a majority shareholder.”
I said, “But these guys told me that I have no power because they control
the board, three to two, and it doesn’t matter what anyone else says.”
He said, “Yes, but the shareholders elect the board. Just have a shareholders’
meeting and elect yourself and your cofounders (or whoever else you
want) to the board, and these guys will be back to their two board seats, which
is what they bargained for. They have a minority investment. They bargained
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

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• a majority shareholder.”