<story><title>StabilityAI cofounder says CEO tricked him into selling stake for $100</title><url>https://www.forbes.com/sites/kenrickcai/2023/07/13/stability-ai-cofounder-says-emad-mostaque-tricked-him-into-selling-stake-for-100/</url></story><parent_chain><item><author>cj</author><text>Simple answer:&lt;p&gt;A successful founder will sell 1 (maybe 2) companies in their lifetime, while PE&amp;#x2F;VC firms do these deals every day of the week.&lt;p&gt;It&amp;#x27;s like entering the ring with a pro MMA fighter and expecting to have a fair fight. You have a massive disadvantage that can&amp;#x27;t be overcome. The best you can do is take precautions and &amp;quot;do your best&amp;quot; but &amp;quot;your best&amp;quot; and &amp;quot;precautions&amp;quot; still isn&amp;#x27;t good enough if your opponent really wants to screw you over. Unfortunately this happens all the time in VC, and especially in PE.&lt;p&gt;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 &amp;quot;Btw, we can&amp;#x27;t do the deal anymore at this price, but we can sign tomorrow for 30% less&amp;quot;. The sad part is it&amp;#x27;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 &amp;#x2F; new deal terms. At which point the founder is basically trapped with their whole team excited about an exit, which PE then exploits.&lt;p&gt;All of the lawyers in the world won&amp;#x27;t help if the PE&amp;#x2F;VC firm has the ability to spread the word &amp;quot;Don&amp;#x27;t do business with John Appleseed&amp;quot; effectively shadow-banning you from future funding from anyone. PE&amp;#x2F;VC world is very small and they have a lot of political leverage, which almost always trumps any legal leverage a founder might have.&lt;p&gt;The best defense is to have another VC&amp;#x2F;PE on your side.&lt;p&gt;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 &amp;quot;family run bootstrapped businesses&amp;quot;. Why? Because they&amp;#x27;re the easiest to screw over and exploit.</text></item><item><author>mediaman</author><text>Stories like this are bizarre. There are a million ways to ensure rights for a founder-owner that do not depend on 51% ownership, such as requiring supermajority votes for replacing the CEO, or right of first refusals granted to the founder-owner for share transfers. If they throw a fit about those terms, then don&amp;#x27;t do the deal!&lt;p&gt;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?</text></item><item><author>cj</author><text>I was chatting with a company who sold a large minority stake in their company to a well known private equity group (think 49%) with the explicit purpose of retaining control.&lt;p&gt;Soon after the transaction closed, the PE firm was able to covertly buy another 2% of voting shares from a pre-existing investor in the company, which resulted in the PE firm gaining full majority control over the company, kicked out the CEO, replaced the board of directors, the whole works.&lt;p&gt;The unfortunate part about these kinds of things is that 1) they happen all the time, and 2) founders rarely talk about it because doing so can so often destroy your ability to get funding for future endevors, etc.&lt;p&gt;I really wish there were an anonymous but vetted &amp;quot;yelp&amp;quot; type of site for people&amp;#x2F;firms who do bad business. So much business is done in bad faith and the people on the losing end rarely have the ability to warn others of their experience without killing their own reputation.</text></item></parent_chain><comment><author>WalterBright</author><text>&amp;gt; The buyer usually waits until the very last minute, then drops the bomb on the seller &amp;quot;Btw, we can&amp;#x27;t do the deal anymore at this price, but we can sign tomorrow for 30% less&amp;quot;. The sad part is it&amp;#x27;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 &amp;#x2F; new deal terms. At which point the founder is basically trapped with their whole team excited about an exit, which PE then exploits.&lt;p&gt;Eh, this was tried on a friend of mine selling his company. He simply said &amp;quot;the deal&amp;#x27;s off&amp;quot; and walked away. A couple weeks later, he got another call which said &amp;quot;ok&amp;quot; and he got the full price.&lt;p&gt;&amp;gt; That also puts bootsrapped companies at a severe disadvantage&lt;p&gt;It&amp;#x27;s very simple. Just say &amp;quot;no&amp;quot;. It&amp;#x27;s an incredibly powerful tool. It&amp;#x27;s crucial to getting a proper deal on anything from selling&amp;#x2F;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&amp;#x27;ll come running out and say &amp;quot;ok&amp;quot;.&lt;p&gt;But you gotta mean it when you say &amp;quot;no&amp;quot; or you&amp;#x27;ll fail. They can smell weakness.</text></comment>
