
Ask HN: Help, Investor wants money back in 7 days "Or else" - anon0264
We recently sold a total of 22% share of our established company to an investor that also wanted to work for us as director of Sales. The person had a large rolodex in a segment of our market that we had not been able to tap and felt they could bring a lot to the table as an employee. So we put together some additional vesting based on rev targets all tied to being employed. The investment granted preferred shares and a seat on the board, voting is with ownership % and it takes 67% to pass.<p>So here we are 8 weeks after the deal, and things could not have gone worse. From day 1 the employee made it clear they did not intend to do sales, but instead had a "vision" for the company and wanted to run it. They first tried to buy out the CEO and president to do so, but we refused. After that they refused to work the sales plan we had developed, refused to be accountable to any touches/sales goals, hired staff without budget approval, purchased equipment/services without approval (sometimes express disapproval), took 20% vacation days, worked 10-4, and walked out of 3 meetings. The person basically would take no direction or training from the CEO (their agreed upon boss) and eventually moved out of the office to setup an office in another location. When called out on this behavior the person threatened to suit for all sorts of things, hostile work environment being #1 - they also threatened to pull their investment 3 times, including 3 working days in!<p>So here we are now, we have made it very clear that the employment will not continue like this, and have started the process of removing the job with cause. Seeing that coming they have requested to reverse the deal and demand we return the full investment in 1 week, or they can "do it the hard way".  They would like to reverse everything so that it is like it never happened. There is nothing in our agreement that covers this, besides them selling their shares, the employment is not guaranteed on paper. We too would like them out of the company for obvious reasons but there are issues with this demand:<p>1. 7 days it a short amount of time to come up with 400k
2. a lot of the investment has been committed (in good faith) to salaries and equipment, included the salary paid to the investor for "working" in the sales role (which yielded 0 sales, 1 presentation, and 0 estimates)
3. Some of the investment bought personal stock from one of the owners. So that money is taxed, been used to delete debt,  and not in the company.
4. They know all our IP from having access to literally everything from basecamp to 3yrs of client sales data, our staff and to how we do what we do. They have made it very clear they want to turn around and open a directly competing company as soon as they leave.<p>Anytime we push back on these issues they again threaten to suit, and they remind us they have a huge pile of cash for that and we don't.<p>We have offered to buy back 185K of their stock immediately, and the rest by the end of the year from accounts receivable. We think this would be more realistic, doing the buy back much faster would starve the company of cash, and very well put us negative on cash-flow. We are also asking that the existing non-compete, non-disparagement, and NDA they signed still stand. I also feel like the 30K spent on their salaries should be deducted from the buyback.<p>Of course we think this is all total BS, and the "right" thing to do is to suit them, but that is not our DNA, and would jeopardize the company we have now (growing revenues at 125% a year for the past 3 years).<p>I know what we did wrong, trust me, but what do you think we should do now to finish this?
======
pg
Things seem past repair. Get a good lawyer, and do what they advise.

You probably don't need to worry about the guy starting a competing company.
If he does it will fail.

~~~
dirkstoop
Further specifying "good": you really need a lawyer who's seriously
experienced in these kinds of matters, not just any lawyer. It makes all the
difference.

Also remember that there's _a lot_ a lawyer can do for you in a situation like
this, way before a lawsuit is even on the horizon.

~~~
nutjob123
Along with get a lawyer's opinion before doing anything i would stress that
you can talk to multiple lawyers or firms to get different prices and
opinions. Also I have found that people are usually happier if they find their
lawyers through a connection rather than just searching Google or the yellow
pages.

------
drats
I am sorry, but this is so convoluted and there is so much money is at stake
that if you haven't hired a lawyer by now you are certifiably insane. A couple
of things are for sure, you and your business partners were a) not equipped to
detect/vet a loony b) were not able to handle them c) did an ask HN in a
situation that obviously calls for a lawyer. I am sorry but you are seriously
lacking business skills. After this is finished you need to either learn from
your mistakes or better yet put out for, and vet very very carefully from
multiple references and past performance, a serious business oriented partner
because this rambling post with tens of thousands of dollars at stake just
screams clueless.

~~~
Multiplayer
I see your points but I think this is overly harsh. You aren't experiencing
this first hand - you are reading a summation after the fact and making a
quick judgement. This possibly is all happening like a slow motion car wreck.

There are a number of dynamics at play in a situation like this and it can get
very confusing, very quickly. The new guy is both an investor whose money they
are currently spending and also an employee which blurs the lines on how to
manage a relationship like this.

I have seen these kinds of relationships blow up before and when you are a
young and inexperienced entrepreneur you don't know whether to engage him,
disengage and get attorneys involved or just go crazy. Sometimes it looks like
the other guy is holding all the cards.

This doesn't scream clueless, it screams confused and not sure whether to
spend scarce resources on attorneys. Next time they will have an attorney
standing by.

