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Stories 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 supermajorit

Stories 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 ago
People 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 ago
  Lawyers 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 ago
    This. Always get a lawyer.
    - wmf 3y ago
      Be 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 ago
      As 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.
      - code_biologist 3y ago
        My company has spent six figures with two different blue chip startup law firms. Our board specified the firms. Those in the VC scene would recognize them. The quality of the work has varied from "decent if eye wateringly expensive" to "subpar", seemingly dependent on the associate that worked on it and if there was any other industry-wide phenomena occupying the firm's attention. I'd still suggest a lawyer for sure, but I wish I had counsel I liked.
        djbusby 3y ago
        I picked an individual who had their own PLLC but was "of council" to two other larger firms in the city. Still was downtown rates but I got a lot of attention from the actual lawyer. And if things ever got real heavy they were my in-road to up-scale.
      - i_am_jl 3y ago
        There are lots of counterfeit motorcycle helmets. Sometimes it's hard to figure out what's a good helmet and a bad helmet. Despite this, throwing up your hands and saying "I don't know how to find a good helmet, I don't want to waste my money on a bad one, I'm just gonna ride my motorcycle without one" is ill advised.
  - deleted 3y ago
    [deleted]
- talldatethrow 3y ago
  You don't need to "know" anything to understand it was potentially possibly. And if you didn't, imo you're sorta braindead and that might explain why they wanted to out you in the first place.
ada1981 3y ago
Exactly. If you do a deal like this, it seems ideal someone more savvy come in and run your company for you.
cj 3y ago
Simple answer: A successful founder will sell 1 (maybe 2) companies in their lifetime, while PE/VC firms do these deals every day of the week. It's like entering the ring with a pro MMA fighter and expecting to have a fair fight. You have a massive disadvantage that can't be overcome. The best you can do is take precautions and "do your best" but "your best" and "precautions" still isn't good enough if your opponent really wants to screw you over. Unfortunately this happens all the time in VC, and especially in PE. As an example, when you sign a term sheet to sell a company, most founders assume the deal will go through at the price that was agreed. In reality, deals almost never close at the originally agreed upon price. The buyer usually waits until the very last minute, then drops the bomb on the seller "Btw, we can't do the deal anymore at this price, but we can sign tomorrow for 30% less". The sad part is it's such a common tactic and PE firms will do things like encourage founders to get their whole team excited about the transaction -before- dropping the bomb / new deal terms. At which point the founder is basically trapped with their whole team excited about an exit, which PE then exploits. All of the lawyers in the world won't help if the PE/VC firm has the ability to spread the word "Don't do business with John Appleseed" effectively shadow-banning you from future funding from anyone. PE/VC world is very small and they have a lot of political leverage, which almost always trumps any legal leverage a founder might have. The best defense is to have another VC/PE on your side. That also puts bootsrapped companies at a severe disadvantage (no VC fighting on their side for the best outcome). There literally are PE firms who specialize in buying "family run bootstrapped businesses". Why? Because they're the easiest to screw over and exploit.
- preommr 3y ago
  > while PE/VC firms do these deals every day of the week That's why you hire a lawyer that also does this stuff everyday of the week.
  - deleted 3y ago
    [deleted]
  - skrebbel 3y ago
    This sounds so easy but plenty lawyers sound great but have no clue either, or will believe that bad ideas aren’t, etc. And they’ll deal with the same VC much sooner than with you, so they’re not particularly incentivized to play super hardball. If I were a first time founder I wouldn’t know where to find the right lawyer. In all honesty I still don’t and I’ve been at it for 8 years now.
boomchinolo78 3y ago
Yeah, the way it's done in my country is the founder and his existing investors pool into a holding for the 51% which the founder controls. Then, they cannot sell around his back

wmf 3y ago

People 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 ago
Lawyers 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 ago
  This. Always get a lawyer.
  - wmf 3y ago
    Be 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 ago
    As 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.
    - code_biologist 3y ago
      My company has spent six figures with two different blue chip startup law firms. Our board specified the firms. Those in the VC scene would recognize them. The quality of the work has varied from "decent if eye wateringly expensive" to "subpar", seemingly dependent on the associate that worked on it and if there was any other industry-wide phenomena occupying the firm's attention. I'd still suggest a lawyer for sure, but I wish I had counsel I liked.
      - djbusby 3y ago
        I picked an individual who had their own PLLC but was "of council" to two other larger firms in the city. Still was downtown rates but I got a lot of attention from the actual lawyer. And if things ever got real heavy they were my in-road to up-scale.
    - i_am_jl 3y ago
      There are lots of counterfeit motorcycle helmets. Sometimes it's hard to figure out what's a good helmet and a bad helmet. Despite this, throwing up your hands and saying "I don't know how to find a good helmet, I don't want to waste my money on a bad one, I'm just gonna ride my motorcycle without one" is ill advised.
- deleted 3y ago
  [deleted]
talldatethrow 3y ago
You don't need to "know" anything to understand it was potentially possibly. And if you didn't, imo you're sorta braindead and that might explain why they wanted to out you in the first place.

ada1981 3y ago

Exactly. If you do a deal like this, it seems ideal someone more savvy come in and run your company for you.

cj 3y ago

Simple answer: A successful founder will sell 1 (maybe 2) companies in their lifetime, while PE/VC firms do these deals every day of the week. It's like entering the ring with a pro MMA fighter and expecting to have a fair fight. You have a massive disadvantage that can't be overcome. The best you can do is take precautions and "do your best" but "your best" and "precautions" still isn't good enough if your opponent really wants to screw you over. Unfortunately this happens all the time in VC, and especially in PE. As an example, when you sign a term sheet to sell a company, most founders assume the deal will go through at the price that was agreed. In reality, deals almost never close at the originally agreed upon price. The buyer usually waits until the very last minute, then drops the bomb on the seller "Btw, we can't do the deal anymore at this price, but we can sign tomorrow for 30% less". The sad part is it's such a common tactic and PE firms will do things like encourage founders to get their whole team excited about the transaction -before- dropping the bomb / new deal terms. At which point the founder is basically trapped with their whole team excited about an exit, which PE then exploits. All of the lawyers in the world won't help if the PE/VC firm has the ability to spread the word "Don't do business with John Appleseed" effectively shadow-banning you from future funding from anyone. PE/VC world is very small and they have a lot of political leverage, which almost always trumps any legal leverage a founder might have. The best defense is to have another VC/PE on your side. That also puts bootsrapped companies at a severe disadvantage (no VC fighting on their side for the best outcome). There literally are PE firms who specialize in buying "family run bootstrapped businesses". Why? Because they're the easiest to screw over and exploit.

preommr 3y ago
> while PE/VC firms do these deals every day of the week That's why you hire a lawyer that also does this stuff everyday of the week.
- deleted 3y ago
  [deleted]
- skrebbel 3y ago
  This sounds so easy but plenty lawyers sound great but have no clue either, or will believe that bad ideas aren’t, etc. And they’ll deal with the same VC much sooner than with you, so they’re not particularly incentivized to play super hardball. If I were a first time founder I wouldn’t know where to find the right lawyer. In all honesty I still don’t and I’ve been at it for 8 years now.

boomchinolo78 3y ago

Yeah, the way it's done in my country is the founder and his existing investors pool into a holding for the 51% which the founder controls. Then, they cannot sell around his back