Selling shares in a private limited comapny
Discussion
Going to try and make this simple and to the point.
4 years ago I helped co-found a spin-out company from a UK university. The company subsequently secured investment from a VC. As time went on, the CEO started doing things behind my back and I had to whistleblow. The other directors and VC agreed with my position but that added to a souring relationship between me and the CEO. On the long run, the VC was always going to back the CEO as it was invention that caused the company to be founded in the first place. Seeing that I would never be in a good position in the future, I handed my notice in and left as a 'good leaver'.
Various investment rounds have taken place since (to my amazement really) and my shareholding has been diluted to around 1% of a £3.2m concern. They were doing another investment round and I was contacted because of pre-emption rights. A chance converstation with the new Chairman made me think I could have a go at selling my shares to the other investors (including the university and VC), get out, and put the saga behind me.
The Chairman is a bit slippery and slow when it comes to representing my interests. I chased him for 6 weeks about offering my shares to the other private investors. All he said was that it was raised at a Board meeting, and the Company did not want to buy the shares back. Well, no surprise there! They do not want to be spending money on shares, they want people to invest in more shares the Company can sell.
I raised it with the Chairman again when I finally got hold of him. He said he would casually ring around some of the shareholders to see if there was interest in buying the shares. It went quiet, so I got hold of him again and asked who he had spoken, and if had contacted all the shareholders. He was evasive, said he had spoken to some (but would not say who). He then added that it was discussed at a subsequent Board meeting and the Company said it was 'not their priority'. Well, this bunch are not going to do anything to help me. Further to that, he suggested that the Company was not keen for me to sell my shares to existing investors because I would be in direct competition for their money, and that it is in the Company's best interests to court the investors further, sell more of their shares, get more money in blah blah blah. I can see the point, but I want out, and I thought that a chairman should be representing the shareholders' interests amongst others (i.e. me).
This bunch are slippery and I don't trust them 1 iota. I would like to know what my rights are. For example, can I request the contact details for the other shareholders so I can ask them of they want to buy extra shares that do not dilute their holding (better value than buying new shares)? I asked the university if they wanted to buy them, but they quickly came back and said that due to pre-emption rights, they would have to be offered to the other shareholders!! I am being prevented from doing that though!
As I said, my shareholding could be worth £30K so I am obviously keen to move them off whilst they are worth this (sometime in the future they may be worth zero of that CEO continues). Would it be fair for me to say to the Chairman that they are being obstructive if I cannot sell? My fear is that I lose the value that the shares have now because of their inaction, and if the company went bust, I could not sue any one later if they have nothing.
This is my first experience of this kind of corporate scenario and I am not enjoying it. I am just trying to get back some of what I have put in, and divorce myself from this lot, leaving them to get on it with it. Some of the other shareholders are ex-academics (with more shares than me), who no longer work there and want to get out too.
Any ideas from the collective PH wisdom as to outwit these people?
4 years ago I helped co-found a spin-out company from a UK university. The company subsequently secured investment from a VC. As time went on, the CEO started doing things behind my back and I had to whistleblow. The other directors and VC agreed with my position but that added to a souring relationship between me and the CEO. On the long run, the VC was always going to back the CEO as it was invention that caused the company to be founded in the first place. Seeing that I would never be in a good position in the future, I handed my notice in and left as a 'good leaver'.
Various investment rounds have taken place since (to my amazement really) and my shareholding has been diluted to around 1% of a £3.2m concern. They were doing another investment round and I was contacted because of pre-emption rights. A chance converstation with the new Chairman made me think I could have a go at selling my shares to the other investors (including the university and VC), get out, and put the saga behind me.
The Chairman is a bit slippery and slow when it comes to representing my interests. I chased him for 6 weeks about offering my shares to the other private investors. All he said was that it was raised at a Board meeting, and the Company did not want to buy the shares back. Well, no surprise there! They do not want to be spending money on shares, they want people to invest in more shares the Company can sell.
I raised it with the Chairman again when I finally got hold of him. He said he would casually ring around some of the shareholders to see if there was interest in buying the shares. It went quiet, so I got hold of him again and asked who he had spoken, and if had contacted all the shareholders. He was evasive, said he had spoken to some (but would not say who). He then added that it was discussed at a subsequent Board meeting and the Company said it was 'not their priority'. Well, this bunch are not going to do anything to help me. Further to that, he suggested that the Company was not keen for me to sell my shares to existing investors because I would be in direct competition for their money, and that it is in the Company's best interests to court the investors further, sell more of their shares, get more money in blah blah blah. I can see the point, but I want out, and I thought that a chairman should be representing the shareholders' interests amongst others (i.e. me).