~~~
drats
No, look at the figures they are talking about, 400k and 185k; plus the other
side has already been threatening legal action. Not taking definitive action
by now, given how long this has been festering, and going to a web forum for
advice is not simple confusion and is very well worth condemning. They came
here for advice but they should function as a cautionary tale to all reading.

------
ankeshk
Time to become a bit Machiavellian - even if its not in your DNA. What are
this persons weak points?

1\. Hire a good lawyer and get good advice. The best defense is a good offense
and all that.

Make sure he has no ability to use company funds. Cancel his company debit /
credit card if he received one as a director of sales. Send an official letter
by registered post letting him know that he does not have the ability to
authorize expenses above $100 or so.

Then follow your lawyer's advice on firing him from the sales position.

Make sure your lawyer communicates the non-compete part with him properly - so
that he realizes that if he leaves now, he won't be able to profit from the
idea at all - and its better to stay with you and earn 22% of the pie than go
for 100% and get a big fight on his hands that he will most likely lose.

2\. > The person had a large rolodex in a segment of our market.

This tells us that the person's reputation can be adversely affected. Threat
of bad press could maybe get him in line.

Also, it would be a good idea to find at least one or two common connections
and try making them mediators.

3\. This is the stick. You need to offer him a carrot too.

Make him an offer: he does not work with you. He retains his shares and plays
a role as an investor. He gives up the board seat - and remains a silent
investor. He gives you a connection / letter of referral for all the contacts
he is sitting on - for a flat fee. No vesting of shares.

Position this "getting a fee for writing a letter of introduction to his
connections" - as the carrot. A lot depends on how you phrase it.

4\. Start contacting other investors who could maybe buy this person's share
out. I doubt if you can find and close someone in 7 days, but the sooner you
start looking, the better.

~~~
okmjuhb
"This tells us that the person's reputation can be adversely affected. Threat
of bad press could maybe get him in line."

Under no circumstances should you make threats like this without talking to a
lawyer.

~~~
techbio
More, please?

~~~
dctoedt
The guy could add a defamation claim to whatever else he pled in a lawsuit --
or it could just give him something to make gorilla dust [1] over.

[1] 2001: A Space Odyssey

------
cperciva
_Anytime we push back on these issues they again threaten to suit_

Sometimes threats are just threats. When I was starting Tarsnap, I spoke to an
"angel" investor who, when it became clear that we wouldn't reach a deal,
threatened to sue me to recover his "expenses" associated with considering an
investment. A few months ago I got an email from an "inventor" threatening to
sue me for infringing on his patent application.

In both cases, I responded that I thought they'd be laughed out of court; and
I haven't heard from either since.

~~~
cletus
Generally speaking you can only do yourself harm by responding to this kind of
threat. Just ignore it.

The first thing a lawyer will probably tell you is say nothing.

~~~
1gor
The first thing my lawyer (in the UK) tells me is to __always __respond to any
correspondence that contains false claims etc. The response should be a short
'I categorically disagree with everything you claim'.

Not responding/objecting, I am told, will be interpreted as a kind of silent
agreement by the judge, if the case ever lands in court.

~~~
cletus
I guess I should elaborate.

When someone starts threatening you with a lawsuit sometimes what they're
doing is going on a fishing expedition. They're baiting you into either
settling or making a damaging admission. For example, "I know I was meant to
pay you but...". You've just stipulated that you owe the sender money. Woops.

There is other kind of correspondence that you should respond to. Either
direct them to your lawyer or forward the correspondence to your lawyer and
have them draft a response, if it's reached that point.

