Ask HN: Help, Investor wants money back in 7 days "Or else"

[anon0264]

We recently sold a total of 22% share of our established company to an investor that also wanted to work for us as director of Sales. The person had a large rolodex in a segment of our market that we had not been able to tap and felt they could bring a lot to the table as an employee. So we put together some additional vesting based on rev targets all tied to being employed. The investment granted preferred shares and a seat on the board, voting is with ownership % and it takes 67% to pass.

So here we are 8 weeks after the deal, and things could not have gone worse. From day 1 the employee made it clear they did not intend to do sales, but instead had a "vision" for the company and wanted to run it. They first tried to buy out the CEO and president to do so, but we refused. After that they refused to work the sales plan we had developed, refused to be accountable to any touches/sales goals, hired staff without budget approval, purchased equipment/services without approval (sometimes express disapproval), took 20% vacation days, worked 10-4, and walked out of 3 meetings. The person basically would take no direction or training from the CEO (their agreed upon boss) and eventually moved out of the office to setup an office in another location. When called out on this behavior the person threatened to suit for all sorts of things, hostile work environment being #1 - they also threatened to pull their investment 3 times, including 3 working days in!

So here we are now, we have made it very clear that the employment will not continue like this, and have started the process of removing the job with cause. Seeing that coming they have requested to reverse the deal and demand we return the full investment in 1 week, or they can "do it the hard way". They would like to reverse everything so that it is like it never happened. There is nothing in our agreement that covers this, besides them selling their shares, the employment is not guaranteed on paper. We too would like them out of the company for obvious reasons but there are issues with this demand:

1. 7 days it a short amount of time to come up with 400k 2. a lot of the investment has been committed (in good faith) to salaries and equipment, included the salary paid to the investor for "working" in the sales role (which yielded 0 sales, 1 presentation, and 0 estimates) 3. Some of the investment bought personal stock from one of the owners. So that money is taxed, been used to delete debt, and not in the company. 4. They know all our IP from having access to literally everything from basecamp to 3yrs of client sales data, our staff and to how we do what we do. They have made it very clear they want to turn around and open a directly competing company as soon as they leave.

Anytime we push back on these issues they again threaten to suit, and they remind us they have a huge pile of cash for that and we don't.

We have offered to buy back 185K of their stock immediately, and the rest by the end of the year from accounts receivable. We think this would be more realistic, doing the buy back much faster would starve the company of cash, and very well put us negative on cash-flow. We are also asking that the existing non-compete, non-disparagement, and NDA they signed still stand. I also feel like the 30K spent on their salaries should be deducted from the buyback.

Of course we think this is all total BS, and the "right" thing to do is to suit them, but that is not our DNA, and would jeopardize the company we have now (growing revenues at 125% a year for the past 3 years).

I know what we did wrong, trust me, but what do you think we should do now to finish this?

[pg]

Things seem past repair. Get a good lawyer, and do what they advise.

You probably don't need to worry about the guy starting a competing company. If he does it will fail.

[dirkstoop]

Further specifying "good": you really need a lawyer who's seriously experienced in these kinds of matters, not just any lawyer. It makes all the difference.

Also remember that there's a lot a lawyer can do for you in a situation like this, way before a lawsuit is even on the horizon.

[lsc]

the thing about the "get a lawyer" advice is that this does not necessarily mean you are going to court. A lawyer is essentially a professional negotiator. I mean, if I was in that situation, I'd find a lawyer who was comfortable negotiating on my behalf.

[drats]

I am sorry, but this is so convoluted and there is so much money is at stake that if you haven't hired a lawyer by now you are certifiably insane. A couple of things are for sure, you and your business partners were a) not equipped to detect/vet a loony b) were not able to handle them c) did an ask HN in a situation that obviously calls for a lawyer. I am sorry but you are seriously lacking business skills. After this is finished you need to either learn from your mistakes or better yet put out for, and vet very very carefully from multiple references and past performance, a serious business oriented partner because this rambling post with tens of thousands of dollars at stake just screams clueless.

[Multiplayer]

I see your points but I think this is overly harsh. You aren't experiencing this first hand - you are reading a summation after the fact and making a quick judgement. This possibly is all happening like a slow motion car wreck.

There are a number of dynamics at play in a situation like this and it can get very confusing, very quickly. The new guy is both an investor whose money they are currently spending and also an employee which blurs the lines on how to manage a relationship like this.

