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I have a friend who is the CEO of a software startup. As with many software companies a large amount of value of the business lies in the software code, and data which has accrued over time.

An investor who owns around 30% of the business is blocking new investment into the business. As the business only has around 2 months runway, it is likely to go into administration after 2 months.

We believe that the investor is trying to force the business into administration, so that he can buy the assets cheaply (code and data), which he will then pass to his own external development team and use it to build a new business.

Is this legal, and what can be done to prevent this happening?

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  • why have I got a downvote for this question?
    – Mazatec
    Dec 20, 2019 at 14:55

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It would depend on how the ownership contract is written. 30% sounds like a minority stake, so I don't know how they could block new investments unless the contract requires a super-majority to approve new rounds of financing. How does the remaining 70% of ownership feel about this?

If they are abiding by the terms of the ownership contract I don't see that this is questionable behavior on their part. This is a business relationship. Business partners may come to have different outlooks on the future of the company, and the best way to protect their investment. Consider flipping the viewpoint:

"I'm a minority owner in a company I no longer have confidence in. I would like to dissolve the company and sell off the assets to re-coup as much of my original investment as I can. The other owners want to chase this to the bitter end, and do a new round of financing, which will significantly dilute my shares, without (in my opinion) giving the company a real chance of success. What can I do?"

When the founder of your friend's company accepted money for shares in the company, they gave up absolute control over the company's direction. Assuming none of the parties are acting in violation of the ownership contract, the most reasonable way to resolve a conflict like this is to buy out the dissenting shareholders.

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    Or: "These guys have a great product, but no idea how to get it to market (or "market it", or "have 'retired' now that they have our money," or...). I would like to dissolve the company buy the asset so I can make sure this wonderful product makes it to market," and so on.
    – Just a guy
    Dec 20, 2019 at 21:13
  • That's the carrot. The carrot has to be accompanied with a stick. As in "if you don't accept the buyout, we'll open source the code and sell any patent claims to someone who will litigate if you challenge them."
    – grovkin
    Dec 21, 2019 at 16:31

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