High Growth and the Buy-Sell

Some people are born with a silver spoon in their mouths, but in my case, I was born with a wooden spoon and knew that whatever I was going to do with my life depended wholly on me. I was raised in the northeastern part of the country where I learned a strong work ethic spending summers working on a farm in Vermont. I was always an enterprising kid – the kid with the lemonade and pumpkin stands – so it was no surprise to those who knew me when I went to college and sought my degree in finance and entrepreneurial studies.

My first jobs out of college gave me the opportunity to learn about the high-tech industry as well as sales and marketing. And after a few years of working for a handful of different companies, I found myself on a treadmill, frustrated. I needed to spread my wings and start building the organization that was right for me.

In January 1990, my first business partner and I started Keystone, a telecommunications company on the east coast. We were “bootstrap entrepreneurs” and quickly built Keystone to sixty-five employees and thirteen million dollars in revenue. In spite of rapid growth, we functioned without a buy-sell agreement for four years. By the time we started developing the document, we had a multimillion dollar company to figure out, and needless to say it was a challenge.

They say that money changes people, and our case was no different. Because we functioned so long without the agreement, our negotiations were “fear based.” We eventually got through the process, but not without contention and duress. Fortunately in 1995, shortly after the agreement was finalized, my partner and I found a buyer and sold the company. We both agreed that it would be easier to sell the business than to keep on going with the relationship so severely strained.

There is no doubt that I went into that first partnership naïve, never anticipating rocky times. I knew very little about how to manage the downside of a partnership, and that first experience taught me a lot. I went on to build three additional multimillion dollar companies including NETtEL, Epic Networks, and BetterWorld Telecom, and in each of those cases the process would work differently. Buy-sell agreements were in place from the outset.

The buy-sell agreement for Keystone was simple – a “shotgun” agreement that ensured an offer made by one partner to another was fair by eliminating “low-ball offers.” Business partners who have used this kind of agreement know that any offer they make must be reasonable because it can be turned back around to them as a counteroffer.

But with each additional company that I would have a hand in developing, the terms of the agreements would become much more complex. They still addressed such issues as what the business would look like, company valuation, who can sell to whom and the rights of shareholders, but now they are complicated by issues involving raising capital and change of control.

In companies like these, each day is like a high-stakes chess game, with institutional and strategic investors moving around the game board calculating what will come next. Shareholder agreements contain covenants for change of control, which give shareholders rights to veto or accept selling the company, bringing in new money, and even who can manage the business. When building a new company, it is easy to overlook the fact that additional dollars will be needed and that investors who bring lots of cash with them can effect a change with regard to who runs the company. In cases like these, “new money” can often become more powerful than the “old money” brought in through institutional investors.

Indeed, whether a company is built with 50/50, majority, or minority partners, there are some key points that I learned as my companies grew and became more sophisticated:

Roles and responsibilities, shareholder participation, and buy-out strategies need to be worked out at the outset, and regular valuation of the business is a must.
Regardless of the size of the company, an attorney needs to be involved to develop the buy-sell. Forming a partnership involves more than just a handshake, and an attorney can bring in “all-encompassing” thinking.
When an organization evolves into working with venture capitalists, paying attention to company bylaws and change of control mechanisms is important for when decisions come down to voting control.
Any arrangement should be structured so that it does not interfere with the existing customer or employee base. That is where the value of many companies lies.

Yes, things have become a bit more complicated since my days of selling lemonade as a child, but building my first company taught me to begin any business with the end in mind.