I have seen these kinds of relationships blow up before and when you are a young and inexperienced entrepreneur you don't know whether to engage him, disengage and get attorneys involved or just go crazy. Sometimes it looks like the other guy is holding all the cards.

This doesn't scream clueless, it screams confused and not sure whether to spend scarce resources on attorneys. Next time they will have an attorney standing by.

[ankeshk]

Time to become a bit Machiavellian - even if its not in your DNA. What are this persons weak points?

1. Hire a good lawyer and get good advice. The best defense is a good offense and all that.

Make sure he has no ability to use company funds. Cancel his company debit / credit card if he received one as a director of sales. Send an official letter by registered post letting him know that he does not have the ability to authorize expenses above $100 or so.

Then follow your lawyer's advice on firing him from the sales position.

Make sure your lawyer communicates the non-compete part with him properly - so that he realizes that if he leaves now, he won't be able to profit from the idea at all - and its better to stay with you and earn 22% of the pie than go for 100% and get a big fight on his hands that he will most likely lose.

2. > The person had a large rolodex in a segment of our market.

This tells us that the person's reputation can be adversely affected. Threat of bad press could maybe get him in line.

Also, it would be a good idea to find at least one or two common connections and try making them mediators.

3. This is the stick. You need to offer him a carrot too.

Make him an offer: he does not work with you. He retains his shares and plays a role as an investor. He gives up the board seat - and remains a silent investor. He gives you a connection / letter of referral for all the contacts he is sitting on - for a flat fee. No vesting of shares.

Position this "getting a fee for writing a letter of introduction to his connections" - as the carrot. A lot depends on how you phrase it.

4. Start contacting other investors who could maybe buy this person's share out. I doubt if you can find and close someone in 7 days, but the sooner you start looking, the better.

[okmjuhb]

"This tells us that the person's reputation can be adversely affected. Threat of bad press could maybe get him in line."

Under no circumstances should you make threats like this without talking to a lawyer.

[ultrasaurus]

Also, if you haven't already, revoke their access to anything he/she can do damage with by copying (source tree) or writing (say posting to your blog).

[cperciva]

Anytime we push back on these issues they again threaten to suit

Sometimes threats are just threats. When I was starting Tarsnap, I spoke to an "angel" investor who, when it became clear that we wouldn't reach a deal, threatened to sue me to recover his "expenses" associated with considering an investment. A few months ago I got an email from an "inventor" threatening to sue me for infringing on his patent application.

In both cases, I responded that I thought they'd be laughed out of court; and I haven't heard from either since.

[cletus]

Generally speaking you can only do yourself harm by responding to this kind of threat. Just ignore it.

The first thing a lawyer will probably tell you is say nothing.

[dotBen]

This is one of those "Ask HN's" where the ONLY helpful + useful answer is: "get a lawyer" and nothing more.

HN'ers all mean well, but few-to-none of us are lawyers. I've seen examples where many well-meaning geeks (I'm one too) have up-voted an answer to a legal question that is actually incorrect or not the best course of action.

Always take legal advice from a lawyer over the advice of 100 geeks. If the amount of money we're talking about here is $400k then you must have had a lawyer involved to do the deal so go back to them seeing as they are familiar (and should have put provisions in for this kind of outcome).

[prawn]

I disagree slightly on the "nothing more". Yes, get a lawyer, but also don't lose too much sleep over the threat to start a competing business. If this guy wasn't bothering to do any sales for OP, then I doubt they'll have the perseverance to follow through on doing it for themselves. They'll have grand plans and talk it up, but I don't think they will see it through. YMMV.

[ScottBurson]

I think the other answers can be useful as ideas that can be bounced around and will perhaps lead to other ideas, but certainly one should consult a lawyer before actually acting on any of them.

[JeffL]

Other answers are also useful because other people can learn about the law that way. Yes, get a lawyer, but also a lot of the advice is interesting and educational as well.

[mattmaroon]

I cringe every time I see something like this posted here. I know you're probably freaking out (I would be in your spot) and desperate, but asking an internet community what to do in a situation like this is like asking a guy on Chatroullette "I have a stabbing pain in my chest, what should I do?"

Do yourself a favor and ignore every piece of advice that isn't "talk to a good lawyer". Except the piece of advice that says you should ignore every piece of advice and talk to a lawyer. Or that second one.

Now my head hurts. What should I do?