I guess what I'm getting at is this: avoid saying anything unnecessary. Don't
volunteer any information you don't have to. Don't accept the premise of the
question (eg when someone says "Are you going to pay me or stiff me?" and you
answer "Stiff you" it can be argued you've accepted the premise of the
question by admitting that you do owe them money).

Also, many make the mistake of assuming that verbal contracts are worth the
paper they're printed on. HUGE mistake. If you tell someone "I'll pay you $100
a day to do my gardening" hoping that if it comes to court it's your word
against his, consider: if that person shows up and does your gardening and
goes home and then does it the day after, any court will come to the
conclusion that some agreement was in place as it isn't reasonable for someone
to simply start doing that, particularly when you didn't correct them of any
alleged misunderstanding.

You'll get similar advice when giving depositions and evidence in court:
answer the question but only the question asked. Don't volunteer anything
else. It'll just get you into trouble. The same applies to any kind of
correspondence.

------
dotBen
This is one of those "Ask HN's" where the ONLY helpful + useful answer is:
"get a lawyer" and nothing more.

HN'ers all mean well, but few-to-none of us are lawyers. I've seen examples
where many well-meaning geeks (I'm one too) have up-voted an answer to a legal
question that is actually _incorrect_ or not the best course of action.

Always take legal advice from a lawyer over the advice of 100 geeks. If the
amount of money we're talking about here is $400k then you must have had a
lawyer involved to do the deal so go back to them seeing as they are familiar
(and should have put provisions in for this kind of outcome).

~~~
prawn
I disagree slightly on the "nothing more". Yes, get a lawyer, but also don't
lose too much sleep over the threat to start a competing business. If this guy
wasn't bothering to do any sales for OP, then I doubt they'll have the
perseverance to follow through on doing it for themselves. They'll have grand
plans and talk it up, but I don't think they will see it through. YMMV.

------
mattmaroon
I cringe every time I see something like this posted here. I know you're
probably freaking out (I would be in your spot) and desperate, but asking an
internet community what to do in a situation like this is like asking a guy on
Chatroullette "I have a stabbing pain in my chest, what should I do?"

Do yourself a favor and ignore every piece of advice that isn't "talk to a
good lawyer". Except the piece of advice that says you should ignore every
piece of advice and talk to a lawyer. Or that second one.

Now my head hurts. What should I do?

~~~
ivankirigin
Talk to a lawyer

------
metamemetics
Casually start giving "guy" the impression you have been always been talking
to lawyers since the beginning even if you haven't. You need to start
methodically slipping in mysterious phrases like "me and original cofounder
Y's attornies", even if you are talking about how everything will work out
without lawyers, you have to convey to him that you've secretly been talking
to lawyers about him since the beginning and are actually a few steps ahead of
him in a secret master plan in which he is the loser. He is gaming you.

Also, humor is life's great defuser. If you can figure out how to make him
_laugh_ at least a couple times in the next few weeks, it will be a
surprisingly _huge_ aid.

[ Even though this is at the unavoidably _SERIOUS BUSINESS_ aka lawyer point,
you need to get meta, make light of the situation, don't jump through the
hoops he creates for you. His train of thought is carrying you and your
business and it's headed to bye-bye camp. DERAIL this train in anyway
possible, even if it involves providing framed motivational posters of LOLcats
for his new office. Also, consider getting him drunk at some point if
possible. ]

~~~
alexro
Simply speaking, make them lose focus, relax

~~~
metamemetics
Hmmm maybe I was thinking of an analogy to foreign relations.

You need to show this would-be invader that you DO have a military (lawyer) of
your own and are capable of defending yourself. To discourage invasion. Once
you have discouraged someone from invading outright, then you can hopefully
work towards an "Obama beer summit" over a few pints
[http://www.msnbc.msn.com/id/32210408/ns/politics-
white_house...](http://www.msnbc.msn.com/id/32210408/ns/politics-white_house/)
Lighten the mood, initiate diplomacy, avoid seeing who has more nuclear
missiles than the other.

------
Br1c3
Stop contact.

Like others have said you need to get a lawyer pronto.

Direct all communication through you new lawyer, or with your lawyer present.

Some things to discuss with your lawyer:

1.Nature of the investment?

