StabilityAI cofounder says CEO tricked him into selling stake for $100(forbes.com)
forbes.com
StabilityAI cofounder says CEO tricked him into selling stake for $100
https://www.forbes.com/sites/kenrickcai/2023/07/13/stability-ai-cofounder-says-emad-mostaque-tricked-him-into-selling-stake-for-100/
238 comments
There 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.
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.
I 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.
If 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.
there are also “poison pill” provisions to prevent takeovers in various ways such as providing minority owners the ability to purchase stock at very steep discounts if a certain event is triggered
> 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
Is that still tolerated by investors? Is it still legal?
"Having your cake and eating it" is a really bad attitude
> "Having your cake and eating it" is a really bad attitude
Ray Dalio says the following in his book Principles:
“When faced with the choice between two things you need that are seemingly at odds, go slowly to figure out how you can have as much of both as possible. There is almost always a good path that you just haven't figured out yet, so look for it until you find it rather than settle for the choice that is then apparent to you.”
He credits this approach to helping his firm spearhead risk parity as well as other successes. Sometimes, trying to have your cake and eat it too leads to being able to do just that.
Ray Dalio says the following in his book Principles:
“When faced with the choice between two things you need that are seemingly at odds, go slowly to figure out how you can have as much of both as possible. There is almost always a good path that you just haven't figured out yet, so look for it until you find it rather than settle for the choice that is then apparent to you.”
He credits this approach to helping his firm spearhead risk parity as well as other successes. Sometimes, trying to have your cake and eat it too leads to being able to do just that.
100%.
At an old job, I worked with an eng manager who believed software quality and time to market were mutually exclusive. You decide which one is important to you and you go for that one.
In his thinking, he then constantly failed to identify options that were both fast to build and good, usually due to significant simplification. He could never find these things because in his mind you couldn't have both.
Later on, I worked for Ray for a few years and would always think of this dude whenever I encountered this principle.
At an old job, I worked with an eng manager who believed software quality and time to market were mutually exclusive. You decide which one is important to you and you go for that one.
In his thinking, he then constantly failed to identify options that were both fast to build and good, usually due to significant simplification. He could never find these things because in his mind you couldn't have both.
Later on, I worked for Ray for a few years and would always think of this dude whenever I encountered this principle.
I don't know if you can still do it, but it's how Zuckerberg has retained control over Meta/Facebook. Zuckerberg and friends has 90% of the voting power, because the special class of shares has 10x voting power compared to regular shares.
It shouldn’t be tolerated nor legal, but it is.
Why? I don't see any problem with dual class shares:
1. It's not like anything is being hidden - people who buy shares without (or with less) voting share rights know what they're getting, and can adjust the amount they're willing to pay for those shares accordingly.
2. Dual share is a double edged sword: if you believe and want a visionary founder to stay in control, you're good. At the same time, you should be clear that if the visionary founder goes off his rocker, there is not much people will be able to do to oust him.
Zuckerberg pretty much shows these pros and cons perfectly. People were wringing their hands at the end of last year when Meta stock was in the toilet that there was nothing anyone could do to replace Zuckerberg. Now, though, Meta is up over 150% over the past year, and the fact that Zuckerberg could play a longer game and wasn't just ousted due to the share dip was probably ultimately good for investors.
1. It's not like anything is being hidden - people who buy shares without (or with less) voting share rights know what they're getting, and can adjust the amount they're willing to pay for those shares accordingly.
2. Dual share is a double edged sword: if you believe and want a visionary founder to stay in control, you're good. At the same time, you should be clear that if the visionary founder goes off his rocker, there is not much people will be able to do to oust him.
Zuckerberg pretty much shows these pros and cons perfectly. People were wringing their hands at the end of last year when Meta stock was in the toilet that there was nothing anyone could do to replace Zuckerberg. Now, though, Meta is up over 150% over the past year, and the fact that Zuckerberg could play a longer game and wasn't just ousted due to the share dip was probably ultimately good for investors.
What's wrong with it? If people want to be allowed to buy/sell second-class shares that don't have voting rights, then I don't see the problem with there being a market for that.
It’s not a free market. Your options are buy the class of stocks that the company wishes to sell, or not participate at all. Therefore it can be aggressively abused to disenfranchise public shareholders who have no say in the creation of share classes in the first place.
One important role of government is to set and maintain standards for listing on markets, so that customers are protected. An example of such a rule would be that all publicly traded companies have equal voting rights across all share classes: one share, one vote.
One important role of government is to set and maintain standards for listing on markets, so that customers are protected. An example of such a rule would be that all publicly traded companies have equal voting rights across all share classes: one share, one vote.
> Therefore it can be aggressively abused to disenfranchise public shareholders who have no say in the creation of share classes in the first place.
Elaborate on this, because I think I'm misreading it.
It seems to me like shareholders, generally already have a vote. Converting those shares, from voting to non-voting, would be quite illegal (at the very least breach of contract) without shareholder sign-off. Which they probably wouldn't do... y'know... because they're the shareholders.
What's being discussed is issuing different shares (with approval of the voting shareholders). And if you don't like that, you can... just not invest in that company. There are several other companies you can invest in if that's what you want.
And if the companies that offer only non-voting shares dominate (probably being driven by the founders)... most investors would probably want that. Most investors are looking for a return first and foremost.
> An example of such a rule would be that all publicly traded companies have equal voting rights across all share classes: one share, one vote.
I agree that it's an example of such a rule. Do you have an argument for why it's a good rule?
Elaborate on this, because I think I'm misreading it.
It seems to me like shareholders, generally already have a vote. Converting those shares, from voting to non-voting, would be quite illegal (at the very least breach of contract) without shareholder sign-off. Which they probably wouldn't do... y'know... because they're the shareholders.
What's being discussed is issuing different shares (with approval of the voting shareholders). And if you don't like that, you can... just not invest in that company. There are several other companies you can invest in if that's what you want.
And if the companies that offer only non-voting shares dominate (probably being driven by the founders)... most investors would probably want that. Most investors are looking for a return first and foremost.
> An example of such a rule would be that all publicly traded companies have equal voting rights across all share classes: one share, one vote.
I agree that it's an example of such a rule. Do you have an argument for why it's a good rule?
> It’s not a free market.
>Your options are buy the class of stocks that the company wishes to sell, or not participate at all.
Respectfully, I think you're confused about what a "free market" is. What you're describing, where market participants can compel the sale of a firm's assets, is antithetical to a free market.
>Your options are buy the class of stocks that the company wishes to sell, or not participate at all.
Respectfully, I think you're confused about what a "free market" is. What you're describing, where market participants can compel the sale of a firm's assets, is antithetical to a free market.
I am suffering no confusion.
Free market: “voluntary exchange and the laws of supply and demand provide the sole basis for the economic system.”
