Bringing in Corporate Governance

[Neutrino]

Hello All,

Lurker for a long time, and really appreciate all the resources here. However the time finally came, where I would like to get some opinions of the community! Have some investors coming in, and currently trying to do all of the worst case scenarios around our current Shareholders Agreement.

Background

Currently a small business with 2 employees, and a dozen or so contract workers as and when needed. Our clients are big multi nationals, governments, defence departments etc Had been hovering around £200-250k turnover each year for past 3 years whilst had been preparing the business for the bigger picture, expanding the facilities, working on our IP etc.

However, we have now secured £1.6m in contracts for the coming year, starting essentially now. So in need of rapid expansion. However, due to our preparedness, this mostly revolves around people, management and corporate governance. As we got these larger contracts from our previous clients on the basis we are moving into a new more structured company.


The Plan

Had been forming, and talking about a non-executive panel for about a year now. This has been headed by a business mentor who has been helping me for years. We have put together 6 individuals, titans of their respective industry's (and mine), ex CEOs/NEDs/Owners of large corporations (literally multi billion pound companies, and managing 10s thousands employees.

We work very well together and for the past 6 months I have been using their experience and knowledge to great benefits. However now we need to make this more formal.

As a side note, im an academic, although I did build the company up Sigle handily, I don't want to be running the "big picture" stuff, im happy as CEO, and potentially eventually, upon my own choosing, someone else even to fill that role. There are also other reasons I wont go into here, as to why I cant/don't want to be the sole person making large financial/business decisions.

To put it into context, we are looking to sell or float in 5 years, have interested second round investors for a few million, and are looking to build it to around £20m. Just to put the potential equity into perspective. Current value, including the coming year contracts, not soley based on historic value is £1.8-2.2m. If purely on historic value, would be lucky to value it above £0.5m

So, these 6 are coming on for 5% each, leaving me with 70%. They are putting money in, however they equity is basically for their experience and value they bring, im happy with this, and that part is without question. Equally, we could never cashflow these 6 non-execs for the amount of work they are willing to put in over the coming years. Cashflow is king and all that.

Everything is set, we have negotiated a shareholders agreement, shares are ready to be issued, and this is all set for next week.

Possible Issues

So, on to the crux of the matter. Of course I have sent this of to solicitors weeks ago. However, they have been more interested in trying to get me to pay them many thousands to draft their own SA, they have not, after repeated requests just reviewed it for me, and laid out the possible outcomes of the way it is set out. I have run it by multiple peers, and whilst they agree it is a lot of power to give up, I, in theory am not giving away my own power, that is, im not getting into a position to be steamrolled.

• We have set the the board to be by 75% shareholders vote. The board is myself, and 3 of the NEDs, with one of them acting as chairman. Each having 5%. As far as im concerned, this means they would always need my decision/vote to get anything passed, I can block absolutely everything.Opposingly, if I ever want to get my agenda past, I only ever need to get one of the 3 to side with me (bear in mind these 3 aren't a connected block who have been in business together before, but even if they ganged up, its not possible for them to pass anything. Im assuming im right on this?
• The shareholders/AGM is set to unanimous - so much in the same way as above, I cant have anything passed by me that I don't want, however, I would need all equity holders to agree with me in order to do "the big stuff" hire/fire directors, close the company, change the business etc etc (just for a side note, im personally fine with this and take comfort in it, crazy I know)
• We have a triggering event under force sale of shares (pro rata amount compared to theirs to bring me under a control value) due to gross negligence/death/mental incapacity etc
• Good leaver, resignations, etc by myself, I get to keep my shares and voting rights

So, that's the core of it, my only concerns now are:

• Have I missed something, can I be booted as CEO?
• The fact I have directors service agreement with the company, and the only force sale condition is on gross misconduct/negligence/death/mental incapacity. I literally would have to personally do something very very bad to even be put in a possible situation of dismissal. As a side note, we have a separate condition, that if I will my shares ot my partner, she can take an interest in the company and keep the shares above a controlling interest or sell to below 50%
• Apart from giving up the sole ability to make decisions, is their any thing I have missed that means I could be steamrolled on a decision?
• The only comment my solicitor came up with is we haven't put any provisions in this SA for future investment. However as decisions always have to be approved by me, I assume decisions on future investment and terms, would always need my rubber stamp (we plan to dilute further, with me ultimately sitting at 51% when we take on a investor in round two). This is also another good point, the current SA is only needed for 3-4 months, a new one will most likely be proposed by the investor, or negotiated again then.