2.What terms did you and the investor agree to in writing?

3.Termination of employment, don’t just fire him w/o talking with your lawyer.

4.His unauthorized hires, purchases.

------
anigbrowl
Who provided the agreements this person signed, and structured the company for
you? You have been in existence 3 years, you say, and going by the numbers you
mention the company is capitalized to the tune of about $2 million. I find it
hard to believe you don't already have an attorney, and that said attorney
would not have given you a professional referral if some unforeseen
circumstance made it impossible to advise you. Or that you have run the
company for this long, and had serious problems over the last 2 months,
without being aware that this is the sort of stuff lawyers do for a living.

It can't be a cash question, you could get an hour of excellent legal advice
for $1000 even in a big city.

Also (and this applies to all legal 411 queries on HN), where is the firm
incorporated/located? Rules vary across different US states, and there are
lots of HN folk who are not in the USA at all. I'm only guessing you're
American when I mention 4 numbers, for all I know you could be in Uzbekistan.
Even if I was a lawyer, how would I know which rules govern your case, or
whether I was close enough to offer assistance?

And why don't you have a throwaway email address in case someone can give you
an exact answer or refer you to a report of an identical case? Depending on
the nature of your business, it might even be appropriate to involve the
police based on the story you tell.

 _the "right" thing to do is to suit them, but that is not our DNA, and would
jeopardize the company we have now_

I'm having trouble taking this seriously.

------
martinkallstrom
Get the most reputable lawyer you can find and afford (firm with known name)
and force the other part into structured negotiations. Don't go to Hacker News
for advice. Advice is worth nothing, proper procedure is everything. At this
point you can easily make a mistake and become accountable.

------
dinkumthinkum
Talk to a lawyer immediately. Now, this doesn't mean you need to go out and
hire the most expensive firm you can find; be reasonable and talk to a few
different firms and really utilize any free initial consultations. Stop
communicating with this person about anything legal until you have gotten
counsel. I mean, if this person brings up legal matters, just tell them you
can't talk about it. Don't offer any more deals. Definitely, do not do
anything at all to make it seem as if you admit wrongdoing. Again, talk to
some lawyers and do not have any more conversations with the person about
possible resolutions, deals, etc without getting consultation. Don't let the
other party know anything about what you are planning. Perhaps you can file
some sort of suit, at least file a complaint that may make the person give up
and go away, which is what I think you really want. He can't force you to come
up with 400K in 7 days. He'd have to file a complaint, you would need to get
served, and then you'd have time to respond. From that point, you can file all
kinds of things. Don't be scared or emotional, get off HN and get to the
calling law firms. Cheer up, people like this usually lose. :)

------
malandrew
Does anyone maintain a blacklist of "nightmare" people to do startup business
with?

Seems like this guy is a surefire candidate to be included in such a list.

~~~
gasull
<http://www.thefunded.com/funds/banned>

It's a list of VCs to avoid.

I wish there was a place to submit "clients from hell" (I know a few), but I
can see how this could be abused too.

------
wisty
"I also feel like the 30K spent on their salaries should be deducted from the
buyback."

IANAL.

They have no right to ask for their investement back. They have offered to
sell you all their shares for 400k within a week. You have made a counter
offer, which they rejected.

You can give them a lower offer (370k, by the end of the year), but they can
refuse.

Realistically, you might have to offer a bit more, as their investement has
grown.

You can hit them with a suit if you want - they acted with apparent, but not
actual authority. From wikipedia: "If the agent has acted without actual
authority, but the principal is nevertheless bound because the agent had
apparent authority, the agent is liable to indemnify the principal for any
resulting loss or damage."

So you can ask them to pay you damages for anything they did without the right
approval. You'll need a lawyer to do this.

You might want to ask them what charges they are thinking about making. There
might be some minority investor rights they can sue over? But I'd ask a lawyer
before doing this - I suspect this could force their hand, which you might not
want to do.

Whatever the case, you want to buy them out, and make sure all the
documentation for this is in good order.

~~~
wisty
IANAL, but it sounds like his threats are just piss and wind. I can't see how
he has any rights, other than those of a minority shareholder and as a
(former) sales manager.