It’s voluntary exchange, yes, but it is not a driven by supply and demand. In the same way that the 1970’s oil market driven by the OPEC cartel was not a free market either. If you don’t like the control that Zuck has, can you express that dislike by buying shares of Meta that don’t include unequal voting rights? You can’t, because this is an issuer controlled market.
Free market: “voluntary exchange and the laws of supply and demand provide the sole basis for the economic system.”
It’s voluntary exchange, yes, but it is not a driven by supply and demand. In the same way that the 1970’s oil market driven by the OPEC cartel was not a free market either. If you don’t like the control that Zuck has, can you express that dislike by buying shares of Meta that don’t include unequal voting rights? You can’t, because this is an issuer controlled market.
>It’s not a free market. Your options are buy the class of stocks that the company wishes to sell, or not participate at all.
this is a pretty expansive definition of freedom, the freedom to buy unfettered options in a company.
this is a pretty expansive definition of freedom, the freedom to buy unfettered options in a company.
I have no idea what you are talking about.
It is a free market though? Sellers in a free market are free to sell what they choose, which includes not selling things they don't want to sell. If the government were to step in and _force_ public companies to sell stock they don't want to sell, that would be the opposite of a free market, by every definition I've heard of.
I don’t know what that has to do with what I wrote. Nowhere did I argue for anything remotely resembling that.
> One important role of government is to set and maintain standards for listing on markets, so that customers are protected. An example of such a rule would be that all publicly traded companies have equal voting rights across all share classes: one share, one vote.
That is exactly what you argued for. Your rule would force public companies to offer up for sale shares with equal voting rights, whereas today many do not want to do so.
I'm not saying it's bad. Perhaps it's a good rule. It's just that you said you want a free market, and then proposed rules that in fact detract from a free market.
That is exactly what you argued for. Your rule would force public companies to offer up for sale shares with equal voting rights, whereas today many do not want to do so.
I'm not saying it's bad. Perhaps it's a good rule. It's just that you said you want a free market, and then proposed rules that in fact detract from a free market.
> 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%.
Can this ever work? The PR group can control the 2% without nominally owning it.
Can this ever work? The PR group can control the 2% without nominally owning it.
The extreme case of this would be Poison Pills, so if that's allowed then I suspect you can contract for this as well.
Having said that this is the type of thing that is likely to get dragged in front of a judge, so the more foolproof way would be to retain 51% control or dual-class shares. Once you give up majority control to third parties, you can't really prevent everyone else ganging up on you and outvoting you.
Having said that this is the type of thing that is likely to get dragged in front of a judge, so the more foolproof way would be to retain 51% control or dual-class shares. Once you give up majority control to third parties, you can't really prevent everyone else ganging up on you and outvoting you.
> Can this ever work? The PR group can control the 2% without nominally owning it.
Yes. In tight-control transactions, there are a number of mechanisms.
Off the top of my head: specifying Board seats in the charter and requiring a supermajority or unanimity to change that. Voting rights agreements that delegate 51% of votes to one party. Turning all shares but two into non-voting shares, the two having 51% and 49% of the votes. Making transferred shares convert to non-voting. Transfer approvals.
Yes. In tight-control transactions, there are a number of mechanisms.
Off the top of my head: specifying Board seats in the charter and requiring a supermajority or unanimity to change that. Voting rights agreements that delegate 51% of votes to one party. Turning all shares but two into non-voting shares, the two having 51% and 49% of the votes. Making transferred shares convert to non-voting. Transfer approvals.
They don’t need to own the shares, they just need the shares to vote their way.
I think Beneficial Ownership bans this now and make it a criminal thing if you have control over an entity (regardless of ownership) and you don't declare that.
You can write all kinds of things in the articles of association/incorporation of a company. There's certain legal requirements but you can set up how the control of it works in many different ways to suit the purposes of the company or the desires of the founder/board. It's just a case of whether any investors will be happy to go along with what you're offering them inside those rules, since usually some degree of formal influence is expected (but not always, see how the tech giants are all generally quite immune from hostile takeover).
How does that work?
In this case wouldn't the individual with > 50% shares need to be diluted to < 50% for another party to acquire > 50% stake?
And surely at the point of dilution the individual would realise they have < 50% shares and this was a risk?
I guess what I'm confuse at is if you own 51% of the shares, unless you sell some of that or dilute your holding there will only ever be 49% stake that can be purchased by another party.
Am I missing something?
In this case wouldn't the individual with > 50% shares need to be diluted to < 50% for another party to acquire > 50% stake?
And surely at the point of dilution the individual would realise they have < 50% shares and this was a risk?
I guess what I'm confuse at is if you own 51% of the shares, unless you sell some of that or dilute your holding there will only ever be 49% stake that can be purchased by another party.
Am I missing something?
> if you own 51% of the shares
Your understanding is correct there.
> Am I missing something?
I think you are missing that there may be one or more third parties who also own a stake. A quick example (figures plucked from the air, not a real world case) might make it clear:
Your understanding is correct there.
> Am I missing something?
I think you are missing that there may be one or more third parties who also own a stake. A quick example (figures plucked from the air, not a real world case) might make it clear:
Starting point:
Founder 75%, Other(s) 25%
--
New investor buys 49% from founder:
Founder 26%, Other(s) 25%, New Investor 49%
Founder no longer has overall control, but nor does the new investor
Founder+Others can block the new investor if they all agree
--
New investor buys 2% from elsewhere:
Founder 26%, Other(s) 23%, New Investor 51%
New investor now has overall control and can do pretty much what they like
Having 51% control guarantees nothing.
I know a guy who had 51% in the family company. His retired dad had, in exchange for money, deprived the 51% shares of their voting power.
His dad then sold the shares on the local stock exchange.
A couple months later, his CEO/son was fighting a hostile takeover of the family-run, but publicly traded company.
So his son bought the 51% from the local stock exchange, thinking he had a majority.
The guy who owned the actual voting shares showed up at the annual shareholder meeting with attorneys and accountants , a small number of shares, and walked out with the keys to the company.
I know a guy who had 51% in the family company. His retired dad had, in exchange for money, deprived the 51% shares of their voting power.
His dad then sold the shares on the local stock exchange.
A couple months later, his CEO/son was fighting a hostile takeover of the family-run, but publicly traded company.
So his son bought the 51% from the local stock exchange, thinking he had a majority.
The guy who owned the actual voting shares showed up at the annual shareholder meeting with attorneys and accountants , a small number of shares, and walked out with the keys to the company.
> I know a guy who had 51% in the family company. His retired dad had, in exchange for money, deprived the 51% shares of their voting power.
You are either leaving out some important details or this is just not accurate. When people say you need to have "51% of shares" to control a company it means that you need to control 51% of voting rights of shares (sometimes different share classes have different voting rights).
It would simply have been impossible for "his retired dad to have deprived the 51% shares of their voting power" if his dad didn't have voting control. So something just doesn't add up in this story.
