
Tell HN: Our VC turned the process of getting acquired into a nightmare - throwaway5317
I run a startup I co-founded on the east coast, which is about as specific as I can be right now. The past three months has been some of the worst in my life but also provided some of the most valuable lessons learned. I thought I would use a throwaway account to blow of some steam and hopefully get some valuable feedback.<p>This is the situation: My startup is profitable with a team of 10 or so people and with a very happy and loyal customer base. But after five years in business I have come to accept that it has failed to yield any really high growth. This has forced us to take a step back and look at how we can reframe our business. We need to find a new product/market fit to kick in the next gear and get back on track to higher growth.<p>Three months ago, a favorable acquisition offer comes along. Part cash part equity, favorable terms. Because of our dwindling growth it is lousy timing valuation-wise. But right in this situation an acquisition might not be so bad because we know that we have a couple of years of very hard work ahead of us if we are going to turn the company around. Our VC has been supportive and great all along the way, although a huge red flag is that he has declined to be part of any new round of financing if that would happen. Discussing the offer with him, we agreed to go for a very rapid negotiation process and see the results.<p>But now when money is on the table, the VC turns very aggressively on us demanding much more of the deal value than stipulated by his share in the company. During the process he behaves very strangely, travels overseas and does not answer emails or calls for days and weeks on end which drags the negotiations out into months. The shareholder agreement allows him to block the deal if he's not happy with the terms, but so can us founders so the negotiations turn into a battle of wills.<p>In the teleconferences we do manage to set up, our VC uses whatever means he can to lean hard on us, including very verbal attacks on us personally. Sometimes he turns awkwardly friendly, doling out legal advice that on fact-checking turns out to be erroneous bordering on dangerous.<p>What happened in the end was that the acquisition offer was rescinded. The reasons cited for the offer to be withdrawn was that the timing was no longer there and that the buyer would not be happy to have our VC as shareholder because of his attitude.<p>So here we are. At this stage our relationship with our VC completely lies in ruins. I'm very ambivalent, the only thing really keeping me from quitting my company is the strong loyalty I feel towards my awesome team of founders and employees. If I'm going to develop a new product and perhaps bring in new funding, why do it in a company where I'm already diluted and the VC has proven to be a huge liability during financing and potential exits? On the other hand, if I start anew I will have to bootstrap completely from scratch instead of leveraging the great team and cashflow I already have.<p>If I do leave, the company will probably saunter along just fine without me. Maybe new management is just what it takes for it to skyrocket.<p>I would love to get an outside view on the above. Bash my head in if you think it is needed, that would be very refreshing. I have a really great lawyer at hand, so whatever legal advice you give me can do little harm because I run everything by him. What do you think?
======
gyardley
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.

~~~
throwaway5317
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.

~~~
dschobel
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.

------
webwright
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.

~~~
throwaway5317
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.

------
davidu
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.

~~~
davros
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.

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

------
pg
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.

------
gojomo
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.

~~~
throwaway5317
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.

~~~
gojomo
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.

~~~
chipmunkninja
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.

------
ajju
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.

~~~
throwaway5317
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...

------
incently
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.

------
bugsy
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.

~~~
gojomo
_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.)

------
bmh100
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.

~~~
throwaway5317
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.

------
geoffc
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!

------
dools
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.

------
mattm
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.

~~~
fedd
like kidnapping?

------
klochner
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.

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

~~~
throwaway5317
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.

------
BRoskopp
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.

------
cheez
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.

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

------
wittjeff
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.

------
nphase
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!

------
mmk
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.

------
djb_hackernews
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.

------
fedd
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.

------
jancona
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.

------
teflonhook
Find some new investors and pay to play him.

