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StabilityAI cofounder says CEO tricked him into selling stake for $100

forbes.com

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Re: StabilityAI cofounder says CEO tricked him into selling stake for $100

#31

Post by bloudermilk »

cabaalis wrote: post #19
khazhoux wrote: post #6

Odd 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?

Hanging onto stock from a company I co-founded a few years ago has caused me tons of stress because that company constantly files for tax extensions forcing me to do so as well. I have other financial processes which rely upon timely processing of my completed tax filing, and every year it causes me trouble. So if something is thought to be worthless and about to fold, "just hang onto it" could cause a non-zero amoun…

Guessing you're a member of an LLC or shareholder of an S-Corp with pass-through taxation. Can't agree more what a pain it is to wait on your old partners to do their taxes every year before you can do your own.

If you're just holding shares/options in a corporation that isn't going through ownership changes, that problem doesn't exist.

That said, there are still valid reasons to cut ties with past partners/employers.

Re: StabilityAI cofounder says CEO tricked him into selling stake for $100

#32

Post by JohnFen »

takinola wrote: post #27
JohnFen wrote: post #22

Earlier quoted context omitted.

It was misplaced trust. That's a really easy mistake to make until you've been burned by it. I'll bet that person won't make that mistake a second time. But better is to avoid swimming with the sharks at all. I have a wonderful horror story about a business deal I made where I was cheated out of about $5 mil. I didn't trust the party I was doing the deal with, so the contract negotiations took most of a year and the…

I feel like the story of the scorpion and the frog applies here. My solution is to try very, very hard not to engage with people I do not trust. My mantra is "good people do good things, bad people do bad things". If you don't want bad things to happen to you, stay away from people you know to be bad regardless of how tempting it may be to associate with them.

Indeed. It was poor decisionmaking on my part. I was blinded by the $$. My attorney tried to warn me off of doing the deal at all. He had done his due diligence and looked into the company, and told me outright that the company was shady.

That was another thing I learned: if you respect someone's expertise enough to pay them for it, you should probably take what they have to say very seriously.

Re: StabilityAI cofounder says CEO tricked him into selling stake for $100

#33

Post by bloudermilk »

andrewstuart wrote: post #24
dustingetz wrote: post #5

VCs don't like dead equity, they will have pressed for this. Nonetheless you cannot lie and this could have been resolved with integrity.

>> VCs don't like dead equity Isn’t a VC investment dead equity?

How could you say that? VCs are there to go to bat for you, make connections that change the trajectory of your business, and support you however they can. /s

Re: StabilityAI cofounder says CEO tricked him into selling stake for $100

#34

Post by ada1981 »

mediaman wrote: post #25
cj wrote: post #7

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. 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…

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…

Exactly. If you do a deal like this, it seems ideal someone more savvy come in and run your company for you.

Re: StabilityAI cofounder says CEO tricked him into selling stake for $100

#35

Post by ada1981 »

SV_BubbleTime wrote: post #2

https://archive.is/Sl3XS (Also, I didn’t research this author, but a reminder that for $500 or so, you too can become a writer for Forbes. They have a massive credibility issue and I suspect are cashing out what little name they have left)

Where do I sign up for $500?

Re: StabilityAI cofounder says CEO tricked him into selling stake for $100

#36

Post by oldtownroad »

khazhoux wrote: post #6

Odd 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 purposes, if I pay you $100 for the equity, it’ll be better for you as you can write the loss off” or something along those lines, something that wouldn’t stand up to scrutiny now but is enough to bamboozle someone into agreeing at the time.

Edit: no theory needed. The lawsuit goes on to say the $100 is the price the co-founder originally paid for the shares when the company was formed.

Re: StabilityAI cofounder says CEO tricked him into selling stake for $100

#37

Post by Simon_O_Rourke »

cj wrote: post #7

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. 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…

From a control point of view, and maybe a salary or job viewpoint, this isn't too good.

But enlighten me how a 40% odd share distribution of a now PE-owned and operated company would be a bad thing? Surely they're going to try and increase the company's value for their own self interest?

Re: StabilityAI cofounder says CEO tricked him into selling stake for $100

#38

Post by arcticbull »

nobrains wrote: post #23
cj wrote: post #7

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. 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 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.

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.

Re: StabilityAI cofounder says CEO tricked him into selling stake for $100

#39

Post by iambateman »

I was part of a group which ceded managerial control of a small business (think 100-500k/year) to a minority shareholder. This person was paid a professional salary to maintain the business, while we kept majority voting rights.

We still had majority ownership until he decided he didn’t give a ** about our ownership claims and openly did his own thing.

The problem is, no lawyer is going to take the case because the $$ is too small and we would be risking our own capital vs the company capital.

The worst part…it’s an LLC and the manager remains kind enough to send the tax statement each year, so I pay for the privilege of having a company stolen from me.

Choose your business partners carefully. :(

Re: StabilityAI cofounder says CEO tricked him into selling stake for $100

#40

Post by zeroCalories »

andrewstuart wrote: post #24
dustingetz wrote: post #5

VCs don't like dead equity, they will have pressed for this. Nonetheless you cannot lie and this could have been resolved with integrity.

>> VCs don't like dead equity Isn’t a VC investment dead equity?

Yeah, that's why they pay a lot of money to get in. Would you give your buddy joe that doesn't do any work 10% for fun?
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