You are either leaving out some important details or this is just not accurate. When people say you need to have "51% of shares" to control a company it means that you need to control 51% of voting rights of shares (sometimes different share classes have different voting rights).
It would simply have been impossible for "his retired dad to have deprived the 51% shares of their voting power" if his dad didn't have voting control. So something just doesn't add up in this story.
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> Having 51% control guarantees nothing.
Maybe. But something (literally) doesn't add up in the original story.
If the CEO had 51% and sold the 49%, there is no place for the PE firm to capture the 2%.
Unless there is convertible debt or some such thing. Or the story is overly-simplified in some other way.
Maybe. But something (literally) doesn't add up in the original story.
If the CEO had 51% and sold the 49%, there is no place for the PE firm to capture the 2%.
Unless there is convertible debt or some such thing. Or the story is overly-simplified in some other way.
The CEO did not have 51%.
If he had less than the PE firm from the get-go, then he was never in control.
Well ... how could you not inform yourself with that much money at stake.
Both legitimate mistakes and arrogant hubris are common enough, as are those who feel good about finding loophole, mistakes, and blind spots, and exploiting them.
Musk, for example, seems to me from what he says to enjoy exploiting the blind spots of other businesses; but he was counter-exploited into buying Twitter for way too much.
Musk, for example, seems to me from what he says to enjoy exploiting the blind spots of other businesses; but he was counter-exploited into buying Twitter for way too much.
Small 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.
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.
> started cold-calling all the listed owners, asking if they could purchase their stocks - warning that the newspaper was on the brink of bankruptcy
In a sane world, this kind of behaviour would be identified as fraudulent and the party responsible would lose their shirt.
In a sane world, this kind of behaviour would be identified as fraudulent and the party responsible would lose their shirt.
Sane people would say "I don't know you" and hang up.
> 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.
This sounds like it should be a pretty big story. "Extremely dangerous to our democracy." On the other hand, it also sounds like it wouldn't be.
This sounds like it should be a pretty big story. "Extremely dangerous to our democracy." On the other hand, it also sounds like it wouldn't be.
> "Extremely dangerous to our democracy."
Obligatory:
https://www.youtube.com/watch?v=QxtkvG1JnPk
https://www.youtube.com/watch?v=cSFqA_8x9jA
Obligatory:
https://www.youtube.com/watch?v=QxtkvG1JnPk
https://www.youtube.com/watch?v=cSFqA_8x9jA
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The era of small local newspapers is long over. Its like saying buying all the libraries would be a threat to democracy.
If it were simply "over", there would be no need to buy them.
The Stranger begs to differ
Local newspapers are vital for towns/cities.
Sadly no one wants to buy the papers.
Sadly no one wants to buy the papers.
never pick a fight with someone who buys ink by the barrel
In 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.
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.
I had to look up FCL - it's a Full Container load (shipping container).
Why not let them buy the minority stake and give locals the extra cash for an asset they forgot they had? Control remains with the majority regardless
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?
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?
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.
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.
> 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.
Eh, this was tried on a friend of mine selling his company. He simply said "the deal's off" and walked away. A couple weeks later, he got another call which said "ok" and he got the full price.
> That also puts bootsrapped companies at a severe disadvantage
It's very simple. Just say "no". It's an incredibly powerful tool. It's crucial to getting a proper deal on anything from selling/buying your house, your car, to your company. Be ready to walk away. Sometimes by the time you started your car and are backing out of the parking spot, they'll come running out and say "ok".
But you gotta mean it when you say "no" or you'll fail. They can smell weakness.
Eh, this was tried on a friend of mine selling his company. He simply said "the deal's off" and walked away. A couple weeks later, he got another call which said "ok" and he got the full price.
> That also puts bootsrapped companies at a severe disadvantage
It's very simple. Just say "no". It's an incredibly powerful tool. It's crucial to getting a proper deal on anything from selling/buying your house, your car, to your company. Be ready to walk away. Sometimes by the time you started your car and are backing out of the parking spot, they'll come running out and say "ok".
But you gotta mean it when you say "no" or you'll fail. They can smell weakness.
“You have to be prepared to walk away.”
At a first approximation, negotiating power in most things is proportional to your credibility to abandon a deal.
As soon as a counterparty knows you can't / won't, you're negotiating from a much worse position.
As soon as a counterparty knows you can't / won't, you're negotiating from a much worse position.
One other advantage of buying family run bootstrapped businesses is that they're too small to trip antitrust scrutiny. There are entire industries whose driving consolidation force is a handful of PE firms buying up old family businesses and running them into the ground. Things like funeral homes, dental offices, and the like.
Yes, I did learn about this from Cory Doctorow, why do you ask?
Yes, I did learn about this from Cory Doctorow, why do you ask?
Links? I’d love to read more.
> 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.
That's why you hire a lawyer that also does this stuff everyday of the week.
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.
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.
I was tangentially involved in a deal where a Big Tech company acquired a VC-funded startup. The startup hired an investment bank as an advisor. The same investment bank that routinely underwrites debt offerings for the Big Tech company. Somehow they advised the startup to take the deal and not play hardball, even though there were public company comps at twice the valuation offered.
[deleted]
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>effectively shadow-banning you from future funding from anyone.
"You had better sell your business to us for a pittance, otherwise we'll lock you out of future deals."
"Ok, here you go. Now can you fund my new thing?"
"Ha! After we screwed you so hard last time? No way, you'll just set our money on fire out of spite. Way too risky."
"You had better sell your business to us for a pittance, otherwise we'll lock you out of future deals."
"Ok, here you go. Now can you fund my new thing?"
"Ha! After we screwed you so hard last time? No way, you'll just set our money on fire out of spite. Way too risky."
> "Btw, we can't do the deal anymore at this price, but we can sign tomorrow for 30% less".
Is this bad-faith stunt pulled after the company spent months focusing energy on the deal (rather than on the business)?
Is this bad-faith stunt pulled after the company spent months focusing energy on the deal (rather than on the business)?
> You have a massive disadvantage that can't be overcome
If somebody can't understand that they need to retain a majority of the voting rights to retain control of a company, then you're certainly right about them being at a massive disadvantage.
If somebody can't understand that they need to retain a majority of the voting rights to retain control of a company, then you're certainly right about them being at a massive disadvantage.
> You have a massive disadvantage that can't be overcome.
You hire a law firm to advise you on the deal.
You hire a law firm to advise you on the deal.
I wonder how one would select a competent law firm that won't charge exorbitant fees, knows what they're doing and actually has your best interests at heart. It seems like a similar problem to the one you're trying to solve by finding a law firm, namely not having any experience in the area to make a good decision.
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People just don't know about this stuff. It was even worse decades ago when there wasn't so much startup content online.
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?".
This. Always get a lawyer.
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.
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.
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.
I'd still suggest a lawyer for sure, but I wish I had counsel I liked.
