Tell HN: Our VC turned the process of getting acquired into a nightmare

The VC controls (and always controlled) the outcome for your company. I can't say I understand his behavior - blocking an acquisition but also refusing to participate in a future round makes both liquidity and fundraising impossible. Perhaps he plans to drive the company to the brink and then do a down round.

The only leverage you have over him is the damage his behavior, if public, could do to his reputation - since VCs live and die by their dealflow. If the deal was still on the table, I would've politely discussed his future exposure - 'if this behavior keeps up and the deal doesn't happen, you are not going to look good in the post-mortem I'll be posting to Hacker News'. Quality VCs know that their reputation depends on keeping entrepreneurs happy.

Now that the deal's dead, you might as well leave - but you'd be doing a disservice to the rest of us to not reveal who this guy is. If you can't do it in public (perhaps you're worried about raising money again from someone else - which, sadly, is probably valid), at a minimum you should be describing the whole story over at The Funded.

Good analysis. I have to agree with Gyardley. If he will not acquiesce to a sale and does not want to participate in future rounds then most likely he wants to do a down round.

That seems to be the only option that explains his behavior unless I am missing something.

So what are the chances that you can line up another buyer? Even at a valuation less than before would be worth considering because it looks like he is out screw you over. You might at least get something out of it even if it was not what you imagined.

If you line this offer up you and the team can give the investor an ultimatum. I think that sometimes directly calling out people's bad behavior can help.

If you can't line up an offer and then working out the math it might be best to quit.

Also I might recommend 'Getting to Yes' as a great book for negotiating. Might be too late this time, but there is always a next time!

Exactly, The only leverage this guy has left is to reveal the antics of the VC in public, and potentially leave the company.

At this point, I would anonymously blog about the entire situation regarding the VC's behavior while never revealing your own name nor the name of the company - only the name of the VC.

Sure, the internet will find out the company name in due coarse, but you will have several days or so of the VCs behavior out there all on its own for the rest of the community to evaluate.

There is a lot more leverage here than that.

I am sure you're right... I don't have a good enough perspective to give much more of an opinion than I did though :)

I generally agree but both VCs and entrepreneur's rely on reputation. I'm not sure a public airing of grievances will do the OP much good.

The threat of doing so is really the only thing that would have any benefit, perhaps encouraging the VC to move faster with future deals, actually posting may damage the OP's standing with potential VCs in the future. There is likely another side to this story and I lean towards keeping dirty laundry private.

1. Agreed on their likely being another side of the story; that seems to be the case more often than not.

2. Outing the VC could provoke him to retaliate by filing a lawsuit for defamation, and/or for tortious interference with prospective economic advantage. The OP doesn't need that kind of grief right now.

3. It might be worth spending a few bucks to talk to a savvy business litigator -- this sort of thing comes up fairly often in closely-held corporations. Maybe Grellas will put in an appearance on this thread?

Speaking of 2) Tortious interference claims can go both ways, but I agree that it's not what a startup CEO needs.

Strong disagree. Outing the VC won't help and the OP has much more leverage than that as I commented elsewhere in the thread.

Thank you for the analysis, I appreciate the clarity with which you describe his confusing behavior. It might be that he has such plans.

As for taking the conflict public, I don't have it in me. It is not something that aligns with my world view because I know that I too can be wrong sometimes and not see the whole story. I prefer that people know they can trust me rather than applying that kind of leverage.

Its surprisingly hard to effect revenge even when its right in front of you and easy to reach.

Exactly, while it might help others to expose the VC, you would be putting your own reputation at risk.

When seeking revenge, bring two shovels and all that.

The down round theory doesn't really make sense. Let's say you own x% of a $y car, but you have the power to crash it and write it off (at which point it is worth $z for parts, z << y) with no consequences except the loss of value in your share. If you do it, after the crash, you can buy any percentage d% you don't already own in a down round (0 < d < 90), at the current price, $z/100%.

Before the crash and down round, your interest is worth $(y * x/100). After the crash, your interest is worth $z * (x + d)/100%, but you have to pay an additional d%/100% * $z. Therefore, the crash and down round changes your wealth by $z * (x% + d%)/100% - $(y * x%/100%) - d%/100% * $z = $(z-y)*(x%/100%). Since z << y, and x > 0, the VC will always lose wealth by destroying value to force a down round. If they could get a z value higher than the true value, the situation might, change, but that would be difficult.

