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 Ever wonder where those strange or seemingly onerous terms in a venture financing come from? Well, you are about to find out, as part of our on-going series "entrepreneurs behaving badly." (For those who missed G-B-U part 1, feel free to go back and review the rationale of this series for context - and know that there are "Good" stories yet to come).
As with most lessons in life, the ones we learn the hard way stick with us the best. And you would think that after over 25 years in the venture business, we must have seen it all and learned it all. Not so! What follows is an example in recent times of what we consider a "U" on the G-B-U scale - and one that actually caused a change in the agreements we strike with entrepreneurs going forward.
In most startup financings, employment contracts are drafted with the founders. This gives us some assurance they won't just walk out with all their stock the first time the Board doesn't agree with them. In turn, those contracts protect the entrepreneur from an out-of-control Board. At least 95% of the time, the agreements prove to not have been necessary, as everyone behaves well. But every once in a while....
In this case, part of the entrepreneur's employment agreement included a six month salary grant if he/she was terminated for other than legal cause. It was a protection against an arbitrary dismissal, and one we decided to accept as part of the total package. However, this was one of those startups where (later on) things didn't work out. For all the good efforts by the team, the product did not end up matching market needs, and we had to shut the doors after millions of dollars were invested.
We went about that wind-down process as gracefully as one can, and the issue of the termination provision came up. Since we were closing the doors, the employees, including the CEO, were technically being terminated. And since it wasn't for what is traditionally defined as "cause" (essentially wrong doing in legal-ese) the case could be made that we owed severance payments.
Now, in 25 years, we'd never seen an entrepreneur CEO who had received millions from folks like us take the last dollars the company had and put them in his or her pocket as the lights were being switched off. Even if the dollars were not material compared to the millions invested, every prior example was of a founder who saw to it that the investors at least recovered that miniscule part of their total bet. But, not this time. We made it clear that since the contract language allowed for the founder to take that money, we would abide by the letter of the law. We also made it clear that we could not imagine anyone actually doing that. Silly us.
So, we now have a term in our founder employment agreements to void the severance payment provision if a company is ending employment because it is ceasing to be a going concern. Sad, yes, but that's how an entrepreneur on the "Ugly" scale can make our documents seem even more finicky than they already were.
Oh, and to add insult to injury, a VP of the same firm came forward in the final days with out-of-pocket expenses from one to two years prior that had never been turned in for reimbursement. The company did not have a stated statute of limitations on how long such expenses could be in arrears - even if it violates all the common sense notions of what year-end audited financials include. So, there's one where you, the entrepreneur, can add some extra language to your documents (i.e. employee handbook), too!
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