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.
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.
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.
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.
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.
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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.
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
Exactly. If you do a deal like this, it seems ideal someone more savvy come in and run your company for you.
There'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.
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.
At least he's eventually honest about being a monster.
Which memoir was that?
Oh 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
Source
> Richard Branson’s Losing My Virginity
They call it "swimming with the sharks" for a reason.
The 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%?
It 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.)
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.)
I 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.
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.
Indeed. 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.
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.
do you want the money or not?
> But we missed one rather obscure method.
Please share.
Please share.
It 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.
This sounds like they sold something they never owned - i.e. "the right to sell without paying you royalty". Reminds me of the recent case where Disney tried to argue that in an acquisition, they bought only the rights, but not the obligations (royalty payments) that went with them [1]. Basically, writers were promised X% in royalty payments, but Disney argued they didn't buy that part of the contract, only the part where they now owned the works.
This is not something that should require, in any remotely sane legal system, an explicit contractual clause to prevent.
[1] https://www.hollywoodreporter.com/business/business-news/sta...
This is not something that should require, in any remotely sane legal system, an explicit contractual clause to prevent.
[1] https://www.hollywoodreporter.com/business/business-news/sta...
The larger context is that what they bought was my entire business, along with all rights to the intellectual property. What I got was a sale price and defined ongoing royalties for the product I formed the company to create.
They did sell something they owned. I neglected to attach a method by which I'd get compensated for them selling that particular thing.
In the mindset of cutthroat business, they legitimately won. They 100% adhered to the terms of the sale, and it's not their fault that I left a loophole they could leverage.
My attorney did say that if I wanted to, a case could be made for a lawsuit -- but it would have been expensive and wouldn't have had high odds of success. I just wanted to move on.
This whole event was my first real business success, and the mistakes I made were legion. It taught me quite a lot -- including that I won't do business with anyone that I am nervous about doing business with. Contracts can only protect you so much.
Also, I feel the need to repeat... I did pretty well from this deal. I was angry when this happened, but with the passage of time, I see that even with this event, I came out of the deal better than I went into it. So I hesitate to even call it a "regret". It's more of a "learning experience".
They did sell something they owned. I neglected to attach a method by which I'd get compensated for them selling that particular thing.
In the mindset of cutthroat business, they legitimately won. They 100% adhered to the terms of the sale, and it's not their fault that I left a loophole they could leverage.
My attorney did say that if I wanted to, a case could be made for a lawsuit -- but it would have been expensive and wouldn't have had high odds of success. I just wanted to move on.
This whole event was my first real business success, and the mistakes I made were legion. It taught me quite a lot -- including that I won't do business with anyone that I am nervous about doing business with. Contracts can only protect you so much.
Also, I feel the need to repeat... I did pretty well from this deal. I was angry when this happened, but with the passage of time, I see that even with this event, I came out of the deal better than I went into it. So I hesitate to even call it a "regret". It's more of a "learning experience".
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> 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.
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.
From 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?
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?
PE 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.
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.
> 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?
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?
Free Market Capitalism interprets good doers as damage and routes around them.
I 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.
Zuckerberg (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.
Some other companies like Lyft or Alphabet have similar structures, but it is very unusual.
I'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.
The NYSE and S&P 500 banned dual class stocks for several decades: 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.
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.
it'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
and rightfully so
How do you expect to make money with zero control?
> How do you expect to make money with zero control?
The way most Facebook shareholders have.
The way most Facebook shareholders have.
What was the name of the PE firm?
> 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.
> 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.
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You don’t need Yelp-For-Private-Equity. Sir, it’s a private equity firm. Screwing companies over is what they do.
Meanwhile, the inbound investors I've taken calls from aren't interested at less than 51%.
Where's the disconnect?
Where's the disconnect?
I'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?
> with the explicit purpose of retaining control
Why wasn't the other party contractually prohibited from obtaining control?
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That sounds like the result of a poorly worded and should never happen under well thought out agreements. Poor advisors if any on this one.
faith is a human concept, organizations are machines that optimize metrics
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What 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.
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.
This story by itself might sound like sour grapes, but in combination with other reports about the CEO(1), I suspect bad news ahead for Stability's investors.
It seems like a narcissist with a very 'dynamic' relationship with the truth chased the AI hype train and ended up with a bunch of money and attention due to a stupid VC. He pissed off the teams that invented Latent Diffusion and his partners at RunwayML in the process, and now it seems like his cofounder as well. What value is there in a company that's only famous because they spent $600k in VC money training an open source model on AWS?
1: https://www.forbes.com/sites/kenrickcai/2023/06/04/stable-di...
It seems like a narcissist with a very 'dynamic' relationship with the truth chased the AI hype train and ended up with a bunch of money and attention due to a stupid VC. He pissed off the teams that invented Latent Diffusion and his partners at RunwayML in the process, and now it seems like his cofounder as well. What value is there in a company that's only famous because they spent $600k in VC money training an open source model on AWS?
1: https://www.forbes.com/sites/kenrickcai/2023/06/04/stable-di...
The finance side of the AI boom is just the crypto bros chasing a new hustle.
Before that they were the Uber for x/y as a service people.
It's a shame we can't get things financed without these PT Barnum clown cars
Before that they were the Uber for x/y as a service people.
It's a shame we can't get things financed without these PT Barnum clown cars
I'm not convinced they are throwing money at nothing this time. If you look into my post history (don't, I'll give you a tl/dr) you can see me being fairly critical about the state of LLMs, but also that I find them incredibly useful for some things. GPT basically writes 95% of our documentation now, only the code we absolutely don't want to share with the internet is still be documented by hand. And that is just a tiny bit of how the new AI boom is actually useful. My wife works with dyslexic people, and the amount of usability AI has in terms of turning the written word into audio is outright amazing. I'm sure this will be hard on a lot of voice actors, copy writers and so on, but AI can do those jobs and a lot of other things.
To me that means that, unlike blockchain, there is actually a viable product behind all the AI hype, and unlike Uber companies have already started selling it rather than waiting for it to become profitable through scale.
Maybe it's just me but the AI hype reminds me a lot more of the dotcom era than any of the recent hype cycles. Of course this means that for every Amazon or Google there will be 9 million failures, and unlike the dotcom era, it's likely that it'll be Google (or most likely Microsoft) who hits the jackpot, meaning it'll be even harder to find the right investment opportunities this time, but I don't think it's a fad.
To me that means that, unlike blockchain, there is actually a viable product behind all the AI hype, and unlike Uber companies have already started selling it rather than waiting for it to become profitable through scale.
Maybe it's just me but the AI hype reminds me a lot more of the dotcom era than any of the recent hype cycles. Of course this means that for every Amazon or Google there will be 9 million failures, and unlike the dotcom era, it's likely that it'll be Google (or most likely Microsoft) who hits the jackpot, meaning it'll be even harder to find the right investment opportunities this time, but I don't think it's a fad.
