Founder-Investors Conflicts, Board Room Drama, What Investors May Not Want You to Know

Have you ever wondered Why Sam Altman, Founder of OpenAI, was fired from his own Company, Read How OpenAI’s Bizarre Structure Gave 4 People the Power to Fire Sam Altman

Sometimes, founders really want their businesses to grow, and they’ll do whatever it takes to get funding. But here’s the thing – when big investors offer a lot of money, they usually want a say in how things are done. That’s when problems can start, and you get those intense boardroom dramas. It’s possible to find a balance between what founders want and what investors want. This case study looks at times when conflicts between founders and investors became a big deal in different companies. Just so you know, I am only talking about what happened at those specific times and not what came later in those companies.

As companies scale up with multiple investment rounds, differences of vision between founders and investors can begin to show up. At this stage, founders have a much smaller shareholding in the company (between 10 to 15%). The last investor often holds the largest percentage, which can exceed founder shareholding by a big margin. For example, Ola’s founders together own between 10 – 12% of the company.

Affect Of Drag Along Rights

Softbank, Snapdeal’s major investor, had the right to make others, including founders, sell their shares. Softbank owned around 33% of Snapdeal, Nexus Partners had 10%, and Kalaari Capital had about 8%. According to Snapdeal’s agreement, Softbank could force founders to sell shares if (a) the Snapdeal Board agreed, needing a simple majority (4 out of 7 members, including the two founders, one each from Nexus and Kalaari, two from Softbank, and one independent director); and (b) Softbank and either Nexus or Kalaari had to agree.

Investors’ ability to affect the composition of the board of directors:

At times, investors may have the authority to appoint a disproportionately high number of directors on the board, even exceeding their shareholding percentage. For instance, in a board of 5 directors, an investor holding 30 percent shares could appoint 3 directors, equivalent to 60%. Shareholders’ Agreements (SHAs) and Articles of Association can be crafted to allow certain decisions, like using drag-along rights, to be made at the board level without needing approval from all shareholders. Investors might also have the power to select or change a CEO. In early 2017, Tiger Global exercised this right by appointing Kalyan Krishnamurthy as the CEO of Flipkart, replacing co-founder Binny Bansal.

What’s the Solution :

At the time of negotiating their investment, founders need to agree on whether they want to retain control over the composition of the Board and have a veto on the appointment of CEOs. For example, as per Ola’s Articles of Association, SoftBank can appoint one director, and a second one if the person is acceptable to the founders and all the shareholders, but it will not apply if it owns more than 50% of preference shares.

Though It’s not viable to spend lacs on big Law firms if you’re a startup, a decent Lawyer or group of Lawyers would be of great help in navigating these scenarios. Also, you must have a basic knowledge of Companies Act, and how shareholders rights are enforced in NCLT(National Company Law Tribunal) and ROC.

Disclaimer : This is not a legal advice or solicitation. It’s just for educational purpose. You will have to hire your Lawyer for any legal advice.

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