[ivankirigin]

Talk to a lawyer

[metamemetics]

Casually start giving "guy" the impression you have been always been talking to lawyers since the beginning even if you haven't. You need to start methodically slipping in mysterious phrases like "me and original cofounder Y's attornies", even if you are talking about how everything will work out without lawyers, you have to convey to him that you've secretly been talking to lawyers about him since the beginning and are actually a few steps ahead of him in a secret master plan in which he is the loser. He is gaming you.

Also, humor is life's great defuser. If you can figure out how to make him laugh at least a couple times in the next few weeks, it will be a surprisingly huge aid.

[ Even though this is at the unavoidably SERIOUS BUSINESS aka lawyer point, you need to get meta, make light of the situation, don't jump through the hoops he creates for you. His train of thought is carrying you and your business and it's headed to bye-bye camp. DERAIL this train in anyway possible, even if it involves providing framed motivational posters of LOLcats for his new office. Also, consider getting him drunk at some point if possible. ]

[alexro]

Simply speaking, make them lose focus, relax

[Br1c3]

Stop contact.

Like others have said you need to get a lawyer pronto.

Direct all communication through you new lawyer, or with your lawyer present.

Some things to discuss with your lawyer:

1.Nature of the investment?

2.What terms did you and the investor agree to in writing?

3.Termination of employment, don’t just fire him w/o talking with your lawyer.

4.His unauthorized hires, purchases.

[anigbrowl]

Who provided the agreements this person signed, and structured the company for you? You have been in existence 3 years, you say, and going by the numbers you mention the company is capitalized to the tune of about $2 million. I find it hard to believe you don't already have an attorney, and that said attorney would not have given you a professional referral if some unforeseen circumstance made it impossible to advise you. Or that you have run the company for this long, and had serious problems over the last 2 months, without being aware that this is the sort of stuff lawyers do for a living.

It can't be a cash question, you could get an hour of excellent legal advice for $1000 even in a big city.

Also (and this applies to all legal 411 queries on HN), where is the firm incorporated/located? Rules vary across different US states, and there are lots of HN folk who are not in the USA at all. I'm only guessing you're American when I mention 4 numbers, for all I know you could be in Uzbekistan. Even if I was a lawyer, how would I know which rules govern your case, or whether I was close enough to offer assistance?

And why don't you have a throwaway email address in case someone can give you an exact answer or refer you to a report of an identical case? Depending on the nature of your business, it might even be appropriate to involve the police based on the story you tell.

the "right" thing to do is to suit them, but that is not our DNA, and would jeopardize the company we have now

I'm having trouble taking this seriously.

[martinkallstrom]

Get the most reputable lawyer you can find and afford (firm with known name) and force the other part into structured negotiations. Don't go to Hacker News for advice. Advice is worth nothing, proper procedure is everything. At this point you can easily make a mistake and become accountable.

[dinkumthinkum]

Talk to a lawyer immediately. Now, this doesn't mean you need to go out and hire the most expensive firm you can find; be reasonable and talk to a few different firms and really utilize any free initial consultations. Stop communicating with this person about anything legal until you have gotten counsel. I mean, if this person brings up legal matters, just tell them you can't talk about it. Don't offer any more deals. Definitely, do not do anything at all to make it seem as if you admit wrongdoing. Again, talk to some lawyers and do not have any more conversations with the person about possible resolutions, deals, etc without getting consultation. Don't let the other party know anything about what you are planning. Perhaps you can file some sort of suit, at least file a complaint that may make the person give up and go away, which is what I think you really want. He can't force you to come up with 400K in 7 days. He'd have to file a complaint, you would need to get served, and then you'd have time to respond. From that point, you can file all kinds of things. Don't be scared or emotional, get off HN and get to the calling law firms. Cheer up, people like this usually lose. :)

[malandrew]

Does anyone maintain a blacklist of "nightmare" people to do startup business with?

Seems like this guy is a surefire candidate to be included in such a list.

[gasull]

http://www.thefunded.com/funds/banned

It's a list of VCs to avoid.

I wish there was a place to submit "clients from hell" (I know a few), but I can see how this could be abused too.

[wisty]

"I also feel like the 30K spent on their salaries should be deducted from the buyback."

IANAL.

They have no right to ask for their investement back. They have offered to sell you all their shares for 400k within a week. You have made a counter offer, which they rejected.

You can give them a lower offer (370k, by the end of the year), but they can refuse.

Realistically, you might have to offer a bit more, as their investement has grown.

You can hit them with a suit if you want - they acted with apparent, but not actual authority. From wikipedia: "If the agent has acted without actual authority, but the principal is nevertheless bound because the agent had apparent authority, the agent is liable to indemnify the principal for any resulting loss or damage."

