Hi everyone
Looking for some advice about what to do here. It feels like there is nothing straight forward in this startup journey :)
So we got offered to purchase our b2b saas platform for let’s say 1.7M now, with an earnout later. It is a great opportunity for us as they are leaders in our industry and almost completely derisk our earnout… it’s been a hard few years getting here.
The interesting part is the breakdown of funds for the 1.7M now.
Investor A invested 2 years ago with 500k, they now own approx 19pc. Investor B invested last year for 1M but said he wanted pref shares on liquidation. We never thought anything of it and put in shareholders agreement.
But… they omitted preference on sale of shares, ie preference shares. So there is no clause in our SHA covering preference for return of the first 1M back to them before the rest is split.
This means that in fact myself and cofounder do best out of this and clear about 450k each. While our investor B only gets 300k now and has to hope the earnout goes to plan, which it will! But that’s an aside.
But investor B is now arguing that he did in fact say this to us in person at the time… preference in sale or shares as well as liquidation.
We are unsure what to do, do we stick to our guns or agree some sort of compromise where we give a bit each to them?
What would or have people done here before?
at the time we barely understood what it meant to be honest and just deferred to the lawyer when it was asked for in the term sheet. the lawyer pretty much copy pasted the clause from the term sheet. Investor Bs mistake…
In down rounds or sub-par exits, it would not be unusual for the the parties to negotiate a different outcome no matter what the agreements say. For example, if the acquisition value, including earnout, would have been less than $1M, and the last investor insisted on preference of $1M, you would have no (financial) incentive to stay on with the company. If the founders walked way, the deal would be dead and the last investor would get zilch.
In your place, first I would have your lawyer and the investors lawyers concretely establish what the shareholder agreement says - which is that there is no preference. Assuming you want to be fair to the last investor, from that starting point you negotiate what every one gets - which would be somewhere between $300K and $1M. For example, you could offer to buy back their shares somewhere in that range as a compromise.
I am surprised that the earn outs would be paid out to the investors - generally they are paid to the employees who stay on. Are you sure it is not some sort of escrow which will be released contingent to some terms?