Right. It's not a discount to the science or discipline but instead to the weird used car men snake oil games we need to play to move the money around.
The royal society and other 18th century science institutions had similar problems. Carnival barkers would shock people with leyden jars, hidden wires and do Stephen Grays flying boy experiment as an amusement to raise money to do actual legitimate science.
Some of the early Copley medal winners were impoverished borderline homeless people who couldn't afford the membership dues to scientific societies. They've got like scientific theories and galaxies named after them today
In Japan, the government has a special status for accomplished people where you get a lifetime monthly stipend so that, say fine poets can write poetry without worrying money. (人間国宝: https://en.m.wikipedia.org/wiki/Living_National_Treasure_(Ja...)
It'd be nice if things that were valued could be funded without having to hustle so much
The royal society and other 18th century science institutions had similar problems. Carnival barkers would shock people with leyden jars, hidden wires and do Stephen Grays flying boy experiment as an amusement to raise money to do actual legitimate science.
Some of the early Copley medal winners were impoverished borderline homeless people who couldn't afford the membership dues to scientific societies. They've got like scientific theories and galaxies named after them today
In Japan, the government has a special status for accomplished people where you get a lifetime monthly stipend so that, say fine poets can write poetry without worrying money. (人間国宝: https://en.m.wikipedia.org/wiki/Living_National_Treasure_(Ja...)
It'd be nice if things that were valued could be funded without having to hustle so much
I have often thought that the current AI hype is a perfect example in some intersection of i) tragedy of the commons; ii) the idea that you don’t have to be smart or skilled to make money; and iii) new fools and new shills are born every minute.
it would actually be pretty cool if we could run Uber Pool with PT Barnum clown cars!
Knowing Uber, they'd probably force the drivers to listen to the Benny Hill Theme
on a loop.
This article is really weird. Am I the only one asking who he pissed off or is a threat to for such a weird article listing off things like over half of all founders do as misdeeds.
Very low quality if not full on paid for “journalism”. Putting only loosely connected logos on a deck? Gimme a break, happens every day in every office in the world.
Very low quality if not full on paid for “journalism”. Putting only loosely connected logos on a deck? Gimme a break, happens every day in every office in the world.
As I understand the article describes fraud, which has little to do with being a good or a bad player. Fraud is a crime. Assuming, of course, that the article is truthful.
Odd story. The point at which you're selling your stake for $100, you've basically decided to give it away. Which raises the question: if he was just going to get $100 and nothing more, why not just hang on to it?
The lawsuit accuses the CEO of being a shady person in general. I think it’s plausible that the co-founder was surrendering equity he thought worthless (to move on from working with the shady person) and perhaps the CEO was advised by someone that a transaction without consideration can be challenging to defend (since he allegedly knew he was lying to the co-founder) so he convinced the co-founder that “for tax purposes, if I pay you $100 for the equity, it’ll be better for you as you can write the loss off” or something along those lines, something that wouldn’t stand up to scrutiny now but is enough to bamboozle someone into agreeing at the time.
Edit: no theory needed. The lawsuit goes on to say the $100 is the price the co-founder originally paid for the shares when the company was formed.
Edit: no theory needed. The lawsuit goes on to say the $100 is the price the co-founder originally paid for the shares when the company was formed.
The CEO might have been shady as all heck but the lawsuit really feels like it's all over the place in terms of claims. It starts by going on about how important the co-founder was to the company and to teaching the CEO almost everything about AI and like the co-founder was the brains behind the technical achievements, but then pivots into talking about how the CEO was responsible for all the code and the actual implementation and the co-founder was just a public face and deals maker who had no involvement in the actual development, and then pivots back to complaints about the CEO fraudulently claiming credit for "being instrumental" or "leading" the efforts to build the stuff.
The complaint simultaneously tries to paint the co-founder as absolutely vital to the success and creation of everything the company did, while at the same time only taking 15% of the company (the CEO started with 70%) and completely unaware of anything regarding the company's assets, income, or valuation, despite apparently negotiating multiple hundred thousand dollar funding campaigns and contributing $15k of his own money. Is it common when you're in the "getting grants from NGO's, before even seed VC funding" part of starting a company for one of three founders to be negotiating these $100k+ funding deals without any access to the company finances?
Didn't follow any public statement of the CEO, didn't have an insight or access to the books despite apparently multiple times running into funders complaining that the company appeared to be mis-managing funds, and apparently didn't even blink an eye (other than to note it I guess) that the deal that he thought was selling his shares back to the company was instead written to sell it to the CEO personally.
CEO may have been crooked as any man could be, but the co-founders own complaint really makes it seem like he walked through his entire run there with his eyes tightly shut.
The complaint simultaneously tries to paint the co-founder as absolutely vital to the success and creation of everything the company did, while at the same time only taking 15% of the company (the CEO started with 70%) and completely unaware of anything regarding the company's assets, income, or valuation, despite apparently negotiating multiple hundred thousand dollar funding campaigns and contributing $15k of his own money. Is it common when you're in the "getting grants from NGO's, before even seed VC funding" part of starting a company for one of three founders to be negotiating these $100k+ funding deals without any access to the company finances?
Didn't follow any public statement of the CEO, didn't have an insight or access to the books despite apparently multiple times running into funders complaining that the company appeared to be mis-managing funds, and apparently didn't even blink an eye (other than to note it I guess) that the deal that he thought was selling his shares back to the company was instead written to sell it to the CEO personally.
CEO may have been crooked as any man could be, but the co-founders own complaint really makes it seem like he walked through his entire run there with his eyes tightly shut.
> The lawsuit goes on to say the $100 is the price the co-founder originally paid for the shares when the company was formed.
My former business partner tried to pull a similar stunt. He mailed me a check for a few dollars (the original purchase price), along with a cheery matter-of-fact explanation. He assumed I'd cash the check and in doing so give away my vested shares for almost nothing, but luckily I did not. Sent a letter back explicitly stating I continued to own the stock and that the shares were not eligible for repurchase under our repurchase agreement.
My former business partner tried to pull a similar stunt. He mailed me a check for a few dollars (the original purchase price), along with a cheery matter-of-fact explanation. He assumed I'd cash the check and in doing so give away my vested shares for almost nothing, but luckily I did not. Sent a letter back explicitly stating I continued to own the stock and that the shares were not eligible for repurchase under our repurchase agreement.
Yeah, I had a similar conversation with a founder a while back. Company he had founded was getting acquired. He was a minority stakeholder at this point. No ability to oppose the acquisition. Acquiring company wanted him to sign docs saying "I relinquish all my interest for no compensation". His answer was basically something like "I think you can spare $10000 if this is that important"
Doesn't make sense without additional facts.
Such an agreement would not be valid in court as there wouldn't be an exchange of consideration.
