VCs don't like dead equity, they will have pressed for this. Nonetheless you cannot lie and this could have been resolved with integrity.
What does dead equity mean?
StabilityAI cofounder says CEO tricked him into selling stake for $100
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Re: StabilityAI cofounder says CEO tricked him into selling stake for $100
#112Earlier quoted context omitted.
never pick a fight with someone who buys ink by the barrel
In this case, the fight picker buys ink by the FCL though. I think in this case: don’t pick a fight in the back yard of a small town where community still exists and everyone sticks up for each other.
I had to look up FCL - it's a Full Container load (shipping container).
Re: StabilityAI cofounder says CEO tricked him into selling stake for $100
#113Earlier quoted context omitted.
I believe the usual path in this type of situation is to dual-class shares, so you can retain voting control while selling beneficial ownership to others. I suspect the PE group would have, you know, rejected this arrangement given their plan.
> the usual path in this type of situation is to dual-class shares Is that still tolerated by investors? Is it still legal? "Having your cake and eating it" is a really bad attitude
It shouldn’t be tolerated nor legal, but it is.
Re: StabilityAI cofounder says CEO tricked him into selling stake for $100
#114The captains of this new industry selling their stake for a handful of magic beans is not great news for solving the AI alignment problem.
Re: StabilityAI cofounder says CEO tricked him into selling stake for $100
#115I 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. 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, r…
There's also the story Richard Branson wrote about in his memoir where the co-founder of Virgin was pro unionizing and his workers were too.
Branson convinced (and lied to) his partner that no one in the company actually liked him and the union attempt would fail. Caused his co-founder to quietly quit and Branson to retain sole control.
I agree, I imagine shady shit like this is quite common just not discussed.
Re: StabilityAI cofounder says CEO tricked him into selling stake for $100
#116May I just say, that the most ridiculous thing in this news really is selling a 15% stake in a company for $100? I'm no way rich, but I would not even bother taking the time to go to a lawyer or whatever and do all this kind of paperwork for such a ridiculous amount of money, I'd just ride it however it goes and not care.
That was my initial reaction as well, maybe he had concern about being liable or something... but yea, seems like something is up there...
Re: StabilityAI cofounder says CEO tricked him into selling stake for $100
#117Earlier quoted context omitted.
> Not sure if regulations allow this, but to make it bullet proof they should have made a contract that the PR group will not go beyond 49%. Can this ever work? The PR group can control the 2% without nominally owning it.
It can work. The contract can specify controlling instead of owning 51%. And then you can have a fun lawsuit. Did the group persuade the 2% to vote their way or did they pay to control that 2%'s votes.
It's probably securities fraud.
Re: StabilityAI cofounder says CEO tricked him into selling stake for $100
#118Earlier quoted context omitted.
There seem to be 2 problems here: 1. Giving another party 49% doesn't guarantee you will have retaining control. You having 51% shares does guarantee that. So, their strategy was flawed. 2. Not sure if regulations allow this, but to make it bullet proof they should have made a contract that the PR group will not go beyond 49%. Without either of the above, the company just did not do good diligence.
Having 51% control guarantees nothing. I know a guy who had 51% in the family company. His retired dad had, in exchange for money, deprived the 51% shares of their voting power. His dad then sold the shares on the local stock exchange. A couple months later, his CEO/son was fighting a hostile takeover of the family-run, but publicly traded company. So his son bought the 51% from the local stock exchange, thinking he…
> I know a guy who had 51% in the family company. His retired dad had, in exchange for money, deprived the 51% shares of their voting power.
You are either leaving out some important details or this is just not accurate. When people say you need to have "51% of shares" to control a company it means that you need to control 51% of voting rights of shares (sometimes different share classes have different voting rights).
It would simply have been impossible for "his retired dad to have deprived the 51% shares of their voting power" if his dad didn't have voting control. So something just doesn't add up in this story.
Re: StabilityAI cofounder says CEO tricked him into selling stake for $100
#119Earlier quoted context omitted.
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't do the deal! If you are selling shares to a PE firm with the explicit goal of retaining control, and y…
Simple answer: A successful founder will sell 1 (maybe 2) companies in their lifetime, while PE/VC firms do these deals every day of the week. It's like entering the ring with a pro MMA fighter and expecting to have a fair fight. You have a massive disadvantage that can't be overcome. The best you can do is take precautions and "do your best" but "your best" and "precautions" still isn't good enough if your opponent…
> You have a massive disadvantage that can't be overcome
If somebody can't understand that they need to retain a majority of the voting rights to retain control of a company, then you're certainly right about them being at a massive disadvantage.
Re: StabilityAI cofounder says CEO tricked him into selling stake for $100
#120Odd story. The point at which you're selling your stake for $100, you've basically decided to give it away. Which raises the question: if he was just going to get $100 and nothing more, why not just hang on to it?
The lawsuit accuses the CEO of being a shady person in general. I think it’s plausible that the co-founder was surrendering equity he thought worthless (to move on from working with the shady person) and perhaps the CEO was advised by someone that a transaction without consideration can be challenging to defend (since he allegedly knew he was lying to the co-founder) so he convinced the co-founder that “for tax purpo…
> The lawsuit goes on to say the $100 is the price the co-founder originally paid for the shares when the company was formed.
My former business partner tried to pull a similar stunt. He mailed me a check for a few dollars (the original purchase price), along with a cheery matter-of-fact explanation. He assumed I'd cash the check and in doing so give away my vested shares for almost nothing, but luckily I did not. Sent a letter back explicitly stating I continued to own the stock and that the shares were not eligible for repurchase under our repurchase agreement.