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I have been involved with a technology startup in the UK from day 0, for over 5 years now.

The company is up to 800k+ revenue over the last year and was on track for a 150k profit. Unfortunately some big deals didn't come in until the following month and so the official 'year end' profit ended up closer to 30k.

We are going through an investment process. We're expecting a business valuation of around 1.5mil by the investor though this has not yet been confirmed. The investment is being described as a "management buyout" rather than a take over. As a result they are only interested in acquiring their shareholding from the directors.

I have small 5% holding in this business and am noted in the due diligence process as a "key employee".

From early days I was always assured that when a day like this comes I would be able to sell my shares to the buyer/investor. I realise now that what is happening is about as good/close as it gets for a startup being "bought out". And so I also realise now that it was naive of me to think the investor would be interested in buying my holding which would almost guarantee the exit of a key employee from the business; which is clearly something they wouldn't want.

So where does this leave me? I am really getting quite desperate to leave now (I'm a software developer) as I need to move on with my life and start something new. It is just the right time for me personally. The company is not offering me the kind of working environment and team work experience that I had expected to be second nature to me by now and at this stage in my career. They have no plans to expand the development team from the office that I work. They want to create a virtual/distributed team all over the country, which is something that I do not believe will work and, even if it does, it isn't something that appeals to me. I need to experience a physical team environment first.

The final nail is that the company has always undervalued/underpaid me right from day 0. Whilst others get put on bonus schemes and higher base salaries; like the sales guys. I've asked about salary review recently and, as expected, the profit wasn't high enough to justify it. And that I will have to wait until the investment comes through.

I was asking all year in the run up to the year end report about the company performance. Every month I would ask. It was looking good each month that a dividend would be paid. Then the last month it falls flat and so no dividend was possible.

So that left me with the final option. Sell my shares to another shareholder. I asked the chairman and CEO about this and initially the CEO expressed interest. But after he spoke with the accountants he doesn't want to go ahead with it as it would, understandably, look very very bad to the investors. I was even warned that if the investors got wind of this it could jeopardise everything and that the other shareholders could sue me! Understandable, but this isn't something I intend or want. It was just a question to find out what my options are.

They did however offer me an option of taking out a loan against my shareholding. (I want to buy a house, you see. And they know this.) But I don't really like this idea because if anything it just ties me even tighter to the company that I want to leave.

They keep saying the company will be worth 10mil in 3-5 years time. And yes, I agree that it could be. But it's on the higher end of the scale. I think 5mil is more likely. And of course 5% of 5mil is 250,000. Unfortunately that just isn't enough anymore to me. There are job offers from London that, while perhaps being more hardcore and stressful, would net that amount for me in that same period. And I'd be learning again, and in a team environment. The very things that I want.

They said that basically I need to wait until the investment process is finished. Then wait at least a further 6 months before leaving. And even then there may be noone who wants to buy my shareholding for a reasonable price. Because after 6 months the valuation of say 1.5mil will be considered "stale". Which likely means I will either have to sell them for a almost pointless amount or just keep them. But then after 3-5 years when the next round of investment/shareholding movement happens they are highly likely to dilute my 5 shares to a meaningless amount (there are currently 100 shares total in the company), because I will be forgotten by then.

I really don't know what to do. If I had known owning a shareholding in a private company was going to be this stressful, damaging to my career and depressing, I would never have accepted it. I would have asked for a higher long term salary or bonuses instead (but of course, back then the company couldn't afford those things!)

