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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

#71

Post by JohnFen »

nickfromseattle wrote: post #57
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…

> But we missed one rather obscure method. Please share.

It was related to international distribution. I had negotiated royalties for international sales, but had neglected to cover the sale of the rights to sell internationally. So the company just sold the rights, of which I didn't get a piece, and the companies that bought the rights had no obligation to pay me anything.

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

#72

Post by ttymck »

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…

I'm not trying to be harsh but this seems like business 101? Is this really that common? If you can't retain control of your company are you truly fit to run it?

> with the explicit purpose of retaining control

Why wasn't the other party contractually prohibited from obtaining control?

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

#73

Post by jrumbut »

piecerough wrote: post #48
i_am_jl wrote: post #43

Earlier quoted context omitted.

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.

As the sibling comment points out, it's not like you can hire any lawyer off Craigslist and expect to be bulletproof.

Lawyers can be an expensive rubber stamp on a deal that is absolutely not in your interest or be a chaos agent that makes you impossible to do business with. They can also make executing complex deals very simple (for you) or ward off sophisticated scammers. At least in my experience, it can be very hard to know which is which before it's too late.

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

#74

Post by TrackerFF »

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…

Small story on these kind of takeovers, but on a MUCH, MUCH smaller scale:

Back home we have this small newspaper that's been going on for 25 years. It's just a small 3 man operation, and it's just a weekly paper that covers local stuff in our small county. Most of their customers are expats and older folks.

When they started out 25 years ago, they raised funds by selling private stocks. All in all, there are maybe 100 owners, many whom probably don't even remember that they own the stock (but you can easily find them, as we have pretty transparent laws when it comes to company ownership).

But here comes the fun part: A couple of years ago some of the leading media companies in our country (Norway) started consolidating "power" by acquiring small local newspapers all over the country. Eventually they came to our local newspaper, and they started cold-calling all the listed owners, asking if they could purchase their stocks - warning that the newspaper was on the brink of bankruptcy, and that they would buy it and restructure it into a profitable paper. Some owners, thinking the stock was going to be worthless anyway, sold them their shares.

They, of course, never told the majority owners any of this. The majority owner (the workers of the newspaper) started getting worried calls from senior/old readers if the newspaper was going to close, because some investors had been calling them with bad news about an impeding bankruptcy?

The paper printed a story about this attempted takeover and the fake news regarding any potential bankruptcy, and people stopped selling their stocks.

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

#75

Post by slashdev »

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?

It's obviously not for the $100, that's just a small, round value to make it legal (some money has to change hands, even if just $1.)

Likely the CEO explains that it's worth nothing, they're re-organizing things for such and such a purpose, and the 15% stake in the cap tables is an inconvenience preventing a possible deal. Please could you do us a favor and help us clear that from the cap table.

I'm the kind of person that would fall for that.

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

#76

Post by mlyle »

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…

> I really wish there were an anonymous but vetted "yelp" type of site for people/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.

If you credibly report your experience, they will know who did it, anonymous or not.

"The Funded" was an attempt to do this for VCs a decade ago. But it was astroturfed in practice.

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

#77

Post by woleium »

TrackerFF wrote: post #74
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…

Small story on these kind of takeovers, but on a MUCH, MUCH smaller scale: Back home we have this small newspaper that's been going on for 25 years. It's just a small 3 man operation, and it's just a weekly paper that covers local stuff in our small county. Most of their customers are expats and older folks. When they started out 25 years ago, they raised funds by selling private stocks. All in all, there are maybe 1…

never pick a fight with someone who buys ink by the barrel

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

#78

Post by RandomBK »

Cpoll wrote: post #60
nobrains wrote: post #23

Earlier 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.

> 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.

The extreme case of this would be Poison Pills, so if that's allowed then I suspect you can contract for this as well.

Having said that this is the type of thing that is likely to get dragged in front of a judge, so the more foolproof way would be to retain 51% control or dual-class shares. Once you give up majority control to third parties, you can't really prevent everyone else ganging up on you and outvoting you.

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

#79

Post by [deleted] »

preommr wrote: post #61
cj wrote: post #42

Earlier quoted context omitted.

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…

> while PE/VC firms do these deals every day of the week That's why you hire a lawyer that also does this stuff everyday of the week.

[deleted]

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

#80

Post by DANmode »

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…

Meanwhile, the inbound investors I've taken calls from aren't interested at less than 51%.

Where's the disconnect?

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