<story><title>StabilityAI cofounder says CEO tricked him into selling stake for $100</title><url>https://www.forbes.com/sites/kenrickcai/2023/07/13/stability-ai-cofounder-says-emad-mostaque-tricked-him-into-selling-stake-for-100/</url></story><parent_chain><item><author>cj</author><text>Simple answer:&lt;p&gt;A successful founder will sell 1 (maybe 2) companies in their lifetime, while PE&amp;#x2F;VC firms do these deals every day of the week.&lt;p&gt;It&amp;#x27;s like entering the ring with a pro MMA fighter and expecting to have a fair fight. You have a massive disadvantage that can&amp;#x27;t be overcome. The best you can do is take precautions and &amp;quot;do your best&amp;quot; but &amp;quot;your best&amp;quot; and &amp;quot;precautions&amp;quot; still isn&amp;#x27;t good enough if your opponent really wants to screw you over. Unfortunately this happens all the time in VC, and especially in PE.&lt;p&gt;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 &amp;quot;Btw, we can&amp;#x27;t do the deal anymore at this price, but we can sign tomorrow for 30% less&amp;quot;. The sad part is it&amp;#x27;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 &amp;#x2F; new deal terms. At which point the founder is basically trapped with their whole team excited about an exit, which PE then exploits.&lt;p&gt;All of the lawyers in the world won&amp;#x27;t help if the PE&amp;#x2F;VC firm has the ability to spread the word &amp;quot;Don&amp;#x27;t do business with John Appleseed&amp;quot; effectively shadow-banning you from future funding from anyone. PE&amp;#x2F;VC world is very small and they have a lot of political leverage, which almost always trumps any legal leverage a founder might have.&lt;p&gt;The best defense is to have another VC&amp;#x2F;PE on your side.&lt;p&gt;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 &amp;quot;family run bootstrapped businesses&amp;quot;. Why? Because they&amp;#x27;re the easiest to screw over and exploit.</text></item><item><author>mediaman</author><text>Stories like this are bizarre. There are a million ways to ensure rights for a founder-owner that do not depend on 51% ownership, such as requiring supermajority votes for replacing the CEO, or right of first refusals granted to the founder-owner for share transfers. If they throw a fit about those terms, then don&amp;#x27;t do the deal!&lt;p&gt;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?</text></item><item><author>cj</author><text>I was chatting with a company who sold a large minority stake in their company to a well known private equity group (think 49%) with the explicit purpose of retaining control.&lt;p&gt;Soon after the transaction closed, the PE firm was able to covertly buy another 2% of voting shares from a pre-existing investor in the company, which resulted in the PE firm gaining full majority control over the company, kicked out the CEO, replaced the board of directors, the whole works.&lt;p&gt;The unfortunate part about these kinds of things is that 1) they happen all the time, and 2) founders rarely talk about it because doing so can so often destroy your ability to get funding for future endevors, etc.&lt;p&gt;I really wish there were an anonymous but vetted &amp;quot;yelp&amp;quot; type of site for people&amp;#x2F;firms who do bad business. So much business is done in bad faith and the people on the losing end rarely have the ability to warn others of their experience without killing their own reputation.</text></item></parent_chain><comment><author>kmeisthax</author><text>One other advantage of buying family run bootstrapped businesses is that they&amp;#x27;re too small to trip antitrust scrutiny. There are entire industries whose driving consolidation force is a handful of PE firms buying up old family businesses and running them into the ground. Things like funeral homes, dental offices, and the like.&lt;p&gt;Yes, I did learn about this from Cory Doctorow, why do you ask?</text></comment>