This is the headline on a special Coutts supplement in the Cambridge Evening News and the article is about family divorce. It could just as well apply to the shareholders of a business. Could we soon have vesting shares in marriage?
I am a tiny investor in a Cambridge active equity company. I do not wish to mention names at this stage but all will be revealed if and when we realise our investment. A group of angels, some making six figure investments, backed two industry veterans, one a bean counter the other a savvy commercial operator to build a business based on the IP of two young, energetic graduates. All went well until the first AGM when we found that the four founders had distributed the option scheme amongst themselves. Each blamed the others for this shameless behaviour but it came out that they thought that the investors owned too much of the company and took action to reduce their dilution. At the next round, a further option scheme was required for new management (I did not follow on) but this time the investor appointed two of their number to monitor the scheme. A bit like shutting the stable door after the horse has bolted.
When the going got tough, the two youngsters buckled down to the job in hand whilst the two veterans started to squabble spending the investors cash to resolve the issue and one of them left the board but retained all his shares. Now the other is finding the grind hard work and complains about his low shareholding and is putting energy into developing other businesses of which he is a major shareholder.
It is time for a change at the top but how do we investors reward new key people without suffering further dilution. It is gong to be difficult to get the veterans to fall on their swords and say “We have failed and missed all the targets. Please have some of my shares to get good people in”. It is not until you have lived through these tough start-ups that you realise why the VCs keep such close control on equity and tighten up the vesting rights.
Equity Fingerpring, the business plan resource, works well if there is an increase in valuation but everyone suffers when targets are missed. Let us hope that the two youngsters are in for the long haul and really have a mission to build a business.
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