Such an agreement would not be valid in court as there wouldn't be an exchange of consideration.
That's not true. Gifts are obviously legal.
Consideration is only required to enforce a contract for future performance, since otherwise there is no harm in breaking the contract.
Consideration is only required to enforce a contract for future performance, since otherwise there is no harm in breaking the contract.
Yes, gifts are legal. But the attorneys weren't asking for a gift, they were asking him to sign a binding legal document. And generally the law does not recognize "gifts" to for-profit entities; such a transaction is characterized as a contribution to the entity...which in the original comment would have defeated the very purpose of the agreement the attorneys were asking him to sign.
Furthermore, consideration isn't required to enforce future performance. It's a fundamental basic requirement to have a contract in the first place. Without consideration, there is no contract.
Furthermore, consideration isn't required to enforce future performance. It's a fundamental basic requirement to have a contract in the first place. Without consideration, there is no contract.
Hanging onto stock from a company I co-founded a few years ago has caused me tons of stress because that company constantly files for tax extensions forcing me to do so as well.
I have other financial processes which rely upon timely processing of my completed tax filing, and every year it causes me trouble. So if something is thought to be worthless and about to fold, "just hang onto it" could cause a non-zero amount of headaches.
I have other financial processes which rely upon timely processing of my completed tax filing, and every year it causes me trouble. So if something is thought to be worthless and about to fold, "just hang onto it" could cause a non-zero amount of headaches.
Guessing you're a member of an LLC or shareholder of an S-Corp with pass-through taxation. Can't agree more what a pain it is to wait on your old partners to do their taxes every year before you can do your own.
If you're just holding shares/options in a corporation that isn't going through ownership changes, that problem doesn't exist.
That said, there are still valid reasons to cut ties with past partners/employers.
If you're just holding shares/options in a corporation that isn't going through ownership changes, that problem doesn't exist.
That said, there are still valid reasons to cut ties with past partners/employers.
I feel for the original commenter. My cofounders and I traded the hassle of personal tax involvement for double taxation with my C-corp, and it was truly one of the best business decisions we have ever made.
What's required to let go of the stock? Is a simple signed document sufficient or is it necessary for money to change hands, like in the article?
Sympathy from me.
It is not strange that tax laws favour the well healed lawyered up.
It is not strange that tax laws favour the well healed lawyered up.
This isn't an us vs them situation. There is nothing wrong with filing a extension. If you don't like it, give the stock back
It's obviously not for the $100, that's just a small, round value to make it legal (some money has to change hands, even if just $1.)
Likely the CEO explains that it's worth nothing, they're re-organizing things for such and such a purpose, and the 15% stake in the cap tables is an inconvenience preventing a possible deal. Please could you do us a favor and help us clear that from the cap table.
I'm the kind of person that would fall for that.
Likely the CEO explains that it's worth nothing, they're re-organizing things for such and such a purpose, and the 15% stake in the cap tables is an inconvenience preventing a possible deal. Please could you do us a favor and help us clear that from the cap table.
I'm the kind of person that would fall for that.
Could be a "peppercorn" as described in
https://en.m.wikipedia.org/wiki/Peppercorn_(law)
https://en.m.wikipedia.org/wiki/Peppercorn_(law)
Oh, I felt that. That's we I need an always on AI assistant game theory optimizer.
My immediate thought exactly. You'd have to be absolutely flat broke for this to make any sense whatsoever. Why sell it at all? And, if it's so worthless, wouldn't you be more than a bit suspicious if the CEO were so keen to buy it off you? Something here smells off to me.
I assume the deal was for something else... Eg. "Sign this deal for 100 bucks and we'll have a shorter list of people to consult at every shareholders meeting. In return, we'll consider you for investment opportunities for your next startup "
And it was in a few transactions? That’s even more odd like the CEO couldn’t afford $100 in a lump sum.
I still own equity in companies I started in the past and no longer have any day-to-day participation in that I'm happy to hold on to.
I've also done what the founder in the article has done - sold equity for very little.
The reasons for doing so are various - most of those reasons being more practical or rational than you might expect.
In my case, I sold my share because I had no faith in the vision, or faith in the potential or even worth of what we pivoted to. I had enough equity that I had a fiduciary responsibility to further the goals of something I was confident would tank the company. It was either fight the board/VCs and my cofounder, risk being sued for not acting in the best interests of shareholders, or sell me stake and move on.
Said company went out of business 2 months later as it pursued its unviable, worthless pivot.
I've also done what the founder in the article has done - sold equity for very little.
The reasons for doing so are various - most of those reasons being more practical or rational than you might expect.
In my case, I sold my share because I had no faith in the vision, or faith in the potential or even worth of what we pivoted to. I had enough equity that I had a fiduciary responsibility to further the goals of something I was confident would tank the company. It was either fight the board/VCs and my cofounder, risk being sued for not acting in the best interests of shareholders, or sell me stake and move on.
Said company went out of business 2 months later as it pursued its unviable, worthless pivot.
If you want to know, watch Dr Phil interviewing people getting conned in romance scams or Unusual Suspects real life crime show where a “best friend” murders him to avoid getting caught in a Ponzi/fraud.
Human nature is to trust on face value. Sometimes that trust is not warranted.
I assume I can be fooled.
I for many people including me, defence against dog eating dog business has to be learned.
Human nature is to trust on face value. Sometimes that trust is not warranted.
I assume I can be fooled.
I for many people including me, defence against dog eating dog business has to be learned.
Key information is obviously being omitted. Unfortunately like most modern journalism it's maximising for outrage not accuracy.
Only thing I can think of is that it might have been the symbolism of the cheque rather than the value.
May I just say, that the most ridiculous thing in this news really is selling a 15% stake in a company for $100?
I'm no way rich, but I would not even bother taking the time to go to a lawyer or whatever and do all this kind of paperwork for such a ridiculous amount of money, I'd just ride it however it goes and not care.
I'm no way rich, but I would not even bother taking the time to go to a lawyer or whatever and do all this kind of paperwork for such a ridiculous amount of money, I'd just ride it however it goes and not care.
> May I just say, that the most ridiculous thing in this news really is selling a 15% stake in a company for $100?
no kidding. i wouldn’t sell a 15% stake in a lemonade stand for $100. that doesn’t even cover the hassle of reviewing the contract and signing a bunch of notarized paperwork
no kidding. i wouldn’t sell a 15% stake in a lemonade stand for $100. that doesn’t even cover the hassle of reviewing the contract and signing a bunch of notarized paperwork
I can think of a scenario where someone might.
Suppose you made it very easy for them to sign it over, with the contracts ready and someone in person ready to guide you through signing them. You could apply guilt and some made up scenario about needing those shares back so that the company can move forwards. Enough spin and pressure could do it.
Suppose you made it very easy for them to sign it over, with the contracts ready and someone in person ready to guide you through signing them. You could apply guilt and some made up scenario about needing those shares back so that the company can move forwards. Enough spin and pressure could do it.
