Founders at Work.pdf

Philip Greenspun 335
for two board seats and veto power over certain transactions from those board
seats, but that’s all they’re entitled to.”
I asked if there was any risk in doing this. He said, “There’s some risk that
they would sue you in the Delaware Chancery Court. But VCs hate to spend
their own money, so I don’t think they’d do it. Litigation is very expensive, and,
if they can’t find a way to stick it to their limited partners, then they are not
going to sue you.”
Basically, whenever VCs do an investment, they make the startup company
pay their legal expenses. Remember, the investments come from the limited
partners, the pension funds, etc. So they get their 2 percent annual management
fee, but a lot of their costs, like their legal expenses, are also actually being
paid by the limited partners. For example, a company is supposed to get a
$700,000 investment, but right away they return $50,000 to pay the legal fees of
the venture capitalists, so the limited partners actually only get $650,000 of
their capital working in that business. If they can’t come up with a scheme like
that, they aren’t going to sue you because they are not going to want to spend
their own money that they could be spending on business jets and vacations and
other things that are delightful to VCs.
So I said, “Great.” My cofounders and I, who were shareholders, had a
meeting and said, “Who wants to vote for Philip Greenspun to be CEO and on
the board?” We had to change the corporate bylaws also because the default
corporate bylaws in Massachusetts are that the shareholders elect officers like
the CEO. The bylaws of the company, for whatever reason, said that the board
elected the CEO, so we said, “Well, let’s just change it back. We’re the shareholders,
so we’ll change this bylaw so now it’s back to the Massachusetts
default.” It was a perfectly legitimate bylaw that the shareholders in a small corporation
would elect the CEO. So we changed the bylaws and elected me as
CEO, which, under some other bylaws, gave me an automatic board seat, and
then we elected a couple of our founders to the board. So now we had a threeto-two
board majority.
Livingston: Where did you physically do this?
Greenspun: We did it by letter actually. We did it in the lawyers’ office downtown
at Edwards and Angell.
I knew that they wouldn’t like this, and I wanted to keep things as orderly as
possible, so I called up the old CEO—whom I think we had elected COO, so
we had demoted him to chief operating officer and kicked him of the board—
and I said, “Let’s face it; you’re just not qualified to run this company. You’re
losing money. But we don’t want to have any disruption, and you are a good
manager and maybe someday you can learn enough to be CEO, but that’s not
today.” We tried to make it conciliatory—“We’re not going to change anything,
we’re not going to go on a mass firing spree, but we have to get this company
back into being cash-flow positive because, whether you know it or not, you’ve
lost a lot of money.” They still didn’t know it, because their accounting was all so
inaccurate; they had no idea. They hadn’t been audited yet. Their accounting