On the other hand, you can sue him for acting as an agent without actual
authority. Those hires and purchases he made that you explicitly vetoed?
Invoice him, and watch him squirm. Tell him he can pay for them with some of
his shares. But ask a lawyer first.

If he keeps making noise, ask him if you can speak to his lawyer. He doesn't
have one. No lawyer would advise him to make such stupid decisions (trying to
roll a CEO with just 20% of shares, vague threats, etc).

You have to buy him out eventually, or he'll be a recurring headache. It might
cost more than 400k, as his investement has matured.

------
Scott_MacGregor
You might want to talk to your company attorney about the possibility of the
company buying back his shares by executing a note for the balance, rather
than all cash. Maybe talk about the possibility of having the note come due
upon some particular event, such as replacing the investor with another
investor of equal or greater value. If the investor is hesitant to go for that
option, you could talk to your attorney about the possibility of having the
company make payments towards the note balance on some other future event as
laid out on a timetable.

If you look in the Attorney engagement letter it probably has language about
their duty is to represent the interests of the company only, and not the
founders, shareholders, officers or other individuals or entities associated
with the Company.

It seems like he wants to willingly pull out as employee and investor/board
member, as long as he gets his investment back. So working out a solution for
the payment for the shares (with the help of the company Attorney) might get
the ball rolling on a solution for you guys.

Good luck with this.

------
stretchwithme
As others have advised, I would contact a good lawyer asap. And then consider
deleting this post if that's possible. Your adversary may find it and use what
you've said here against you. If not the details, he may use the fact that
you've said it in this forum. Again, a lawyer would be a better advisor on
that too.

------
iuguy
Having been in a similar situation in the past, albeit without the stock all I
can say is lawyer up. Nobody on HN is going to be in a position to give you
valid advice. You need to see a real lawyer, not Internet bush-lawyers.

It does look to me like you need to determine what your objectives are for the
situation. From my point of view, if you can stomach it, kicking them out of
the board is a top priority. I wouldn't worry too much about the shares as
long as you can live with them being a silent (albeit voting) investor. If
you're going to buy them out, make sure it's on your terms and doesn't put too
much strain on the company.

------
redwoods
1\. Keep the investment, assuming the shareholders agreement provides for
this. Do not jeopardise your cash position for the emotional convenience. 2\.
Instruct a lawyer to commence filing suit for breach of employment contract.
This usually sobers up aggressive types. 3\. Tenaciously and repeatedly
communicate this persons breaches to them whenever they accuse you. Do not
admit wrongdoing.

~~~
redwoods
NB: not sure why I got down votes on this post - if an investor has put $ into
a company, then he can't just pull it out at short notice unless the
shareholders agreement allows for this. If you put cash in, you put it in. It
won't come out unless there are either a) dividends or b) a liquidity event of
some kind. An investment company is not a bank holding deposits and investors
shouldn't put money in and then create waves by expecting it out again outside
of a) or b) - unless they have a redeemable convertible note of some kind....
But maybe I missed something?

------
sp4rki
Food for thought, they signed a Non-Compete and NDA agreement. They can't
directly compete with you and if they do you better sue them like your life
depends on it. Also, as it was said by another poster, you are agreeing that
you did something wrong, not legally I presume, but it certainly makes you
look bad.

In any case. Get A Laywer

~~~
dotBen
How do you know they signed an NDA and non-compete, or are you just
speculating? If so, not sure speculation is helpful here.

As it happens, non-competes tend not to be enforceable in most states,
although granted it doesn't say what jurisdiction (or even country) this is
occurring in.

~~~
sp4rki
Because the original poster said so?

 _We are also asking that the existing non-compete, non-disparagement, and NDA
they signed still stand_

~~~
dotBen
My bad, didn't see OP said there was a non-compete, etc.

However, my point still stands that non-competes are rarely enforceable.

~~~
sp4rki
Perhaps they are not, but when you have those three agreements signed it
becomes hell to try to compete. You shouldn't compete (even if it's not
enforceable), you can't talk in any way that reflect wrongly on the other
business, and off course you can't share any intellectual property obtained
while in the company. I think they are pretty safe regarding competition from
the snafu investor.

~~~
dotBen
Investors fund rival businesses all the time.

Most investors won't sign NDAs, let alone non-competes. It's further example
of how weird this situation is - on both sides of the table.