This bunch are slippery and I don't trust them 1 iota. I would like to know what my rights are. For example, can I request the contact details for the other shareholders so I can ask them of they want to buy extra shares that do not dilute their holding (better value than buying new shares)? I asked the university if they wanted to buy them, but they quickly came back and said that due to pre-emption rights, they would have to be offered to the other shareholders!! I am being prevented from doing that though!
As I said, my shareholding could be worth £30K so I am obviously keen to move them off whilst they are worth this (sometime in the future they may be worth zero of that CEO continues). Would it be fair for me to say to the Chairman that they are being obstructive if I cannot sell? My fear is that I lose the value that the shares have now because of their inaction, and if the company went bust, I could not sue any one later if they have nothing.
This is my first experience of this kind of corporate scenario and I am not enjoying it. I am just trying to get back some of what I have put in, and divorce myself from this lot, leaving them to get on it with it. Some of the other shareholders are ex-academics (with more shares than me), who no longer work there and want to get out too.
Any ideas from the collective PH wisdom as to outwit these people?
a lot can depend on shareholder agreements - so in the absence of knowing that detail it can be hard to advise...
Is the shareholder / members register kept privately or on the public record - if the latter, easy to see who are shareholders...
If the former - then you need to push them - you have a right to see the members' register as a member yourself...
https://www.informdirect.co.uk/shares/shareholders...
https://www.legislation.gov.uk/ukpga/2006/46/secti...
also, most invested companies are quite public about who is investing - so how would you not know the investors / shareholders?
depending on your split of shares in the company - and the terms of the shareholders agreement, then I would be targeting a shareholder where your % may help improve their % ideally to move them from one level of rights in the company to another - for which they might pay a premium...
Is the shareholder / members register kept privately or on the public record - if the latter, easy to see who are shareholders...
If the former - then you need to push them - you have a right to see the members' register as a member yourself...
https://www.informdirect.co.uk/shares/shareholders...
https://www.legislation.gov.uk/ukpga/2006/46/secti...
also, most invested companies are quite public about who is investing - so how would you not know the investors / shareholders?
depending on your split of shares in the company - and the terms of the shareholders agreement, then I would be targeting a shareholder where your % may help improve their % ideally to move them from one level of rights in the company to another - for which they might pay a premium...
Thank you for the reply. It is proving very tricky but I will ask/dig out my shareholders' agreement , if need be asking the Chair for a copy. I believe myself a very reasonable person and try to come across as that, but I will certainly press them as required.
Part of me thinks 'to hell with them'. I could probably engineer a situation that actually panics existing shareholders and the company would run out of money. However, my being reasonable means that all things being equal, I would hope the company keeps on trading, that people keep their jobs, and investors keep their shirts.
Part of me thinks 'to hell with them'. I could probably engineer a situation that actually panics existing shareholders and the company would run out of money. However, my being reasonable means that all things being equal, I would hope the company keeps on trading, that people keep their jobs, and investors keep their shirts.
Long story, but the person who represents the original VC is not on side with me. The VC was persuaded to put in a lot of money after I left, something that I would have advised against. I hear that that they will not be putting any more money in. A subsequent round put that to the test and it was an alternate VC who put in, and I do not have a relationship with them at all.
ultimately - you don't need to have a relationship:
check the shareholder's agreement - this will dictate what you can do / can't do, it may be that you can force your shares to be bought / that you can't sell them / that you have no restrictions / etc.
then check the members' register (as above, you have a legal right to see this):
- understand who the other shareholders are
- understand their % holdings (if they 1% off a break point, then having your share could give them more power = incentive to buy)
contact them to see if they will buy, options are:
- company buys shares back - but they may be restricted from using investor funds in that way - in essence it dilutes the investor's shareholding using their funds to do that...
- another shareholder buys them - you have to ask why they might do that - if it is a significant change in % then you have a reason - otherwise, you may find it difficult to sell them - for the investor, they would normally buy shares based on that money then being invested to grow the business - to buy your shares would be a purchase for cash and take that cash out of the business - therefore it is not as valuable as an investment in the business as there is no growth potential from the spend of cash - if an investor were to buy, expect it to be at a discounted rate... they have no reason to buy and no benefit from that money - so it could be seen as a weak purchase...
- sold on the open market - very tricky...
Basically at 1%, unless you have something in the shareholders' agreement to help you then you are basically stuffed - there is little opportunity to liquidate such an investment...
I know it is a bit late - but for others - if you are getting investors into a company, then understanding exit strategies for all concerned is important - esp. minority shareholders...
check the shareholder's agreement - this will dictate what you can do / can't do, it may be that you can force your shares to be bought / that you can't sell them / that you have no restrictions / etc.
then check the members' register (as above, you have a legal right to see this):
- understand who the other shareholders are
- understand their % holdings (if they 1% off a break point, then having your share could give them more power = incentive to buy)
contact them to see if they will buy, options are:
- company buys shares back - but they may be restricted from using investor funds in that way - in essence it dilutes the investor's shareholding using their funds to do that...
