Hi, it’s Melissa, and welcome (back) to “your founder next door“, a weekly publication on the strategies and stories behind building a company without an abundance of resources and friends in high places. No BS, just straight-up truth bombs.
Yesterday, I was interviewed for a book Tim Deeson is writing about bootstrapping.
Somewhere in the middle of it, I told a story I hadn’t thought about in years. When I finished telling it, I thought, wait, that was actually insane.
When you’re in the middle of it, you’re just going and every crazy thing gets normalized. You file it away, then years later someone asks you a question and the whole thing comes out of your mouth and you hear it properly for the first time.
Let me tell you…
This was the beginning of Spacio, my last startup. It was me, my CTO, and maybe one other person. I can’t remember exactly. We were trying to get a product built fast and everything was moving too slowly. My CTO wasn’t really delivering, and I was starting to panic because runway was dwindling.
I had a friend who’d come from Silicon Valley and moved to Vancouver, where I was living. He started a dev shop and talked constantly about his Silicon Valley clients. He talked himself up a lot, and offered to help us build our product.
We didn’t have much cash. So he proposed we split it, half in cash, half converting into equity on a convertible note. He said he wanted us to be invested too, so the cash portion was important to show dedication. It sounded fair, and sounded like a partnership.
The cash half was still a stretch for us. I wanted the product built so badly that I found the money anyway. I was excited to have a “Silicon Valley” quality development partner.
The deliverables we got back were bad. Things were taking far longer than promised, and it barely worked as intended.
Then a friend who worked at that dev shop called me. He told me not to say anything because he didn’t want to get in trouble, but they were putting all their new junior hires on our project because it was the smallest one they had. We were the practice run to test new people. We weren’t getting the real deal. My friend knew we were frustrated and couldn’t withhold that information from us any longer because it was unfair.
I never called my “friend” (the dev shop founder) out on it, because I didn’t want the person who told me to get fired. I just said this isn’t working, we need to end it. We took whatever they’d built and rebuilt all of it ourselves in the end.
I never spoke to that friend again. I felt cheated, and I was.
A few years later, that trade converted into 1.5%.
I didn’t think about it. Nobody thinks about 1.5% in the beginning. It looks like a rounding error especially when you’re bootstrapped and own the majority of the equity.
At some point, I asked if he’d sell it back to me. That’s when he told me he’d sold his company to a publicly traded company, and our shares went with it. He didn’t have a relationship with them anymore, and it wasn’t his problem. I asked why he didn’t give me back the equity, he didn’t respond. Our equity mattered so little to him that he didn’t even bother keeping it when he sold. It was annoying and heartbreaking because that equity meant everything to my cofounder and I, and it was the company we woke up everyday fighting for.
So our shares now belonged to a billion-dollar public company I had never spoken to in my life. Because of how our shareholders’ agreement was written, a transfer didn’t need our approval if the entity holding the equity got acquired. This is normal, but I’ve since changed that for eWebinar.
I tried tracking down this billion-dollar company’s CFO to ask about buying our shares back. He had no idea the equity existed. He didn’t know it came along with the acquisition. He asked me how much I’d offer for it.
Just think about this for a second… A billion-dollar company, negotiating over a tiny stake they didn’t know they owned, with a founder who obviously couldn’t afford to buy it back. We had no cash. We couldn’t offer anything real. They never replied.
A couple of years later, Spacio was getting acquired. Every shareholder has to sign the closing documents.
I emailed the CFO. No response. I went through his executive assistant. Also no response. Weeks went by… complete silence.
I wasn’t that worried, because we had a drag-along clause. That’s what it’s for.
The day before closing, I told my lawyer to just drag them along. He said, “What do you mean drag them along??”
Apparently, we couldn’t just do it. There was a process to bring the case to court. A judge had to determine that every shareholder is being treated equally before we could force the sale. It would’ve taken two to three months, minimum.
Our shareholders agreement didn’t give me power of attorney to sign on their behalf. Most founders assume a drag-along clause is automatic. It isn’t always the case. At least not in Canada, which is where we were. (It might be good to check in with your lawyer how your drag-along clause can be executed, if needed.)
The deal was closing the next day and there was one signature I didn’t know how to get.
I couldn’t tell the buyer. If they knew, they’d freak out and I’d be put on the spot as to why I didn’t say something earlier.
I can’t remember if I told my cofounder. I’m not sure I did. I didn’t want him to freak out either, and some part of my brain just zeroed in on solving this myself.
Through what I can only describe as an act of God, I found the CFO’s mobile number on some document on the internet.
I texted this stranger a sob story. That this sale was going to change my life, and that I really, really needed him to sign.
He texted back.
He didn’t know the deal was happening. His assistant had never passed a single email along. Maybe she thought it was a scam? That’s how little it mattered to them. And it was everything to us. In the end, he signed it, and the rest is history.
💡 Here’s what I learned: it doesn’t matter how small the stake is. Equity is equity, a shareholder is a shareholder, and a shareholder is a business partner. Every business partner should be evaluated like one.
When you hand out advisor shares, you trade equity for work, you give a little here and a little there. Those people are almost never with you for the duration of your journey. But their signature will be.
I will never trade work for equity and invite a business partner in that way again. The goals between a startup and a dev shop are very rarely aligned. A startup wants the best thing, a dev shop wants to finish the thing in the shortest amount of time with the least amount of hours invested. Besides, the math doesn’t even work.
Say you trade 1.5% for $50,000 of work. Feels cheap today. Now ask what you want to sell the company for. If that 1.5% becomes $500,000 at exit, what would you have done to find the $50,000 instead? Would you have borrowed it? Stretched? Built a worse version yourself and fixed it later?
My exit wasn’t a windfall like that. But that 1.5% still turned out to be a Porsche.
Equity is like toothpaste. Once it’s out of the tube, you can’t put it back in.
Till next time,
— Melissa, your founder next door ✌️
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Wow, I can only imagine how scary it must have been the day before closing when you couldn't get that signature. I'm glad it worked out in the end. I love this last line: "Equity is like toothpaste. Once it’s out of the tube, you can’t put it back in." It's a weird analogy but very true.