Big Startup acquires Niche Software, Part 2

In the first part of this post I explained a creative deal which Niche Software struck with Big Startup. How did it work out?

Not so well: Niche Software didn’t have the rocket-fuel effect on Big Startup that everyone hoped for. And Big Startup ran into unrelated difficulties in other aspects of its business. Big Startup also hired a new Finance Director who didn’t like the look of the deal at all, and thought it was far too generous to Niche Software.

At this point, the minority shareholder / CEO of Niche Software starts to worry about his £200k escrow retention. That’s part of the original £1m payment which is kept in escrow for twelve months after the acquisition of his shares. It is due to be released as long as the owner of Niche Software is still working as CEO of the business on the first anniversary of the deal. A simple mechanism to stop him walking away within the first twelve months.

But as Big Startup now has control of the company through their 51% shareholding, they could just fire him to avoid paying out the £200k. They are also now funding the operating costs of Niche Software, so could stop funding that and force Niche into administration.

This has the potential to get very acrimonious and messy.

My advice to the CEO of Niche Software was as follows: offer Big Startup two options. One where you agree some new target which, if reached, means Big Startup would be happy to exercise their option to acquire the remaining shares on the original terms and everyone is happy. Proposing this makes it clear you haven’t given up, and are not leaving them in the lurch.

Second option is to just give Big Startup the remaining 49% of the shares for a peppercorn now, as long as the £200k in escrow is paid out now (which would end up being a couple of months early), and part company. No tears.

Big Startup went for option two. Why? Why didn’t they just force Niche into administration, fire the CEO, buy the assets (code, customer base, etc.) from the administrators for a pittance and save themselves £200k?

Because it isn’t just about money. They would end up in a big acrimonious dispute with the minority shareholder / CEO of Niche Software. The CEO of Niche has been amicable and friendly throughout these discussions, happily discussing in a matter-of-fact way the pros and cons of Big Startup using their majority shareholding control to force Niche into administration, for example. A dispute would be distracting for Big Startup’s management. The CEO of Niche is offering them an easy way out, where everyone parts company amicably, and it can all be wrapped up in a few days. That’s a big incentive.

The owner of Niche went into the deal fully aware that it might not work out. He was happy that the original payment of £1m was a reasonable price to sell at. The option was structured to share in the upside if there was any. The upside now looks very unlikely indeed, so Niche is happy to walk away as long as they get the whole of their £1m.

Big Startup is happy because they quickly tidy up what now looks like a messy distracting deal. They get full ownership of Niche so they aren’t losing anything. They only spend what they originally expected to spend anyway.

This is one example of a potentially very acrimonious situation which I helped resolve with no tears. If you have a shareholder dispute which you think I might be able to help with give me a call or drop me an email.