Startups · M&a

How do we fairly share proceeds from the sale of a startup between the team and investors?

John Straw Student at University of Florida

October 1st, 2016

  • We raised $2 Million in capital in notes and accumulated ~$1M in interest on those notes over a long many years.
  • We spent the investment money half way through the journey. Instead of a shut down, the team continued to work and grow the business to modest revenues, but has not been paid wages to the tune of $1 Million. The company also has other unpaid debts of $250K
  • We have a likely term sheet for ~$3.25 M in cash. The common shareholders will get nothing. There are no carve out arrangements in place but there is enough to pay principle back and make everyone whole.
  • What arrangements can be made now without involving the buyer (before the term sheet) to ensure everyone is whole?

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

October 1st, 2016

The general rule is that if people are owed wages then wages get paid first, then taxes, general creditors and then the owners.  Whatever you decide it can come back and bite you. Consult your lawyer and get general agreement and signed releases from everyone.

Arthur Lipper Chairman of British Far East Holdings Ltd.

October 1st, 2016

If the best deal you can make is for a cash amount only sufficient to repay debts then there is nothing to share with equity owners or others. It does not sound to me if you are being professionally advised. Arthur

David M

October 1st, 2016

I think there has to be more information provided.  You are talking about several contracted players, and without knowing what is in those contracts, it is difficult to comment.

Follow your contracts within your legal responsibilities.  After that, yes you should absolutely be fair.  If you are not fair to those inside and outside of your company who have kept you afloat, you won't have a business to do what is best for!

Tom DiClemente Management Consulting | Interim CEO/COO | Coach

October 2nd, 2016

Note this is in no way legal advice. You should hire an attorney for legal advice.

I'm assuming you already tried to negotiate with your noteholders before coming to this forum. If not, you need to do that now. If a friendly discussion did not result in a resolution, you need to hire a lawyer.

Keep in mind that you will need to pay the lawyer and any other professional fees first when you receive any payout.

More info would really be needed but here are a few ifs and buts:

I assume the notes are also secured by the full assets of the company. If so, keep in mind that the noteholders could demand their security and then make a deal with the buyer. Your reaction may be to file for a voluntary bankruptcy in which case the court will decide who gets paid what. For sure the common shareholders will still not be paid, unless they have some uncommon leverage that you have not included in your question. Whether the purchaser sticks around or becomes a debtor in possession instead is another matter.

Regardless, you will have to pay employees who are rightfully due a realistic level of wages and their benefits. This is not limitless unless your noteholders agree. Generally, unless you make a friendly agreement with your noteholders that is very employee friendly, you will fall back to the statutory wage limits (with the exception of pension type benefits which will get more generous treatment) and the 180 day limit unless you make a peaceful negotiation and do not go through bankruptcy. 

Next you will have to pay your debts of $250,000.

Your secured creditor, I'm assuming due to your concerns that they must be secured, will receive the rest.

Like I said, talk to them first and see if they will agree to carve out some amount for the founders, although I think from what you've told us it is unlikely unless they are a government institution.

Then hire an attorney to help you through this process so there is nothing that comes back to bite you. But, without that friendly and generous agreement with creditors, or you owning some key intellectual property in another entity to which the noteholders have no rights, you will most likely need to put any recovery for common shareholders out of your mind.

Judith Szepesi Founding Partner and Patent Strategist at HIPLegal LLP

October 1st, 2016

Generally you pay your debts first (and that includes unpaid wages), before you distribute to shareholders.