I was once really broke and sold my 50% share in a startup I'd built for, IIRC, £500.
In retrospect, perhaps I came out the winner?
This was it: https://dudefactory.com/
I went on to turn that £500 into approx $13.5m: https://torrentfreak.com/major-tv-torrent-site-thebox-bz-cal...
In retrospect, perhaps I came out the winner?
This was it: https://dudefactory.com/
I went on to turn that £500 into approx $13.5m: https://torrentfreak.com/major-tv-torrent-site-thebox-bz-cal...
How do you make that much money as a private torrent tracker, advertising?
(Obligatory congrats)
Edit: and was running that site related to why you went to jail?
(Obligatory congrats)
Edit: and was running that site related to why you went to jail?
Folks would pay to bump their ratio so they could download more. Site was not related to my jail spell.
(also all the money is long gone, First Wife has what's left of it, I am broke once again lol)
(also all the money is long gone, First Wife has what's left of it, I am broke once again lol)
The box was my favorite torrent site back in the day but the seeding requirements were a little insane especially when there was no one that wanted the same content.
Yeah, it was a bitch when you wanted some totally random show that no-one wanted. You could get yourself in a horrible ratio hole. I guess that's why we made so much money from people buying themselves out of holes.
That's funny. I didn't know you could buy credits.
Owning a 15% stake in a company also generates paperwork. Long-term, getting rid of it should be less paperwork overall.
Right? Like ... what happened in that transaction?
My feeling is that the guy also got some favors or something under the table, and the $100 was purely nominal. If that's the case, it could be that whatever he was promised didn't actually pan out, and now he's suing in retaliation.
In any case, "$100 for a 15% stake" simply cannot be the whole story.
My feeling is that the guy also got some favors or something under the table, and the $100 was purely nominal. If that's the case, it could be that whatever he was promised didn't actually pan out, and now he's suing in retaliation.
In any case, "$100 for a 15% stake" simply cannot be the whole story.
That was my initial reaction as well, maybe he had concern about being liable or something... but yea, seems like something is up there...
One of the biggest warnings with "equity" in a startup:
Even if you know what you're doing and you watch it like a hawk it's pretty easy for other parties to pull any number of shady but technically legal moves to significantly devalue yours/others while protecting their own.
If this proves to have merit it's one of the more shocking (yet straightforward) instances of this kind of unfortunately routine behavior.
That said it's a little hard to believe anyone would take $100 instead of holding on to it to see what happens. Depending on personal circumstances I can see how $100k or more could be tempting but $100 is ridiculous.
Even if you know what you're doing and you watch it like a hawk it's pretty easy for other parties to pull any number of shady but technically legal moves to significantly devalue yours/others while protecting their own.
If this proves to have merit it's one of the more shocking (yet straightforward) instances of this kind of unfortunately routine behavior.
That said it's a little hard to believe anyone would take $100 instead of holding on to it to see what happens. Depending on personal circumstances I can see how $100k or more could be tempting but $100 is ridiculous.
This dude very well may be better off with the 100 bucks at this point. The company is bleeding money at a ridiculous rate, so they're going to need to fundraise shortly. Given how little they have to show for their initial funding, they're going to struggle to attract any further investments. The initial investors already look like absolute clowns for giving a $1B valuation to a company whose primary selling points were 1) a model which was state-of-the-art for maybe a month 2) a github repo with a lot of stars and 3) a loose association to some mediocre researchers. Unless they can find someone to hold the bag in the very near future, their equity is going to be just about worthless.
Let's be nice; they've released Stable Diffusion and now SDXL for free, which has completely changed the landscape on what can practically be done by individuals.
Having an open foundation model for image-generation is a service to the world. It just isn't exactly obvious how it could possibly lead to profit.
Having an open foundation model for image-generation is a service to the world. It just isn't exactly obvious how it could possibly lead to profit.
__loam(1)
The loose association was with decent researchers, no need to bring them down. I do agree about the rest.
Mediocre in regard to the standard set by other research teams pulling $1B+ valuations. The OpenAI founding team and the recently announced team at xAI are what I would consider to be exceptionally strong groups. Adept, Anthropic, Inflection, and character.ai are also strong. Look at the track records and accolades of researchers at these groups. Ilya Sutskever alone has more research experience than the combined team of phd students Emad was working with (and eventually hired).
Wow, the AI field has barely boomed for like 1 year, and we are already all-in on credentialism?
Stable Diffusion has had a very large impact on the entire arts industry, far more people have used SD than have Claude or pi. If another open source startup can reach that level of industry shaking fame and intense user interest, they could have easily be valued at 1B.
If SDXL works out, that'll be another large leap forward. Midjourney's models are stronger, but they can't compete against a legion of 1000 fine-tunes for every purpose.
Stable Diffusion has had a very large impact on the entire arts industry, far more people have used SD than have Claude or pi. If another open source startup can reach that level of industry shaking fame and intense user interest, they could have easily be valued at 1B.
If SDXL works out, that'll be another large leap forward. Midjourney's models are stronger, but they can't compete against a legion of 1000 fine-tunes for every purpose.
Yeah. I still don't see how this will work for _Stability_, but the impact is definitely there.
The researchers responsible for latent diffusion and VQGAN have competed directly with OpenAI for at least 2 years. They are at the top of their field.
Maybe this is callous, but this kind of sounds like a win win. Investors who are responsible for enshittifying all my favorite stuff finally get screwed for once, AI gets democratized instead of being solely in the hands of OpenAI/Google/etc in the process. Nice.
The dude might well be better off in the near future when the hype passes and company is worth its fair price of $50.
VCs don't like dead equity, they will have pressed for this. Nonetheless you cannot lie and this could have been resolved with integrity.
I had a former employer call once and ask me to sign a form confirming that I had opted not to exercise the stock options worth 0.125% of the company when I left.
They were raising a new round and my old grant was a sticking point because the new investors weren't content with the company not having a record of my exercise.
I signed because it helped them out, cost me nothing and seemed like the right thing to do. Just think it was funny that a VC was so averse to dead equity that they made the company make sure someone who wasn't on the cap table agreed that they weren't on the cap table.
They were raising a new round and my old grant was a sticking point because the new investors weren't content with the company not having a record of my exercise.
I signed because it helped them out, cost me nothing and seemed like the right thing to do. Just think it was funny that a VC was so averse to dead equity that they made the company make sure someone who wasn't on the cap table agreed that they weren't on the cap table.
>> VCs don't like dead equity
Isn’t a VC investment dead equity?
Isn’t a VC investment dead equity?
Not if they are actively participating. They might have a seat. They might vote on deals. They might actually help.
Dead equity does none of the these things. Think of it as spent or no longer in play.