There are lots of ifs and buts, and this should hopefully not be needed. We are very good friends, respected business peers in the community, I doubt they would ever risk their own reputation. We have been working on this a long time, it was always my own decision etc

Any and all views welcome.

 

[The Byre]

This is definitely one for @The Resolver. I suggest you get him to hold your hand here.

http://www.boardroomresolve.com/

 

[ethical PR]

If your solicitors aren't following your instructions, why haven't you instructed another firm?

As @TheByre says The Resolver has expertise in this area.

With something as important as this, you can't rely on informal advice from a forum.

 

[Clinton]

So, on to the crux of the matter. Of course I have sent this of to solicitors weeks ago. However, they have been more interested in trying to get me to pay them many thousands ....

Here we go, yet another one wanting to do it on the cheap!

You won't believe how often we get this on these forums and how often we get the later complaints that it's all gone pear shaped.

• Have I missed something

Yes, tons of stuff. I'm not going to list them all but I'll tell you one: These situations require proper professional expertise ... and it costs thousands of pounds. Sometimes, after paying the thousands of pounds, the deal still doesn't happen. That's just the way it is.

To play the game you need to have the balls ... and you need to be willing to spend large sums of money to play properly. Sometimes, after paying large sums to one lawyer, you need to drop him and start again with a different lawyer! That happens, too. If you find a good lawyer in this area, pay him generously and keep him close, he'll be invaluable. And don't flinch or hesitate when quoted a fee, pay it with a big smile.

Instead of all the big talk about floating and getting second round investors in for several million ...at this point you need to change your thinking, pull out your wallet - this game involves large amounts of upfront payments, learn how to play. You've got to get rid of that small business mentality of scrimping on professional costs. Otherwise you'll never get to floating, or to your second round.

 

[The Byre]

I didn't read all of the OP as it was just too long and contained stuff that was unsuitable for a quick-n-dirty reply on a forum.

However I do agree with this statement -

Here we go, yet another one wanting to do it on the cheap!

Your High Street solicitor may be just the chap for some simple conveyancing or an insurance claim, but he is not an expert in M&As and probably out of his depth in the more 'interesting' aspects of company law.

You won't believe how often we get this on these forums and how often we get the later complaints that it's all gone pear shaped.

The first thing investors do is interfere in your business - and if it is profitable, try to take it from you or just undermine you so that they can take over. This is often the case with retired business people who are always convinced that they know everything better!

You need proper adult supervision to counteract such things.

 

[Neutrino]

Thank you all for the replies.

Not adverse at all to spending the money. I came to these forums to get an idea of what i should be looking out for, in order to guide myself better with the solicitors. Opinions on the power share, rather than legal precedents.

The SA is comprehensive, covering all aspects of the business. I have only mentioned here however the question around board setup, and to get views around that. The fact I have not mentioned anything else does not mean it isn't being looked at.

As you say, adult supervision is needed...

Thanks.

 

[Clinton]

Not adverse at all to spending the money...

Great! Pay those solicitors the many thousands they asked for and let us know how it goes.

When/if the time comes for an IPO on AIM, those solicitors fees will seem like chicken sh*t. A NOMAD + accountant could set you back a quarter of a mil for a target float of 20.

Proportionately speaking, your £2m company (by your valuation!) needs to put £25K aside to get all the legal and numbers stuff right at this stage. Maybe knock a few quid off of that £25K for the fact that there's no regulatory/compliance to deal with and no underwriting ... but on the flip side, smaller deals cost proportionately more.

I've been involved in many, many deals in the low millions and, seriously, £25K is not an unusual figure for a deal this size.

I came to these forums to get an idea of what i should be looking out for, in order to guide myself better with the solicitors.

Doesn't look like it, sir. Your OP reads like you're trying to use this forum as an alternative to lawyers. I didn't read your OP as requesting guidance on dealing with solicitors. Your "Have I missed something?" caught my eye. It suggests you wanted us to read your long post, study it carefully and come up with ideas/suggestions for what else you need to insert on the board side of things if you are DIY-ing this baby.

We are very good friends, respected business peers in the community, I doubt they would ever risk their own reputation.

Then why bother with an SA? Here's an alternative: Spit on your right palm. Ask them to spit on their right palms. And then simply shake hands! Deal done.