Can I leave and start again?

IrishZeus

Hi all - looking for a steer on a situation I've found myself in.


I'm giving an abridged version of events here:

I'm currently MD of a small business which was founded in 2015
I had two financial backers who invested €150k
The company was split 40/30/30 with me taking 40%
The company struggled hugely and an additional €50k investment was required by them. In return, my equity reduced to 20% and they took 40% each
The company continued struggling and money ran out. I couldn't take a wage so I left for alternative employment and continued working on getting the company to work. I pivoted the model and we began getting sales.
I then left employment altogether and lived on savings/borrowings for 9 months to grow the company.
The company revenues grew from €12k to €325k to (YTD) €1.2m over the 3 years involved. (Profitable in Y2 and YTD in Y3)
In total, being conservative, I have forgone about €120k in earned income/sweat equity
The other two directors have now decided they want to sell
I, quite simply put, am not willing to revert to being an "employee" for a board/VC/investor or whoever buys their share. The most important aspect of "owning" this company for me, is the freedom and flexibility that comes with it. (I work long hours but can manage my own schedule/holidays etc etc)
Therefore, I am going to be speaking with them to move to at least a 50/50 partnership model or I will potentially push for a 51% share to protect myself in the longterm.


I do not know if they will agree to this. I am fully in agreement that their 200k should be returned in full, along with a ROI and I am more than happy for this to happen either through dividends or a sale, as long as I am protected within the company with a 50%+ share.

I am not willing to continue building value for them on a 20% split and would be hesitant to continue on into next year (with a 2.5m rev target) on anything less than 50%. The reason being that I want to be running this company into the longterm and as a minority shareholder, I would very very vulnerable.

The question, as per the title is - if they completely refuse to agree to a 50/50 or majority share - can I legally leave the company and start again by myself?

To clarify two points in advance - 1.) there is no shareholders agreement in place, everything has been done as a "gentlemens agreement" and 2.) if I leave, some of the staff would also leave with me to join the new company.

The other two investors have no involvement in the day-to-day running of the company and have never even met a single member of my team of 6+ people. I am doing 100% of the running and operations of the company. Without being arrogant, without me, the company would fail so me resigning is simply not an option for them.

But, in the position that an agreement cannot be reached - would I be in a position to leave and start again?

PS: I am aware that legal advice is not allowed here and I will not construe any advice as such. I am simply looking for guidance/information/experience.

Many thanks in advance.

Gloomtastic!

Ok, well done so far. Being in business can be a total bitch, if it was easy everyone would be doing it.

How much money have the other two got behind them?

If, as I suspect, it’s lots then they can tie you up in legal battles until they kill you financially and emotionally.

Your business was dead but they saved you because they wanted to protect their initial investment. Whether that is because they believed in you or the business i’m not sure. But they will always look to protect their money.

So, if you want to avoid a legal nightmare, I think you need to bring money to the table to buy back your stake. Can you source any? You could be cheeky and ask them.

Rule No. 1. If you don’t ask, you don’t get!

Good luck to you!

twowheelsonly

The short answer is yes, you could leave and start again but the big question is would that be worth it ?
Can you afford new offices /premises, equipment, transport ? Have you enough seed money to get you to the successful point that you're at now in a short space of time or will you need more outside investment to get you going again?

IMO, I'd be looking at trying to buy back 15% from each of your partners at a reasonable rate, possibly even in staged payments which would still leave them with 25% each to dispose of at whatever price they can get. If, as you predict, there will be continued growth then they should be well able to recoup their investment plus get a fair ROI. It will also keep the door open for you to go back to them if you ever need them in the future.

Forget about the blood sweat and tears that you've already invested. That comes with setting up a successful business and the only way you'll get that back is if you sell your share.

Right now you're actually in a pretty good place. Chances are that if they secure a buyer that same buyer will also be interested in your share. You could end up getting proportionally more for your share than your partners will get for theirs. That usually comes with a caveat that you can't set up as a competitor for X amount of time though. The other scenario is that they buy your share but keep you on as a well paid MD / CEO which is a regular enough occurrence as well. That's actually exactly what the two original directors of a well known online Ticket selling company did when they sold. One was kept as MD for the British Isles and the other as MD for Europe. Worth thinking about.

IrishZeus

To answer both above posts (and thanks for the replies, genuinely appreciated):

Yes, they have a lot of financial backing behind them and would probably pursue a legal option if that is actually an option for them - would they have grounds for this? I am presuming they probably do but I just can't find any guidance on this. However, this would not be a preferred option for them or me. If they went legal, I would simply resign and move on to be honest. I don't have the time, energy or finances to get into a legal battle.