What I think is actually happening here is the VC is playing what is called a game of chicken in game theory (http://en.wikipedia.org/wiki/Game_of_Chicken) to try to get more than their rightful share of the deal. A game of chicken is where if one player gives up first, the player who gives up loses a small amount, and the other player gains a small amount. If neither player gives up, they both lose a large amount. The VC wants you to give them more, by forcing you to choose between doing what they want, or hurting both yourself and them by completely destroying value in the company.

Strategically, you now need to either capitulate to what they want, convince them that you won't back down (if they are convinced you won't back down no matter what, it is in their interests to back down and let the next acquisition opportunity go ahead), or find a way to stop them blocking acquisition.

The three options you suggested are pretty much the only three options available aside from quitting the company, aren't they?

You failed to negotiate effectively with your VC.

At this point, you should explain to your VC (hopefully he is your only one) that you intend to: (1) wind down the business, layoff all staff, pay off all debtors and cease all company operations. And (2), without soliciting any employees or infringing on any IP, you intend to reconstitute a new company in the X space where X is your current business.

Explain how it was a pleasure to work with him, and you're sorry you were unable to return his equity in this endeavor. You can ask if he is interested in finding a buyer for his remaining equity, despite it's precipitous loss in value pending the imminent loss of all employees, and if so, you may be able to arrange a buyer.

You are on the east coast so be sure you do not have any sort of non-compete agreement with your company that is enforceable. You most certainly have a non-solicit agreement in place, so be cautious, and email none of these communications or plans around. This is a decent time to be paranoid.

It all depends on the exact details of any contracts with the VC such as your shareholder agreement. Is there a drag-along right? What board representation does the VC have? Do you have the ability to call a shareholder meeting and get them voted off the board?

You need to work through with your lawyer and ask him or her in great detail what options you have in terms of forcing the VC to cooperate. Can you wind up the company without his/her agreement? What non-compete clauses apply? Can they be worked around?

Do you have the right to make a share issue in a way that would dilute the VC below a control threshold (while satisfying all legal and fiduciary obligations)?

Others in this thread have suggested you 'out' the VC - do not do this without legal advice, and I would recommend you not do it at all. You need to be 100% in compliance with the law of libel etc. Even if a staff member leaks information without your consent that places you in a weaker position not a stronger position.

If you have strong options, then pursue them. This may lead to the VC showing willingness to compromise. In which case, do genuinely consider compromise.

Okay... but why is this a comment to my comment? I don't see any connection to my post.

How does the rest of the team feel? Ready to walk or eager to charge forward and continue trusting the VC?

If there's some team solidarity on the matter, you could try renegotiating the terms or buying him out.

i.e. you could say: "We feel like that deal broke down because of you, which was contrary to the interests of the founders and other shareholders of the company. It's hard to be motivated to grow this company when we know that you could submarine any exit or additional financing at a whim. We talked it over and 6 of the 10 people on the team are going to walk, though of course we'll give you a month to find new management if you'd like to. As an alternative, we'd stick around if you'd be willing to legally adjust your rights so that you can only block a sale of less than $1M dollars. As an additional alternative, the company will buy back your shares for $X over Y months."

If there's no solidarity and everyone but you wants to soldier on (either for the lifestyle job or trusting that the VC will act sensibly next time), then you should probably announce your intention to step away and see what your co-founders want to do.

Thank you for great advice. The takeaway for me is that I should get a more thourough feel for what the rest of the team thinks. There is a lot of leverage to be applied this way.

Was it a VC (= a partner at a VC fund) or an angel? This would be odd behavior from a VC. From a VC's point of view, your company would be "going sideways," and they are usually happy to get out of those because it frees up a board seat.

Had a similar thing happen to a company I was involved with a long while ago. (The VC involved was far from the valley.)

In fact, the partner even resigned from our board during acquisition negotiations, because the squeeze he was attempting, enriching his firm at the expense of other shareholders, wouldn't mesh well with the fiduciary responsibilities of a board member.

Some people think using every lever at their disposal to eke out a few extra percent at the last minute proves their business mettle. I suppose they expect – or prefer to guarantee – that this be their last transaction with the others affected.