 _You shouldn't compete (even if it's not enforceable)_

I would never sign a non-compete because it's not enforcable (I'm in
California). If I _really_ wanted to work on a project and the founders said I
had to sign the non-compete with no other option I would tell them in writing
that I know it is not enforceable and have no interest in adhering to it, and
sign it anyway. If the opportunity later came up to compete, I would. Nothing
illegal about it.

People go work at rival companies all the time - right now there are loads of
good folks leaving Zynga to work for rival companies in exactly the same space
- and vice-versa.

------
bretpiatt
Like most of the others have said, "get a lawyer" though I'd actually get two
-- first, an employment lawyer to handle the termination as Director of Sales
and -- second, an investment lawyer, to explain your options there. Don't
assume one lawyer is going to be able to be great at both.

~~~
cletus
If he's in at at will employment state he doesn't need a reason to get rid of
him.

The OP said he was terminating the guy with cause which is interesting. If the
investment is contractually tied to the position it could of course be much
more complicated.

------
dminor
After you get a lawyer, stop stressing out about it. These ordeals may seem
like the end of the world the first time you go through them, but they always
resolve themselves eventually, and the end result is rarely dire.

------
drallison
Get a good lawyer from a major firm; you'll need a depth of skills not
available in a small firm. Collect all relevant paperwork. Document
everything. Write memos to "the file", keep notes. Don't delay.

------
trevelyan
Off-topic, but congratulations on growing a business where you'll be able to
pay back such a large amount of money on basically zero notice (and I mean
raising over $200k... by the end of the year).

------
csomar
His only way is to get a lawyer, however, I find this post helpful. This can
show new comers the problems that they can face with investors and therefore
take caution.

------
goatforce5
Doing the right thing isn't in your DNA?

------
eof
OP, Get a lawyer and sue for damages.

~~~
dctoedt
Old joke: Filing a lawsuit is like making love to a gorilla; once you start,
you're not done till the gorilla is.

~~~
eof
I should have said, get a lawyer and threaten loudly to sue for damages.

------
gasull
IANAL, but AFAIK returning money means, legally, that you agree that you did
something wrong, therefore if you return the money the investor might be able
to sue you with further litigation.

~~~
Judson
Not trying to sound like I am "Mr. Lawyer", but I did take a class on evidence
this semester. But, more to the point:

If (s)he were to try and settle the dispute, it cannot be used against the
defendant in court to prove negligence or wrongdoing. Ironically, this is so
that people will be willing to settle disputes out of court, instead of
clogging the court system with tons of suits.

So, giving the money back, in an attempt to settle the dispute, does not
enable further suit.

~~~
cperciva
Is that a blanket rule for attempts-to-resolve-disputes, or does it only apply
to negotiations after a lawsuit has been filed?

~~~
sdurkin
All attempts to negotiate or compromise cannot be offered in court as proof of
liability.

Rule 408. Compromise and Offers to Compromise

(a) Prohibited uses.—Evidence of the following is not admissible on behalf of
any party, when offered to prove liability for, invalidity of, or amount of a
claim that was disputed as to validity or amount, or to impeach through a
prior inconsistent statement or contradiction:

(1) furnishing or offering or promising to furnish or accepting or offering or
promising to accept a valuable consideration in compromising or attempting to
compromise the claim

Those are the Federal rules. They vary from state to state, but most are
pretty close.

~~~
cperciva
_furnishing or offering or promising to furnish or accepting or offering or
promising to accept a valuable consideration in compromising or attempting to
compromise the claim_

Does "the claim" here mean "anything people were arguing about", or does it
specifically mean a lawsuit which had been filed?

~~~
sdurkin
A claim means any dispute for which one party believes it is entitled to a
remedy. Its not necessary that a suit have been filed.

If you're worried about ways settlement offers can potentially be used against
you, remember that the rule only bars using such evidence for the purpose of
proving liability. As long as its offered for some other purpose, it can be
allowed in. And once a jury hears the evidence, in practice it doesn't really
matter for what purpose they were told to consider it.

~~~
cperciva
Thanks! I doubt I'll ever need to know this stuff (I certainly hope I'll never
need to know it!) but I always like learning about how such systems work.