So you can ask them to pay you damages for anything they did without the right approval. You'll need a lawyer to do this.

You might want to ask them what charges they are thinking about making. There might be some minority investor rights they can sue over? But I'd ask a lawyer before doing this - I suspect this could force their hand, which you might not want to do.

Whatever the case, you want to buy them out, and make sure all the documentation for this is in good order.

[wisty]

IANAL, but it sounds like his threats are just piss and wind. I can't see how he has any rights, other than those of a minority shareholder and as a (former) sales manager.

On the other hand, you can sue him for acting as an agent without actual authority. Those hires and purchases he made that you explicitly vetoed? Invoice him, and watch him squirm. Tell him he can pay for them with some of his shares. But ask a lawyer first.

If he keeps making noise, ask him if you can speak to his lawyer. He doesn't have one. No lawyer would advise him to make such stupid decisions (trying to roll a CEO with just 20% of shares, vague threats, etc).

You have to buy him out eventually, or he'll be a recurring headache. It might cost more than 400k, as his investement has matured.

[Scott_MacGregor]

You might want to talk to your company attorney about the possibility of the company buying back his shares by executing a note for the balance, rather than all cash. Maybe talk about the possibility of having the note come due upon some particular event, such as replacing the investor with another investor of equal or greater value. If the investor is hesitant to go for that option, you could talk to your attorney about the possibility of having the company make payments towards the note balance on some other future event as laid out on a timetable.

If you look in the Attorney engagement letter it probably has language about their duty is to represent the interests of the company only, and not the founders, shareholders, officers or other individuals or entities associated with the Company.

It seems like he wants to willingly pull out as employee and investor/board member, as long as he gets his investment back. So working out a solution for the payment for the shares (with the help of the company Attorney) might get the ball rolling on a solution for you guys.

Good luck with this.

[stretchwithme]

As others have advised, I would contact a good lawyer asap. And then consider deleting this post if that's possible. Your adversary may find it and use what you've said here against you. If not the details, he may use the fact that you've said it in this forum. Again, a lawyer would be a better advisor on that too.

[_b8r0]

Having been in a similar situation in the past, albeit without the stock all I can say is lawyer up. Nobody on HN is going to be in a position to give you valid advice. You need to see a real lawyer, not Internet bush-lawyers.

It does look to me like you need to determine what your objectives are for the situation. From my point of view, if you can stomach it, kicking them out of the board is a top priority. I wouldn't worry too much about the shares as long as you can live with them being a silent (albeit voting) investor. If you're going to buy them out, make sure it's on your terms and doesn't put too much strain on the company.

[redwoods]

1. Keep the investment, assuming the shareholders agreement provides for this. Do not jeopardise your cash position for the emotional convenience. 2. Instruct a lawyer to commence filing suit for breach of employment contract. This usually sobers up aggressive types. 3. Tenaciously and repeatedly communicate this persons breaches to them whenever they accuse you. Do not admit wrongdoing.

[redwoods]

NB: not sure why I got down votes on this post - if an investor has put $ into a company, then he can't just pull it out at short notice unless the shareholders agreement allows for this. If you put cash in, you put it in. It won't come out unless there are either a) dividends or b) a liquidity event of some kind. An investment company is not a bank holding deposits and investors shouldn't put money in and then create waves by expecting it out again outside of a) or b) - unless they have a redeemable convertible note of some kind.... But maybe I missed something?

[sp4rki]

Food for thought, they signed a Non-Compete and NDA agreement. They can't directly compete with you and if they do you better sue them like your life depends on it. Also, as it was said by another poster, you are agreeing that you did something wrong, not legally I presume, but it certainly makes you look bad.

In any case. Get A Laywer

[dotBen]

How do you know they signed an NDA and non-compete, or are you just speculating? If so, not sure speculation is helpful here.

As it happens, non-competes tend not to be enforceable in most states, although granted it doesn't say what jurisdiction (or even country) this is occurring in.

[bretpiatt]

Like most of the others have said, "get a lawyer" though I'd actually get two -- first, an employment lawyer to handle the termination as Director of Sales and -- second, an investment lawyer, to explain your options there. Don't assume one lawyer is going to be able to be great at both.

[cletus]

If he's in at at will employment state he doesn't need a reason to get rid of him.

The OP said he was terminating the guy with cause which is interesting. If the investment is contractually tied to the position it could of course be much more complicated.