We wound up acquiescing to his demands to avoid ruining the acquisition. And most of us resolved to never do business with him or his firm again.

If another acquisition materializes, you may just have to acquiesce and/or play chicken/hardball with this VC – all the while hiding any internal dissent from the acquirer, so that ultimately it's up to you and your investors whether you walk away from a deal.

If he's a bit player at a larger VC firm, you might privately share your concerns with other more senior partners there – which almost always would be a relationship-destroying maneuver, but if the relationship is already kaput, why not?

Hardball might involve having your own lawyer find the maximum you can do under the investment agreement without the VC's agreement – asset sales, de facto liquidation, etc. – or find grounds to (credibly threaten to) sue the VC for breaches of various duties.

It was very valuable to hear of a similar situation. I'm happy to hear that you were able to rescue the deal, albeit paying a heavy price.

I believe the net price wasn't that heavy, but it stung, because it broke the all-in-it-together logic that otherwise had ruled.

It was already a good result for the investor – the last-minute extras demanded weren't a part of any prior negotiated preference, they were just new things extracted in return for not vetoing a deal everyone else wanted.

The biggest lesson I've learned from various startups is that "all-in-it-together" is an awful lot like asking "How are you?" (The correct answer is "Fine!", even if your arm just got torn off, your cat died, and your spouse left you for a monkey): It's conversation, and nothing more.

In the end, everybody is unpredictable. If you don't protect your rights from the start, you'll have problems. Even (especially?) if you're BFFs, everything should be spelled out in advance, including metrics for conceptual terms such as "success", etc.

Sounds like a crappy situation. Hindsight is 20/20 but what I learnt from your story is that it's important to ask investors the minimum valuation and cash/equity split they will accept before engaging a potential buyer. In general, knowing your own limits is important going into any negotiation.

Before quitting and losing control over so many years of hard work, I would recommend putting your recent frustration with the VC aside and sitting down with him to understand what he wants from any future liquidity events. You say he has been a good investor so far, and may be he is under pressure from LPs or has something that would explain his strange behavior.

I can imagine it would be hard to work on a startup where your final outcome seemingly depends on a person who seems to be fickle and unreliable. Any clarity you can get on this may help align your interests with them.

Reminds me of something a very wise venture capitalist once told me in a cynical moment: "At exit, everyones' interests are misaligned". The only thing you can do to avoid this is try to 'hire' VCs who are also good people.

Sorry it has come to this. Hope it works out for you.

Thanks for the empathy with the situation. It is very good advice to make it perfectly clear what the intents of our VC is going forward. I sure will take the experiences from this process with me in future ventures.

Niels Bohr said that "An expert is a person that have made all the possible mistakes in a narrow field". Sometimes I feel like I'm getting there...

Please please post the name of your the partner, and if not that, the VC firm on TheFunded.com in the private area and post a link to it here.

From what you say your VC is a vindicative and manipulative SOB who is wielding his veto power as blackmail to nix a deal unless you agree to give him more than his agreed upon terms.

It's a nightmare scenario. If it was me I would play hardball back. Walk away from the whole thing and let the company melt down, better that all should lose than he should win and all you should lose. Alternatively maybe he comes to his senses, but you have to be willing to carry through with it. I hate playing hard ball, but once you find yourself with someone who is going to do that, you have to play hard ball back or you'll lose for sure.

If you do decide it is all for naught and you are probably going to bail, I recommend you open source your code base for some plausible business reason, and then wait a few months before leaving. This way you'll be able to recover your own work for use in future ventures should it come to that.

Obviously you picked the wrong VC but why on earth would you give him such veto power. That was your mistake and now you are paying the price. Oh well.

why on earth would you give him such veto power

Even the YC 'Series AA' model document terms include protective provisions where a majority of the preferred shareholders have veto power over any merger/acquisition.

It's a customary provision, and this previously-supportive investor may have had the majority of an early round. So even if his shares, if converted, would only be a small percentage of the company, he may have effective veto power.

In the end you're counting on the decency and reputation of your investor(s) that they don't turn out to be the kind of people who think, "can I squeeze a few more bucks out of this deal if I'm willing to blow it up, and don't care what people think of me?" (Or even if, in the investor's real peer group, he can tell it as an impressive war story of his negotiating prowess.)