For the second post, short answer yes, I have enough to get up and running again and to reach current revenues within 2-3 months. What I don't have is enough to buy back shares or to get into a legal battle. Hence, if no agreement can be reached, my options are to continue as a minority shareholder (which I don't want) or to resign and let the company wind down (which nobody wants and is a lose-lose)

Honestly, I don't want to be a paid MD/CEO. I want to own my business - it was the main reason I got into this. Money is not the motivator for me - my overarching goal is to not report to anyone for the next 30+ years of my career. Again, I'm not trying to be selfish - they fully deserve their 200k back plus a very healthy return for helping me get to this position in the first place. But there is also a requirement for me to meet my own personal needs so I am looking at the best/middle/worst/nuclear options to get there.

zephyro

IrishZeus wrote: »

Hence, if no agreement can be reached, my options are to continue as a minority shareholder (which I don't want) or to resign and let the company wind down (which nobody wants and is a lose-lose)

As a fellow small business owner, my take is that the first thing you need to do is discuss this with them and outline what you want ... it's very likely that they appreciate everything you've done and will be happy to come to an agreement. There's no point spending time thinking about alternatives yet when they probably won't arise.

Gloomtastic!

IrishZeus wrote: »

To answer both above posts (and thanks for the replies, genuinely appreciated):

Yes, they have a lot of financial backing behind them and would probably pursue a legal option if that is actually an option for them - would they have grounds for this? I am presuming they probably do but I just can't find any guidance on this. However, this would not be a preferred option for them or me. If they went legal, I would simply resign and move on to be honest. I don't have the time, energy or finances to get into a legal battle.

For the second post, short answer yes, I have enough to get up and running again and to reach current revenues within 2-3 months. What I don't have is enough to buy back shares or to get into a legal battle. Hence, if no agreement can be reached, my options are to continue as a minority shareholder (which I don't want) or to resign and let the company wind down (which nobody wants and is a lose-lose)

Honestly, I don't want to be a paid MD/CEO. I want to own my business - it was the main reason I got into this. Money is not the motivator for me - my overarching goal is to not report to anyone for the next 30+ years of my career. Again, I'm not trying to be selfish - they fully deserve their 200k back plus a very healthy return for helping me get to this position in the first place. But there is also a requirement for me to meet my own personal needs so I am looking at the best/middle/worst/nuclear options to get there.

If you leave and start up again they will go after you legally. Money is king then and you will lose everything. All customer data belongs to the current company and if you start again you can’t use it. Likewise with staff. That’s where they’d tie you up legally.

So you need to talk to them and work this out to an amicable conclusion. Remember, they want to protect their investment and if you can’t buy back your shareholding they may sell their stake elsewhere.

The idea that you want to be in control of your destiny is admirable but unless you are debt-free and very profitable then it’s not reality I’m afraid.

IrishZeus

zephyro wrote: »

As a fellow small business owner, my take is that the first thing you need to do is discuss this with them and outline what you want ... it's very likely that they appreciate everything you've done and will be happy to come to an agreement. There's no point spending time thinking about alternatives yet when they probably won't arise.

Agreed and I've arranged to meet them on Friday for an initial discussion

Trojan

Personally I'd lay out all the cards like you have here - my style would be to mention the legal option too - in a completely open, transparent and non-threatening way. I'd tell them I'm looking for a solution that works for everyone, and ask if they have suggestions. I'd also briefly acknowledge and own any mistakes, particularly those made in the early years, and thank them for everything they've contributed, regardless of how it turns out.

Best of luck with it, and please give us a quick report back with how it ends up getting resolved.

Piddar

Hey,

I'm just adding my take on this, I have a similar situation but a few things resonate as in my case, I am part of a company that is just being sold.
Myself and my team were deemed by the due-diligence report carried out to "be the company" in as much as all the technology in the company was not worth anything without the smarts to make it work.

So in this scenario, reading your initial post, and echoing your post, for the 20% you are doing all the work (and ok, waged, etc), but selling "the company", is it like my situation in so much as you and your team are the company?

If so, it's worth holding on to that thought while negotiating your position as, if they do not factor this in, if you, or your team leaves, irrespective of starting again, the company valuation would at best drop, at worst, be worth nothing.

That is a powerful position to be in and one that they'd be wise to recognise.

May not be the case of course, just thought it worth mentioning.

One last point re; selling, I've only experience in tech, but the value of the companies I review as part of our acquisition plan is based on book (sales) revenues, USP and sustainability. Lots of factors, but in short, if you stopped working there, sales revenue drops, if you stop working there, USP may be impacted (long term roadmap / planning etc - making the offer stale), etc etc etc..

Anyone looking to buy this business would look at it with that perspective and as such, you / they may be hard pressed to find a buyer if you or your team were not part of the mix.

P.

IrishZeus

Thanks again for the replies.

If I leave, the company would suffer a lot and probably (95%) would fail. 5 of my 6 staff are revenue generating - if they leave, the company fails overnight.

The other two are looking at ridiculous valuations at the moment (currently 20x net profit, which does not tie into our model/industry) but they expect to revise this *upwards* which is beyond ridiculous. So, in the short term, I'm not actually too worried about being sold!

So overall I am in a powerful position to make demands. I've no interest in getting to that point though - they have been good to me and put me in this position in the first place so threats would be the nuclear option.

I'll report back after the chat - hopefully it all goes smoothly!