- another shareholder buys them - you have to ask why they might do that - if it is a significant change in % then you have a reason - otherwise, you may find it difficult to sell them - for the investor, they would normally buy shares based on that money then being invested to grow the business - to buy your shares would be a purchase for cash and take that cash out of the business - therefore it is not as valuable as an investment in the business as there is no growth potential from the spend of cash - if an investor were to buy, expect it to be at a discounted rate... they have no reason to buy and no benefit from that money - so it could be seen as a weak purchase...
- sold on the open market - very tricky...
Basically at 1%, unless you have something in the shareholders' agreement to help you then you are basically stuffed - there is little opportunity to liquidate such an investment...
I know it is a bit late - but for others - if you are getting investors into a company, then understanding exit strategies for all concerned is important - esp. minority shareholders...
Thank you again. You give a good view from the perspective of other shareholders. The way I saw it was that an existing shareholder could put say £30K into the company in return for new shares that dilute everyone OR they buy £30K of shares that increases their stake but without the dilution of new shares.
My view is to just try and get out, get a return on my blood and sweat, and leave David Brent and his chums to carry on playing Monopoly with everyone else's money. The business is very risky (especially given the personality of the person in charge and lack of real world business experience) and may not be around in 12 months.
My difficulty is that these guys invariably don't play by the rules and always seem to operate in the grey space rather than 'good practice'. Trust is not something I can give them.
My view is to just try and get out, get a return on my blood and sweat, and leave David Brent and his chums to carry on playing Monopoly with everyone else's money. The business is very risky (especially given the personality of the person in charge and lack of real world business experience) and may not be around in 12 months.
My difficulty is that these guys invariably don't play by the rules and always seem to operate in the grey space rather than 'good practice'. Trust is not something I can give them.
All investors have different policies on their expected return... however most are likely to play an odds game across a number of investments...
So if they want to double their money, and invest £100 in 10 companies they invest £1,000 and want £2,000 in return. Depending on their risk profile they might expect 4 to fail, 2 companies to remain static, 2 to double their money and 2 to soar... so they lose £400, and return 2 x £100, 2 x £200 giving £600 - so the other two companies have to return 7x each to bring in the remaining £1,400 so that they double their money...
In reality some VCs will have a riskier profile still and might need one company to grow 20x to allow 9 to fail - additionally there will be other costs such as DD etc. Which need to be embedded. So, to make a modest return on their fund, they might need some serious returns in their invested company (figures are illustrative)
So for every £ put into an investment, they will be looking for a magnitude of return - that is why they don’t just invest generically in a growth company in the way in which someone might buy shares on the stock market, but instead they invest specifically against known growth plans, eg investing £1m to buy manufacturing kit to drop production costs to 1/3, allowing the price to the consumer to drop and margins to increase - targeting a large growth in sales...
So, when it comes to your selling shares, you are maybe thinking with the mindset of someone buying shares in the stock market, but not thinking about returns... if your shares have an investment-led market value - where is their upside in buying them? When they invest in the company, they a) get the shares at a discounted value, but b) their cash goes into the business to be leveraged in growing the value of the business - buying from you only gives them an opportunity for a discount on the shares, the money goes outside the business, so doesn’t help...
Also, why would the business buy back your shares? Doing so takes money out of the business and weakens it... If you helped found the business and now want out, what is that saying about the business future, it would concern me as an investor...
That is why you need to look at the share agreement, to see whether you have a right to sell at particular points or not...
If your shares have a ‘value’ based on the latest round of investment of £30k then I suspect that you would be lucky to get half that... in reality your holding is too insignificant- it has no say in major decisions and investors can buy in / sell out with no regard to you... so unless protected by the shareholders’ agreement you are in a very weak place...
So if they want to double their money, and invest £100 in 10 companies they invest £1,000 and want £2,000 in return. Depending on their risk profile they might expect 4 to fail, 2 companies to remain static, 2 to double their money and 2 to soar... so they lose £400, and return 2 x £100, 2 x £200 giving £600 - so the other two companies have to return 7x each to bring in the remaining £1,400 so that they double their money...
In reality some VCs will have a riskier profile still and might need one company to grow 20x to allow 9 to fail - additionally there will be other costs such as DD etc. Which need to be embedded. So, to make a modest return on their fund, they might need some serious returns in their invested company (figures are illustrative)
So for every £ put into an investment, they will be looking for a magnitude of return - that is why they don’t just invest generically in a growth company in the way in which someone might buy shares on the stock market, but instead they invest specifically against known growth plans, eg investing £1m to buy manufacturing kit to drop production costs to 1/3, allowing the price to the consumer to drop and margins to increase - targeting a large growth in sales...