It'll be dressed up as something else – "I'm not receiving a proper premium for my preferred privileges!" – but is really just a bet that their toughness/ambivalence can force other shareholders to cave.

I suspect it's a more likely tactic with investors whose background is in other older, and more zero-sum industries. (The similar experience I mentioned in my other comment was with someone from the government-granted telecom franchise field.)

This is only two cents' worth, but there are a few things you must first discover: What do you personally want out of life, our of your career, out of this company, out of this deal? What does the VC want, in as much detail as you can understand? It may be critical to understand why your VC behaved that way and what his reasoning was for doing so. Also, it sounds like you are describing a liquidation preference, which is common down-side protection that only has a big impact when you miss the goals. It is part of the insurance they demand to take the risk. In both cases, this includes ideas like "to make money", "to feel like I was treated fair", "to feel like I made the best decision available", etc. Then, what is the best alternative to your current situation? What is the VC's best alternative to the current situation? Finally, is it at all possible to find a way, any way, for you both to get as much as you want? It is important to try to keep the negotiation from being about who has more power (worst) or who is right (bad). It should be about what you both want.

You've got a good team. You have successfully served a niche. Now what? Spin off the existing product and start from scratch? Take the technology and launch a new product, while managing the cash flow of the existing customer base? Much of this depends on what you want: a good lifestyle (where you should bootstrap) or to get rich (where you should take on a VC).

Since the relationship with the investor is important, try hard to repair it or find a new investor somehow, even by starting over.

I know the advice is very generic, but I hope that helped.

Thank you for very valuable advice all over. It aligns very much with my thoughts but lays it out with perfect clarity. Your advice also focuses on process rather than ends, which I appreciate as a complement to all the (also very valuable) alternatives proposed by other commenters.

Yikes, sorry to hear this. In retrospect probably your best play was to work with the acquirer to negotiate a low figure 100% cash deal with good going forward comp and equity options for you and your operating team. With that in hand you then lay out a scenario to the VC where your team is exhausted and it is either this deal of the company falls apart. The hope is he grumbles all the way to his low cash takeout and you get another chance to prove your company out in a different equity structure. Good luck going forward!

I was slightly unclear as to the circumstances, but basically I read you have an existing investor who is basically inactive in the business, but is being difficult during further acquisition.

You have 10 staff, and you're profitable. It sounds as though it might be best to try and sever ties with this investor if he's making things difficult for you.

One way of doing this would be to cut costs in order to offer to buy out this investor after some period of time, eg. you have 10 people, if you can redistribute the equity held by the current VC/Angel whatever to your employees as restricted stock with a vesting period of two years you may be able to save enough money to buy out the "toxic investor".

Taking this approach depends, of course, on your staff's ability/willingness to withstand a paycut for that, long, the ability to make that kind of decision independently of the existing VC and whether or not you could buy out this dude after some reasonable period of time (eg. 2 years).

The other thing I would point out is if you already have a profitable business and 10 employees, you really shouldn't need any new funding to build a new product. If you have half your team work Fridays on new product development you'll have something in 6 months or so that you can sell.

From what you mention, it sounds like his behaviour has drastically changed.

Have you considered the possibility that he is having serious trouble in his personal life - perhaps financial or relationship trouble?

His recent behaviour does sound dodgy but in common with how people react when they are facing serious personal issues. It could also be that someone else is putting pressure on him in regards to this deal.

You may want to approach him sympathetically to see if that could be the case.

like kidnapping?

If he doesn't want to participate in future rounds, you could try to raise a new round to cash him out, or you could take a down round and dilute him.

How hard will it be to take another round with the original VC refusing to participate? Supposedly, it's pretty hard.

Yes, I believe it will be very hard for us to raise another round. The VC's story is that they changed their strategy since investing in us. True or not, it is a high liability since it is easy for prospective financers to read something else into the fact.

Here is what you should have done: Told them that you will sign the documents to close the acquisition. If he wants, he can sue later. In truth, he won't sue for a few reasons: a) it is the right thing to allow the acquisition to happen, and b) he doesn't want the truth to come out that he blocked the sale solely because he un-rightfully wanted a bigger chunk of the company.