Piddar

its more a case of simply stating your position based upon your two principal shareholders walking away. Goodwill continuance needs incentive.. no incentive, it just won't work...

Facts count here. If they're as well versed as you point out then they will already know this position is untenable and the risks of not reaching some compromise.

Doesnt have to be a sell me back to 50% though, other options exist around loaning you the capital on paper to buy back your shares and taking a revenue from the loan notes provided based upon incremental revenue increases.

P.

pedroeibar1

The fact that you have no shareholders' agreement is telling.. Do not go to that meeting on your own.
Bring an accountant you can trust, not the accountant / auditor used by the company. You need to plan this with the accountant in advance, not wing it on the day and certainly not with some randomers on Boards. Postpone the meeting if necessary, do not be bounced into it.

searay

IrishZeus wrote: »

Hi all - looking for a steer on a situation I've found myself in.


I'm giving an abridged version of events here:

I'm currently MD of a small business which was founded in 2015
I had two financial backers who invested €150k
The company was split 40/30/30 with me taking 40%
The company struggled hugely and an additional €50k investment was required by them. In return, my equity reduced to 20% and they took 40% each
The company continued struggling and money ran out. I couldn't take a wage so I left for alternative employment and continued working on getting the company to work. I pivoted the model and we began getting sales.
I then left employment altogether and lived on savings/borrowings for 9 months to grow the company.
The company revenues grew from €12k to €325k to (YTD) €1.2m over the 3 years involved. (Profitable in Y2 and YTD in Y3)
In total, being conservative, I have forgone about €120k in earned income/sweat equity
The other two directors have now decided they want to sell
I, quite simply put, am not willing to revert to being an "employee" for a board/VC/investor or whoever buys their share. The most important aspect of "owning" this company for me, is the freedom and flexibility that comes with it. (I work long hours but can manage my own schedule/holidays etc etc)
Therefore, I am going to be speaking with them to move to at least a 50/50 partnership model or I will potentially push for a 51% share to protect myself in the longterm.


I do not know if they will agree to this. I am fully in agreement that their 200k should be returned in full, along with a ROI and I am more than happy for this to happen either through dividends or a sale, as long as I am protected within the company with a 50%+ share.

I am not willing to continue building value for them on a 20% split and would be hesitant to continue on into next year (with a 2.5m rev target) on anything less than 50%. The reason being that I want to be running this company into the longterm and as a minority shareholder, I would very very vulnerable.

The question, as per the title is - if they completely refuse to agree to a 50/50 or majority share - can I legally leave the company and start again by myself?

To clarify two points in advance - 1.) there is no shareholders agreement in place, everything has been done as a "gentlemens agreement" and 2.) if I leave, some of the staff would also leave with me to join the new company.

The other two investors have no involvement in the day-to-day running of the company and have never even met a single member of my team of 6+ people. I am doing 100% of the running and operations of the company. Without being arrogant, without me, the company would fail so me resigning is simply not an option for them.

But, in the position that an agreement cannot be reached - would I be in a position to leave and start again?

PS: I am aware that legal advice is not allowed here and I will not construe any advice as such. I am simply looking for guidance/information/experience.

Many thanks in advance.

I think you need to get professional advice from somebody who knows what the Company does and can advise on the value of the business is now, what the likelihood of selling it is and what it has the potential to go to.

They should also assess what importance you have to the business and the same for your partners. If you are key, then walking away and starting again may be a good option.

On the other hand if a buyer can maintain or build the business without you, then you are in a weaker position.

antoinolachtnai

There is great advice here.

The thing is, you also need to look at it from the investors' point of view.

What they really want is their money back and a fair return. They have no long term interest in owning part of your company. (I say this based on what you have told us about yourself, rather than making any guess about them.) They have been involved nearly five years. They need to see their return, especially since this is a success.

What's a fair return? I would say that they could reasonably expect to maybe triple their money (about a 24 percent compounding return over 5 years). We could argue about that all day.

On the other hand, what you want is to get them out of the business and get legal control back.

In legal terms, they are not really in a fantastic position either. the lack of a shareholders' agreement is as bad for them as it is for you.

I think the first thing to do is for you to understand your financial position, in particular, how much you could afford to pay them.

The second thing is to meet these people or advisors and understand what they want. It may be that they have some unrealistic expectations, but you just need to deal with that. But I would anticipate that they more than likely would rather have some actual money in 2020 for their shares, rather than pie-in-the-sky dreams of money they might get in 2024.

Then you need to work with them (you doing most of the work) do a deal that gives you and them what you and they want or at least enough of what you and they want so you can all move on.

The main problem you face, as I see it, is that the company will continue to require reinvestment of profits as it continues to aggressively expand. This means that there won't be much money available to buy these guys out, and this means that buying them out may take quite some time. To buy them out, you will have to bring in other investment.

If the figures are strong, you will be able to get someone to finance this. But it will be another cost. And the new investors may be more aggressive than the lads you have at the moment.

The answer to your question at the end, could you leave and start again? Yes you could, but the cost would be enormous for both you and your investors. I think it would be a big lose-lose.