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Ask HN: Do minority shareholders scare away new investors?

12 points by horsecaptin ↗ HN
I own 8% of a company - through equity earned via an early cash investment plus part-time work over the course of 14 or so months.

Now my old co-founders would like me to sell back a large percentage of my shares back to the company. Their rationale is that investors are refusing to invest in the company because of my ownership stake.

Is this normal or are the investors that they're talking to up to no good?

10 comments

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blacksqr
There's only one reason they want to buy your shares, and that's because they're valuable.

If you think the company has good prospects, keep the shares. If you're right, outsiders will eventually agree with you and invest.

If you think the company is not a good investment, ask the co-founders how they're valuing the company for potential investors and ask for the full share value plus a premium.

If they won't pay a premium, you know they're BSing you and they're just hoping you'll be dumb enough to give them your shares cheap in advance of a deal.

montrose
This argument is false in the general case. It can weaken a company to have given away too much stock early on, because then there's not enough left to raise money and hire people with. If horsecaptin owned 80% of the company rather than 8%, for example, the company would be damaged goods, and investors would avoid it unless it had truly stupendous growth.

This is one reason spinoffs rarely work.

The argument for horsecaptin keeping the stock is that while 80% makes the company damaged goods, 8% may not.

blacksqr
If OP owned 80% of the shares, there would be no discussion, because OP would control the company.
mx1093472
It depends upon how many minority interests are out there. If ownership is completely dispersed among multiple small shareholders, I could see potential investors not being amenable as they could potentially have a difficult time acquiring the entire company should they chose to do so in the future.

I agree with blacksqr though, if they want you to sell, the offer better come with a premium.

siegel
This is not particularly abnormal. Your holding is what is sometimes referred to as "dead weight on the cap table." From the standpoint of investors, your 8% of the company isn't serving a purpose to move the company forward. If you were a full-time employee, the investors would push for you to subject your shares to vesting and continue working to "earn" those shares again. But you aren't.

That being said, they can't force you to do this and, if you are going to do it, as blacksqr says, you should get a premium for it.

At a minimum, any repurchase should be conditioned on the company closing a significant investment round. You can enter into an agreement now where you bind yourself to sell back a percentage of shares subject to that condition. That way the investor, if they care, knows that you will be divesting of a significant percentage of your shares. At the same time, you don't unnecessarily sell back your shares before an investor insists on it (Note: The investor's money is going to end up being used for the share repurchase. So, if they don't actually care, they probably will not agree to fund the repurchase).

It can get a little complicated, in that there are tax implications for you, as well as a potentially detrimental impact on the company's 409A valuation. With some creative lawyering, there could be a win-win here.

T2_t2
I have no idea what the correct answer is, but as this is one of those questions that matters, OP probably needs proper proper advice from someone you trust in the know.

If, for whatever reason, getting proper advice is not something you can get, this is perhaps the best of the info, as Siegel's Bio says https://news.ycombinator.com/user?id=siegel:

> Startup Attorney Grellas Shah LLP http://www.grellas.com https://www.linkedin.com/in/david-siegel-a271265/

siegel
Thanks, T2_t2.

I certainly understand the OP's concern about being fleeced here. It is a very fair and understandable concern. But the founders' claim that investors are being scared away could be very real.

It's a delicate balancing act because while the OP doesn't want to get taken advantage of, I'm sure he also doesn't want to engineer a situation where the company can't get funding and his shares become worthless.

montrose
Investors don't like it and often try to pressure companies they want to invest in into "clawing back" such stock. But while 40% might make them say no to a company they liked, I don't think 8% would.

The investors will claim pretty convincingly that it makes a big difference to them though. And that will put a lot of pressure on your (presumably inexperienced) cofounders, who will consider you a jerk for not giving in.

charlesdm
But there's nothing they can do to fix that, aside from the founder being stupid or diluting his stake by putting in a massive amount of money.

Sell them back at a good price, or keep them. Whatever option you prefer.

arseraptor
This is a pretty small amount for them to be squabbling. Something is afoot