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?
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.
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.
As soon as a counterparty knows you can't / won't, you're negotiating from a much worse position.
Yes, I did learn about this from Cory Doctorow, why do you ask?
That's why you hire a lawyer that also does this stuff everyday of the week.
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.
"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."
Is this bad-faith stunt pulled after the company spent months focusing energy on the deal (rather than on the business)?
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 hire a law firm to advise you on the deal.
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.
I'd still suggest a lawyer for sure, but I wish I had counsel I liked.
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.
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.