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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

#41

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

I had a former employer call once and ask me to sign a form confirming that I had opted not to exercise the stock options worth 0.125% of the company when I left.

They were raising a new round and my old grant was a sticking point because the new investors weren't content with the company not having a record of my exercise.

I signed because it helped them out, cost me nothing and seemed like the right thing to do. Just think it was funny that a VC was so averse to dead equity that they made the company make sure someone who wasn't on the cap table agreed that they weren't on the cap table.

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

#42
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…

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 really wants to screw you over. Unfortunately this happens all the time in VC, and especially in PE.

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 "Btw, we can't do the deal anymore at this price, but we can sign tomorrow for 30% less". The sad part is it'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 / new deal terms. At which point the founder is basically trapped with their whole team excited about an exit, which PE then exploits.

All of the lawyers in the world won't help if the PE/VC firm has the ability to spread the word "Don't do business with John Appleseed" effectively shadow-banning you from future funding from anyone. PE/VC world is very small and they have a lot of political leverage, which almost always trumps any legal leverage a founder might have.

The best defense is to have another VC/PE on your side.

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 "family run bootstrapped businesses". Why? Because they're the easiest to screw over and exploit.

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

#43
post #30

Earlier 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…

People just don't know about this stuff. It was even worse decades ago when there wasn't so much startup content online.

Lawyers have always known about this kind of stuff. Blows my mind that business owners are negotiating contracts like "I know what all these words mean, why would I need a lawyer to review this?".

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

#44
post #30

Earlier 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…

People just don't know about this stuff. It was even worse decades ago when there wasn't so much startup content online.

You don't need to "know" anything to understand it was potentially possibly. And if you didn't, imo you're sorta braindead and that might explain why they wanted to out you in the first place.

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

#45
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?

Only thing I can think of is that it might have been the symbolism of the cheque rather than the value.

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

#46

May 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.

> May I just say, that the most ridiculous thing in this news really is selling a 15% stake in a company for $100?

no kidding. i wouldn’t sell a 15% stake in a lemonade stand for $100. that doesn’t even cover the hassle of reviewing the contract and signing a bunch of notarized paperwork

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

#47
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…

[deleted]

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

#48
post #43
post #30

Earlier quoted context omitted.

People just don't know about this stuff. It was even worse decades ago when there wasn't so much startup content online.

Lawyers have always known about this kind of stuff. Blows my mind that business owners are negotiating contracts like "I know what all these words mean, why would I need a lawyer to review this?".

This. Always get a lawyer.

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

#50
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?

PE and Founder interests are not as aligned as many would assume at face value.

Founders often care about doing good by their customers, vendors, employees... while the average PE firm will happily screw everyone over the moment there's a monetary incentive to do so.

If a founder has the same time horizon for an exit as the PE/VC and if the founder is emotionally detached from the business/product/customers/employees, then all incentives are aligned. But that's usually not the case which is why you often see CEO's ousted and replaced by a "professional CEO" to "take the company to the next level". In reality founder-CEOs are ousted most often because their passion for the business gets in the way of maximizing profit.

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