So, when it comes to your selling shares, you are maybe thinking with the mindset of someone buying shares in the stock market, but not thinking about returns... if your shares have an investment-led market value - where is their upside in buying them? When they invest in the company, they a) get the shares at a discounted value, but b) their cash goes into the business to be leveraged in growing the value of the business - buying from you only gives them an opportunity for a discount on the shares, the money goes outside the business, so doesn’t help...
Also, why would the business buy back your shares? Doing so takes money out of the business and weakens it... If you helped found the business and now want out, what is that saying about the business future, it would concern me as an investor...
That is why you need to look at the share agreement, to see whether you have a right to sell at particular points or not...
If your shares have a ‘value’ based on the latest round of investment of £30k then I suspect that you would be lucky to get half that... in reality your holding is too insignificant- it has no say in major decisions and investors can buy in / sell out with no regard to you... so unless protected by the shareholders’ agreement you are in a very weak place...
Edited by akirk on Friday 25th January 07:31
It will all depend on the shareholder agreement.
If the VCs know what they are doing (which is likely) I'd imagine your shares are worthless without their goodwill. But it really will come down to the shareholder agreement. If they have messed that up your shares could be worth a lot.
If the VCs know what they are doing (which is likely) I'd imagine your shares are worthless without their goodwill. But it really will come down to the shareholder agreement. If they have messed that up your shares could be worth a lot.
You might also want to check the company's articles as well as any shareholder agreement. The two should dovetail in the mechanisms for share acquisition and disposal.
Ultimately, the shares are only worth what another party is prepared to pay. The motivation to purchase the shares also needs to be there.
Has the company had a formal valuation or are you assuming the value based on some arbitrary measure?
The company buying the shares at a discount then cancelling them could be attractive to the other shareholders as it concentrates their percentage of ownership and I imagine dividends, assuming their shares are entitled to them.
Ultimately, the shares are only worth what another party is prepared to pay. The motivation to purchase the shares also needs to be there.
Has the company had a formal valuation or are you assuming the value based on some arbitrary measure?
The company buying the shares at a discount then cancelling them could be attractive to the other shareholders as it concentrates their percentage of ownership and I imagine dividends, assuming their shares are entitled to them.
You say the company is worth £3.2m - on what basis was this valuation arrived at?
You're a minority shareholder with no (legitimate) influence or control over the direction of the company. Even if your valuation of £3.2m is correct, 1% of the shares in a private limited company would attract a discount of 75 - 90% so your £30k is more like £3k in reality (although the 'real' reality is that they are worth £nil unless you have a willing buyer).
In short I'd say your shares are worth nothing like £30k so don't worry about it. Just cross your fingers that in a couple of years a buyer for the company at a fulsome valuation comes along...
You're a minority shareholder with no (legitimate) influence or control over the direction of the company. Even if your valuation of £3.2m is correct, 1% of the shares in a private limited company would attract a discount of 75 - 90% so your £30k is more like £3k in reality (although the 'real' reality is that they are worth £nil unless you have a willing buyer).
In short I'd say your shares are worth nothing like £30k so don't worry about it. Just cross your fingers that in a couple of years a buyer for the company at a fulsome valuation comes along...
Thanks all.
The company valuation is that given by the VCs. It is essentially the figure they band about because it is what has been invested in the company by them and others. They would not value the company any less than that. However, I totally agree that something is only worth what someone would pay for it, rather than the sum of their investment. Some private investors also recently put money in and that is the figure they would have been given, paying what they did for their shares.
The pre-emption rights will (I think) be another issue for me to divest shares, as there will be a process for all shareholders to be contacted to offer my holding. the grey space is....who can drive that process if the company is not interested? I think it is their responsibility to offer my shares to other shareholders if it is my desire, but they can choose not to. As said previously, I will have to study the shareholders agreement. Knowing the sharky VCs, they are likely to have it stitched up in their interests, rather than something that could be considered fair.
The company valuation is that given by the VCs. It is essentially the figure they band about because it is what has been invested in the company by them and others. They would not value the company any less than that. However, I totally agree that something is only worth what someone would pay for it, rather than the sum of their investment. Some private investors also recently put money in and that is the figure they would have been given, paying what they did for their shares.
The pre-emption rights will (I think) be another issue for me to divest shares, as there will be a process for all shareholders to be contacted to offer my holding. the grey space is....who can drive that process if the company is not interested? I think it is their responsibility to offer my shares to other shareholders if it is my desire, but they can choose not to. As said previously, I will have to study the shareholders agreement. Knowing the sharky VCs, they are likely to have it stitched up in their interests, rather than something that could be considered fair.
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