My board is trying to force me out. What should I do?

QUESTION:

My VC dominated board of directors is trying to pressure me to step down from the post of CEO, but I own the majority of shares still. Any advice on how to handle this situation?

ANSWER:

Ethan Stone

by Ethan Stone, Stone Business Law

First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.

First, you have my sympathies. It’s a tough situation. The combination of hard decisions and high emotions make for a very unpleasant experience. So it won’t be easy, but I’ll try to give you a few thoughts.

There are two directions to approach this problem: legal rights and organizational dynamics/politics. In each case, the most important thing in this situation is to have an experienced adviser (probably a lawyer, but possibly an entrepreneur or uninvolved VC who has been through this before) to help you think through the facts of your situation. That’s not just a boilerplate warning. I’ll give you some general pointers, but every situation is different and the differences matter a lot.

Legal Options

I’ll start with the law because there’s not much to say. Unfortunately, your specific legal rights can vary widely depending on the state where your company is organized, the specific organizational documents (certificate of incorporation, bylaws, voting agreements, investor rights agreements etc.) and exactly what has happened to date.  Depending on those factors, you might be in a position to tell the VCs to go shove it.  You might also be entirely at their mercy.  So there’s not much more to say on this other than that you should get a lawyer to go over the documents and the facts with you before you jump to any conclusions about your legal rights or take any action to exercise them or give them up.

Another general point about legal rights: Fights (especially ones that go to litigation) are almost never good for business. So in most cases, the real importance of knowing your legal rights is not to get ready to fight, but to establish how strong your bargaining position is. Sometimes, of course, you’re forced into a fight by other people’s foolishness, greed or ego. If not, it usually makes sense to take the first shot only if you think you have a good chance of taking your opponent down with that first shot (e.g. you have clear power to replace the entire board by a written shareholder action). If your opponents are going to have the right to skulk around the business after you start a fight, the business is likely to suffer and the fight will probably be messy.

Organizational Options

That leaves organizational dynamics.

Step Back and Understand

An important first step is to try as hard as you can to suppress your emotions and analyze the situation objectively. To formulate a good response to the VCs, you need an objective understanding of their motivations and your own. Looking at a situation like this objectively will usually be hard: They’re trying to take away your baby and they’re also probably questioning your abilities. So naturally, your first emotional response will be to disagree. Unless you’re sure the VCs are acting out of spite or irrationality, however, you should be able to understand where they’re coming from, even if you disagree.

Once you’re sure you understand the VCs’ reasons, try to analyze where you disagree with them. Again, that’s a hard thing to do. How could you not disagree with someone trying to force you out? But try for a moment not to assume anything and think it through. In particular, try to remember that the VCs might have a less biased view than you do when it comes to your and other people’s ability to run the company. Don’t beat yourself up, but bear in mind your own bias.

Formulate a Response

Once you’ve gone through this exercise, there are several ways to use the results. Let’s start with the obvious: If you think they’re trying to force you out to cheat you of your shares, go to a lawyer and forget the rest of this answer.

Leaving that aside, there are several other possibilities.

First, you may remain firm in your desire to resist, not because you don’t sympathize with the VCs’ thinking but because it’s your company, dammit, and you want to see it through. With that clarity, you’re probably going to have to rely on your legal rights, since you aren’t going to persuade anyone. So focus on that and evaluate the legal strength of your position. If your legal rights are strong enough to give you a good bargaining position, make that clear to the VCs and start bargaining for the solution you want (i.e. start thinking about concessions you can make, short of leaving). Even if you find that you have the legal power to thwart the VCs, you’re still going to have to live with them. So make it clear to them that you’re not leaving and then talk to them about other steps you might take to address their concerns.

Second, you may conclude that you understand the VCs’ reasons but disagree with them. For example, you might understand why they want to take the business in a different direction but disagree with their strategic judgment. Or you might understand why they might doubt your ability to manage the company through the next stage of development but feel confident that they’re wrong about you.

Either way, you now have something to talk about with the VCs and you should do that as the first step. Indicate clearly that you understand their reasons. Make sure they understand your viewpoint (in a way that takes theirs into account). Then see if you can’t reach a resolution. You can’t always, but it’s usually worth a try.

Be creative about solutions. If they think you don’t have all of the qualities needed to run the company, for example, think about whether bringing in a new person to help you and rearranging responsibilities might be as good or better than just replacing you (not least because booting you out could hurt the morale of your team). If there’s a disagreement about what direction to take the company, think about whether there’s any way to go in both directions, for example by devoting most of the resources to one idea but enough to the other to keep it going and get to a validation test.

Third, you may conclude that they’re right. I know it’s unlikely, but keep an open mind. Remember what you have at stake (besides your ego which, I know, is important): an equity interest in the business and a reputation that might be important in future ventures. So try not to bite off your nose to spite your face.

If You Have to Go, Negotiate Your Exit

If you conclude at any point that you have to go or want to go, you’re not done. The terms of your departure can be very important to you. Even if the VCs have the right to force you out, you can almost always make things easier by going willingly. So you almost always have some bargaining power. Use it to get what you want as you leave.

That might be as simple as an adequate cash payout. It might be vesting of some or all of your founders’ shares and/or a release of some of the restrictions you agreed to at the investment (e.g. drag along rights or a non-compete) or some additional rights to protect your interest once you’re outside (e.g. information rights). You might want to take some IP with you (outright or by license) to start a new venture, possibly even with a new investment by the VCs. Think about what you want and try to get it.

Again, I’m sorry you’re going through this. I hope things turn out well and that these thoughts help.