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Minority shareholder / Venture Capital

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    #2
    cerebus
    Registered Users Posts: 447 ✭✭cerebus


    arbitrage wrote: »
    I was wondering how a minority shareholder could be wiped out at any moment as is mentioned in the NY Times article below. I believe this happened to the initial investor in Facebook who was a friend of the founder.


    http://boss.blogs.nytimes.com/2013/01/02/should-a-cash-poor-entrepreneur-give-up-control-to-keep-her-start-up-alive/#postComment

    If you control the majority of a company you control the destiny of the company. A minority shareholder can get out-voted on any governance issues.

    There are protections in many jurisdictions to safeguard minority shareholder rights, but theoretically a majority shareholder could do many things to disenfranchise a minority shareholder. Some examples:

    - Issue new equity to the majority shareholder that sits at the top of the preference stack (and pushes minority shareholders down), or that dilutes the minority ownership
    - Sell company assets to a NewCo (one where the minority shareholder is not involved) at a nominal price
    - Control investment/expense decisions - if the minority shareholder has no control over the operation of the company it can be possible for the majority shareholder to make management decisions in such a way that there is no return on investment for the minority shareholder

    As an entrepreneur, control of your own destiny should be top of your mind. It's why control and board seats are a big deal for any startup when negotiating with venture capital investors. People get fixated on valuation, but I would argue that control provisions are more important!


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