I don't know why some people are so touchy about the term. It's not a value judgment on the contributor. Furthermore, I would argue that a lot of the time Angel investment or friends and family investment is dead Equity too
Dead equity does none of the these things. Think of it as spent or no longer in play.
I don't know why some people are so touchy about the term. It's not a value judgment on the contributor. Furthermore, I would argue that a lot of the time Angel investment or friends and family investment is dead Equity too
How could you say that? VCs are there to go to bat for you, make connections that change the trajectory of your business, and support you however they can. /s
Yeah, that's why they pay a lot of money to get in. Would you give your buddy joe that doesn't do any work 10% for fun?
What does dead equity mean?
Equity owned by former employees or anyone not still involved in building the company. Awesome derogatory term for people who got paid fair and square.
Dead people made a lot of contributions to the world too.. They just aren't contributing any more.
I was part of a group which ceded managerial control of a small business (think 100-500k/year) to a minority shareholder. This person was paid a professional salary to maintain the business, while we kept majority voting rights.
We still had majority ownership until he decided he didn’t give a ** about our ownership claims and openly did his own thing.
The problem is, no lawyer is going to take the case because the $$ is too small and we would be risking our own capital vs the company capital.
The worst part…it’s an LLC and the manager remains kind enough to send the tax statement each year, so I pay for the privilege of having a company stolen from me.
Choose your business partners carefully. :(
We still had majority ownership until he decided he didn’t give a ** about our ownership claims and openly did his own thing.
The problem is, no lawyer is going to take the case because the $$ is too small and we would be risking our own capital vs the company capital.
The worst part…it’s an LLC and the manager remains kind enough to send the tax statement each year, so I pay for the privilege of having a company stolen from me.
Choose your business partners carefully. :(
I don't understand. You have majority ownership and you can't fire the manager of your own company?
It is confusing what when on here. If you hired him then you have a contract. Fire him. And if he doesn’t leave or return bank accounts or money get the police to charge him with trespass or thief depending. Also he has probably misappropriated money so find that and claw it back.
It’s hard to explain, but it’s…complicated.
More likely you're being disingenuous about the situation
The company is yours. Why can't you use its capital? Do you no longer have access to the bank accounts?
You had majority voting, right. Why not just fire him.
https://archive.is/Sl3XS
(Also, I didn’t research this author, but a reminder that for $500 or so, you too can become a writer for Forbes. They have a massive credibility issue and I suspect are cashing out what little name they have left)
(Also, I didn’t research this author, but a reminder that for $500 or so, you too can become a writer for Forbes. They have a massive credibility issue and I suspect are cashing out what little name they have left)
I assume this guy has a decent income and is not desperate for money. Why would he sell anything for $100??? Time, effort, legal fees and whatnot are much higher than $100.
Even if the company would be indeed worthless, I would not bother selling my shares for $100. I would just watch them go to 0.
Even if the company would be indeed worthless, I would not bother selling my shares for $100. I would just watch them go to 0.
Not that I could judge for either side here, but I feel we are missing part of the story.
Who would sell anything like that for 100 dollars in 2 transactions? If it really was worth nearly nothing I'd probably not ask my cofounder to pay me 100 bucks for it either.
Who would sell anything like that for 100 dollars in 2 transactions? If it really was worth nearly nothing I'd probably not ask my cofounder to pay me 100 bucks for it either.
The captains of this new industry selling their stake for a handful of magic beans is not great news for solving the AI alignment problem.
It takes a few years before liars/fraudsters are put behind bars. I enjoyed this video today about Alex Mashinsky who lied a lot and was finally arrested for fraud: https://www.youtube.com/watch?v=zRpl7Pr0fs4
Seems more and more of these stories make company owners sound like criminals. Those exist surely and we do have a movie about Zuck, but while that seemed interesting enough to make a movie about, it now seems to quite normal. People murder for a few bucks, how does this ceo sleep at night? It is not ‘just business’.
The founder of DataTree (bought by NYSE:FAF) did something similar and got away with it bc coming forward would have wrecked all the mom n pops as the acquisition fell thru. Of course, the mom n pops turned into nasty bitches as soon as they received their wires, but…
So many people don’t do the right thing.
What's the point of cashing out for literally $100? That's barely a single grocery trip. At that point, even if it was nearly worthless you may as well keep the stock certificate as a souvenir and hold on to a small hope things turn around.
If the cofounder is that level of unaware about the existence of his own company, I would say it was even right to take shares from him. The worst case scenario is that CEO has to dissolve previous company and create a new one to take that 15%.
High finance.
It is best understood by modelling it as an international criminal conspiracy.
All models are wrong.....
It is best understood by modelling it as an international criminal conspiracy.
All models are wrong.....
Corporations do not benefit from open source as a phenomenon. Another attack on Emad from Forbes, which is clearly paid for and lobbies for the interests of AI giants.
It's like spending your worthless bitcoin on pizza.
As crappy as this is... There's a hard case the CEO would have never raised a dollar if there was 15% of zombie equity on the cap table, making this guys 15% stake worthless anyway.
However, if he refused to sell his 15% stake, there's absolutely no reason why you wouldn't incorporate a separate business all together, especially if you were on the cusp of fundraising a massive round.
Summary: Bad business by the CEO, poor thinking by the stakeholder, Bad due-diligence by the VC firms. /end
However, if he refused to sell his 15% stake, there's absolutely no reason why you wouldn't incorporate a separate business all together, especially if you were on the cusp of fundraising a massive round.
Summary: Bad business by the CEO, poor thinking by the stakeholder, Bad due-diligence by the VC firms. /end
How broke someone has to be to sell 15% of anything for 100 bucks? Just the domain name was probably worth 10 times that.
Isn’t this essentially what Zuckerberg did to his cofounder?
Or some variant of the same recipe…,
Or some variant of the same recipe…,
Not quite -- Eduardo Saverin has had a pretty good life after he was diluted out. "Eduardo Luiz Saverin is a Brazilian billionaire entrepreneur and angel investor based in Singapore. Saverin is one of the co-founders of Facebook. In 2012, he owned 53 million Facebook shares (approximately 2% of all outstanding shares), valued at approximately $2 billion at the time"
https://en.wikipedia.org/wiki/Eduardo_Saverin
I'd say nothing like giving up a stake for $100
https://en.wikipedia.org/wiki/Eduardo_Saverin
I'd say nothing like giving up a stake for $100
He had to go through a lawsuit to get them... kinda like the story.
How do you go from cofounder 50% to owning 2%? Did he just trust his friend like most of us would and the zucc made him sign a document he didn't bother to review?
> after he was diluted out
Saverin had to sue Zuckerberg to get the money though, which is what the guy in this story is also doing.
Man, he should've at least held out for a sack of magic beans!
...or a couple of BTC?
Maybe he used one of those super-persuasive AIs I keep hearing about.
I ate dinner last night and cost me $100. What kind of weirdness is this?
epic cover photo...
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.