It is my strong opinion that him going dark with communication was a negotiating tactic. He was stretching you over a barrel and then fucking you. You telling him you will (and then doing it) to sign the legal documents is the way to unblock that situation. That is what happened to the other person who had a VC do this.

You need to absolutely document that this VC did this in TheFunded.com. There needs to be consequences to VCs. You would want your VCs in the future to be self-policed by TheFunded against doing something like this.

Consider this a WAG because I don't know any of the people involved. I assume that in the VCs world there are winners (high multiple return) and losers (not a high multiple return). While you may have attained profitability, in his mind you're actually a non-winner, and that is a continual cause of stress. To his peers he has probably been talking up the various angles for potential growth for your company for a long time, yet the desired growth has not been forthcoming. It looks and feels like failure within that peergroup (for their objectives), so a) that's where the reluctance, animosity, and faux-professional posturing came from in negotiations. Now he has to have a story for why the deal fell apart. That story is either that he believes you can grow the investment more going alone, or that you personally sunk it. Either way, it's on you and his pessimism is probably high. Not good, but then where else is he going to go with this?

I think of VCs as managers, and I'm usually of the opinion that the most likely solution to a bad manager is a new job, so I'm inclined to favor any path away from this guy. What path would be best?

Having a profitable company with 10+ employees is a pretty good position to be in if you want to launch something new. I'm inclined to recommend making full use of that opportunity, whether new equity from this VC is a possibility or not. Another concern, though, is that you don't want to risk the health of the company by diverting too much of the available cashflow, or by hurting their market positioning. So it seems to me that any pivot is going to have to be a soft one, or else you'll have to find a growth or new opportunity that really does seem like a sure bet. So my recommendations are: 1) Swallow your well-justified bitterness. It just won't help you get through this. If you want to spread truth about this VCs character, do it after you have gotten out of the current stickiness, and even then I think some coded politeness can suffice. 2) Tell the VC that you're going to double-down on finding new growth opportunities. Lay it on thick, and check in more frequently to give him backing with his peers. 3) Assume that the VC will talk smack (widely) about you if ever challenged in any public context, and may be doing so anyway now that this deal exploded, so be proactive about working your relationships with his peers and your peer community. Consider this your ongoing side project as you... 4) Work on finding the right pivot for you and for the company. Consider this your top priority. If you find another startup that has a better opportunity that you can jump to, take it. But don't risk your current profitable status. Tipping into negative cashflow will endanger the whole situation but will also give the VC more ammunition in laying blame on you.

Ouch.

I can provide no advice based on experience but since the acquisition offer has been revoked, I would suggest for next time to do the following calculus:

In one year, if I agree to his terms, will I /really/ be that much worse off? Will I be so poor?

If not, agree with a stipulation that it is to be completed within X timeframe otherwise they get the old share.

If so, be prepared to lose it all.

9/10 times, you're usually better off capitulating and making sure all your friends know NOT to deal with this guy.

Anyway, good luck.

I think it's better to think "when I'm 95", instead of "in 1 year".

It sounds like the ROI on the investment didn't meet levels acceptable to the VC's portfolio requirements. If the rest of of the team is ready to walk, then it sounds like the best thing to do in this situation is to move on and take them with you.

Best of luck!

you can shop the deal. if you were close to closing on one, just as well go shop the deal with the competitor. or get a banker to shop the deal for you. one is ridgecrestcap in marin, ca. the managing directors have connections all over silicon valley.

you're so close to exit it would be a shame to leave, its like stopping at mile 20 of a marathon, just stick it out and finish. gl.

I don't have any advice but it'd be great if you shared your 20/20 hindsight so other founders can avoid such scenarios and VC.

interesting story and comments. i am going to print it out and read it loud during the investment negotiations asking for comments and advice how to avoid such situations.

Unfortunately, if the VC has decided to not to participate in any future financing, the failure of the company may be a best case scenario for him. Think about it from his point of view--two of the worst things you can do as a VC are:

- Throw good money after bad by pouring more money into a loser, and

- Give up on a company, only to have it succeed without you, either through a cram-down or an acquisition on unfavorable terms

So in that situation, the VC's interest is that your company either succeed without further investment or go out of business.

I wish I had good advice for you--perhaps, as some others have suggested, threats may help. My guess is that you don't have much to lose.

Find some new investors and pay to play him.