it's not more common. If I buy meta stock I have zero expectation of being able to sway company decisions. I just care that if they make money I make money.
- blibble 3y agoit's not more common because the index providers cottoned on and now it's banned if you want to be in the index and rightfully so
- hgsgm 3y agoSo why by stock and not a bond?
- JohnFen 3y agoA bond is just a loan that is repayed with a fixed return. A stock is equity and can be worth a lot more. Stocks are riskier than bonds, but have a greater profit potential. Which you prefer depends entirely on what your investment goal is.
- sbierwagen 3y agoThe NYSE and S&P 500 banned dual class stocks for several decades: https://www.investopedia.com/terms/d/dualclassstock.asp https://www.investopedia.com/terms/d/dualclassstock.asp During periods when VCs have more leverage they'll lean on founders to not issue dual class stocks, since of course it reduces their power to fire CEOs when things aren't going well.
- ttymck 3y agoI'm not trying to be harsh but this seems like business 101? Is this really that common? If you can't retain control of your company are you truly fit to run it? > with the explicit purpose of retaining control Why wasn't the other party contractually prohibited from obtaining control?
- TrackerFF 3y agoSmall story on these kind of takeovers, but on a MUCH, MUCH smaller scale: Back home we have this small newspaper that's been going on for 25 years. It's just a small 3 man operation, and it's just a weekly paper that covers local stuff in our small county. Most of their customers are expats and older folks. When they started out 25 years ago, they raised funds by selling private stocks. All in all, there are maybe 100 owners, many whom probably don't even remember that they own the stock (but you can easily find them, as we have pretty transparent laws when it comes to company ownership). But here comes the fun part: A couple of years ago some of the leading media companies in our country (Norway) started consolidating "power" by acquiring small local newspapers all over the country. Eventually they came to our local newspaper, and they started cold-calling all the listed owners, asking if they could purchase their stocks - warning that the newspaper was on the brink of bankruptcy, and that they would buy it and restructure it into a profitable paper. Some owners, thinking the stock was going to be worthless anyway, sold them their shares. They, of course, never told the majority owners any of this. The majority owner (the workers of the newspaper) started getting worried calls from senior/old readers if the newspaper was going to close, because some investors had been calling them with bad news about an impeding bankruptcy? The paper printed a story about this attempted takeover and the fake news regarding any potential bankruptcy, and people stopped selling their stocks.
- woleium 3y agonever pick a fight with someone who buys ink by the barrel
- quickthrower2 3y agoIn this case, the fight picker buys ink by the FCL though. I think in this case: don’t pick a fight in the back yard of a small town where community still exists and everyone sticks up for each other.
- jwozn 3y agoI had to look up FCL - it's a Full Container load (shipping container).
- mlyle 3y ago> I really wish there were an anonymous but vetted "yelp" type of site for people/firms who do bad business. So much business is done in bad faith and the people on the losing end rarely have the ability to warn others of their experience without killing their own reputation. If you credibly report your experience, they will know who did it, anonymous or not. "The Funded" was an attempt to do this for VCs a decade ago. But it was astroturfed in practice.
- DANmode 3y agoMeanwhile, the inbound investors I've taken calls from aren't interested at less than 51%. Where's the disconnect?
- dustingetz 3y agofaith is a human concept, organizations are machines that optimize metrics
- marricks 3y agoThere's also the story Richard Branson wrote about in his memoir where the co-founder of Virgin was pro unionizing and his workers were too. Branson convinced (and lied to) his partner that no one in the company actually liked him and the union attempt would fail. Caused his co-founder to quietly quit and Branson to retain sole control. I agree, I imagine shady shit like this is quite common just not discussed.
- hgsgm 3y agoAt least he's eventually honest about being a monster.
- aledalgrande 3y agoWhich memoir was that?
- marricks 3y agoOh wow, I misremembered it a bit. It was about a magazine Branson was running "Student" in his early days. The details of the story are accurate though. Source > Richard Branson’s Losing My Virginity
- Mizoguchi 3y agoIf your "partner" sides with a union to take over the company that's an all out war.
- saagarjha 3y agoSounds like Branson sided against the union?
- mbesto 3y ago> 1) they happen all the time, > So much business is done in bad faith and the people on the losing end rarely have the ability to warn others of their experience without killing their own reputation. The M&A world is much smaller than you think. These reputations get around and the story you're referring is an exception not the norm. Availability bias 101. Source - work in PE, rarely see this happen.
- deleted 3y ago[deleted]
- dav43 3y agoThat sounds like the result of a poorly worded and should never happen under well thought out agreements. Poor advisors if any on this one.
- H8crilA 3y agoWhat you described is not illegal. Capitalism is intended to be brutal like that. Companies are not owned by the founders, they are fundamentally owned by the shareholders, whether it seems fair or not. What the article describes is a simple case of large fraud: deceiving someone for a personal gain. That is of course if the article is truthful.
- eschneider 3y agoYou don’t need Yelp-For-Private-Equity. Sir, it’s a private equity firm. Screwing companies over is what they do.