Ask HN: Help, Investor wants money back in 7 days "Or else"
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!
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:
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.
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.
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.
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).
I know what we did wrong, trust me, but what do you think we should do now to finish this?
79 comments
[ 0.36 ms ] story [ 156 ms ] threadYou probably don't need to worry about the guy starting a competing company. If he does it will fail.
I think they may be better described as a referentless third person pronoun rather than a genderless one in a lot of circumstances. The genderlessness is more of a consequence of having no referent.
What's even odder is that Paul used "they" for the lawyer, apparently intending to be gender-neutral, but failed to notice that the OP had done similarly.
I don't mean to be making a huge deal out of this. It's just something we could probably all stand to be more aware of, myself included.
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.
A rather useful institution for a society.
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.
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.
Does "the claim" here mean "anything people were arguing about", or does it specifically mean a lawsuit which had 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.
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.
The first thing a lawyer will probably tell you is say nothing.
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.
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.
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.
In any case. Get A Laywer
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.
We are also asking that the existing non-compete, non-disparagement, and NDA they signed still stand
However, my point still stands that non-competes are rarely enforceable.
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.
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.
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.
Under no circumstances should you make threats like this without talking to a lawyer.
[1] 2001: A Space Odyssey
Now go get a lawyer.
Put NOTHING of a threatening nature in any form of writing or voicemail. Hell, write nothing that doesn't document that you are in the right for that matter. Consider everything you do as possible evidence in a future court hearing and act accordingly.
Good luck & don't lose hope.
Seems like this guy is a surefire candidate to be included in such a list.
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.
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).
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?
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. ]
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... Lighten the mood, initiate diplomacy, avoid seeing who has more nuclear missiles than the other.
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.
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.
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.
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.