HELP! :(

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I forgot to mention that there is also talk that my 5% could be diluted during the investment process to 2.5%. Because they are talking of increasing the total number of shares from 100 to 200. Which would mean if the company is worth 5mil in 3-5 years, then 125,000 is what my shares would be worth. That is nowhere near enough for me to break even on my current suppressed salary. – Jo Skipp Aug 2 '11 at 10:10
Are any of the directors or management selling shares? All of their shares? Is anyone leaving the company after this investment? And, very importantly, are you vested? – Stu Thompson Aug 2 '11 at 10:45
@Mr. X : Yes one director is I believe selling a very large portion of his shares, or possibly ALL of them. The other director is selling some shares but not all. I'd guess the former is selling about 35% and the latter about 15%. As far as I'm aware nobody is being 'forced out' as a result of this investment. What do you mean by "vested"? – Jo Skipp Aug 2 '11 at 11:06
After looking up what it means: no, I do not believe I have a vested shareholding. I've always been led to believe that they are restrictive rather than permissive shares. – Jo Skipp Aug 2 '11 at 11:16
Do you actually have any paperwork? Something with signatures? – Stu Thompson Aug 2 '11 at 13:49
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1 Answer

up vote 5 down vote

Vested: you own the shares out right, if you quit then they won't be returned to the company.

I've been in your shoes, I feel your pain. I think you are being sold out.

It is time to play hardball. The director(s) are not just selling the company, but also selling you. They've even codified it in the due diligence documentation. It sounds like some of them have their eye on the exit door and are most likely basing all of their decisions on maximizing their personal payout.

Your moment of leverage will pass once the deal is done. I would act quickly. Specifically:

  • Have an idea on what number would make you happy. A market rate salary? A single lump sum? More shares? A combination?
  • Write and sign a resignation. It is an important step emotionally, and you'll need it below.
  • Create a simple spreadsheet documenting the difference between a market rate salary and what they have been paying you. Aka: your investment in the company.

.

 Year   Market   Mine    Diff
 ----   ------   ------  -----
 2006      41k      30k    11k
 2007      42k      30k    12k      
 2008      43k      30k    13k
 2009      45k      30k    15k
 2010      48k      32k    16k
 2011      49k      32k    18k
                         -----
                           85k
  • Have a chat with the existing directors, bring the above printout and resignation with you
    • Tell them you are giving up on the house. (General piece of advice: don't let your employer know anything about your own financial goals, interests or activities. Some will use it against you.) The point is to portray an image of someone is mobile, and not stuck.
    • Show them how much you have invested, and if they are going to cash out (partly or fully), it is only fair that you get to also. They will understand this...they have done their own calculations for themselves.
    • Tell them if you don't, then you are accepting a loss of your investment, and will go else where in search of the highest salary. It is a blatant threat, so you'll want to be nice about it. "I love this job, and it's been great working with you, but I need to do what is right for me."
    • Tell them you will be speaking to the new investors/owners about this if they don't address your concerns.
    • The resignation letter is half prop, half "final straw execution script". Put it on the table, they will know what it is. If they ask tell them what it is. It demonstrates your commitment to leaving if there is not an agreement. Once you submit a resignation, they will have a responsibility to tell the new owners/investors.
  • Unless the above goes swimmingly well, you'll need to contact the new investors/owners. This is your last chance to work things out. Maybe they would be willing to compensate you in some way that is agreeable? Then again, maybe they'll get cold feet and abandon the deal. It's tricky, but potentially necessary.

The conversation with your current directors/management could very easily go poorly. From their point of view, you will be endangering their own personal financial situation. If the deal goes bust, they will be furious.

If you don't do this now, and quit the company after the shares change hands, then the new investors are getting shafted. I personally would feel bad about that.

As I said earlier, "been there and done that". It didn't work out for me with the company, and we parted ways. I lost a solid £65k "investment" (sub-market salary) and told them to keep the shares. Then I moved onto a well paid gig that was professionally so much more interesting.

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This post is very useful to me and clarifies a lot of things in my mind that I have already been thinking about. Thank you. I am in the process of drawing up a Spreadsheet that visualises roughly what my personal investment is into the company through suppressed salary. – Jo Skipp Aug 2 '11 at 14:30
I've added up my investment, it comes in at a low bound of 15k, a high bound of 94k and an average of 54k. That sounds about right to me, it must be about 50-60k that I've been losing out on the past 5 years. – Jo Skipp Aug 2 '11 at 14:42
@Jo Skipp: Good luck. Come back and let us know what you did, and how things worked out! – Stu Thompson Aug 2 '11 at 15:04

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