To stick to terms of agreement with friends

[Bungybungy]

Burner account. I’ve been friends with F for decades. She had a large social media presence. I’ve worked hard to establish my business and have been successful. I’m proud of what I’ve achieved. 5 years ago, F came to me with a business idea, wanting to set up herself. She didn’t at that time have the funds to set up by herself so I agreed to invest a not insignificant sum in return for 20% of the business. She was happy with that deal, and because I work in legal services, I got our guy who deals with contracts to draw up an agreement specifying what rights and responsibilities etc. Although this was an area she had worked in before, she had never actually run a business before. I guess that’s why she came to me in part, so it wasn’t just about the money. To her credit, and using my advice, the business has grown quickly and is well known. At the time of the investment I understood that I could just as easily have lost my money completely.

Our relationship is now very difficult as I’ve realised over the last 2 years that she’s been distancing herself from me, which is fine, relationships come and go, but last week I got a letter from her solicitor telling me that she was unhappy with my ownership and that she wanted to buy me out for just over my initial investment. Given the business is now worth several times over my initial investment, I can’t accept that (she put close to no money in herself). For her to pay me off would cost her 5 times my initial investment. AIBU to expect her to honour the agreement? I know she’s contractually bound but she’s been so vile about this, I’m second guessing myself. She keeps threatening to “out” my business via her social media(I have no idea what this means). I’m actually scared about what she could do.

Is she vindictive enough to declare herself bankrupt/cease trading (and open a new business under another name instead) just to spite you?

I’m no lawyer but she could use the fact that you used your company’s lawyer to draft the contract as a way out? Or perhaps she’ll be told that the onus was on her to seek her own independent legal advice.

Either way, do NOT back down. She’s a cow and no longer a friend.

Op does the company accounts so I'm not sure how the ex-friend would manage this

Also, surely she can’t declare the business itself bankrupt? If she declares herself bankrupt, it’s her assets at risk - she can’t do this to seize the OP’s 20%.

You should take advice on whether her threats amount to blackmail. On your facts it sounds like there is a chance they would. Get your solicitor to write a letter telling her to stop. Much better than letting her post something and pursuing for defamation after the event.

That aside I agree with most of the rest of what's been said.

Your not being unreasonable, she probably wouldn't be where she is now with out your initial help , you did it all the correct way getting a legal agreement, she's the one being snide here not you. Reminds me of why I don't lend money to friends, all over you one minute then dont hear off then when it comes to pay back on the day we agreed, then I have then embarrassment of chasing them... Not the same but it reminds me of that. X

She sounds vile! Definitely don't let her walk all over you. Make her buy you out what you are owed.

I assume you are legally a shareholder - listed on the annual return/co memo on start up?

And seperately you have a shareholder agreement about buy outs

under Co Act provisions, on minoriry shareholders, you can enforce a sale if the relationship has broken down (but thats costly).

however, she can - pay out any cash in the business as her salary (unless you can soemhow restrict that) and start up a new company. as all the goodwill in the company is really HER i assume? I asusme no automatic dividend rights for you all?

So its a tricky situation. Legally you have powers but she can make the company worthless by withdrawing her work from it.

You own 20% of the business so she needs to pay you 20% of what the business is worth.

Id stick to this as doesn’t sound like you will remain friends anyway.

I work in investments, seed capital for new businesses is a killer, she could have flogged herself for years and never got going. I’d issue the request for buyout per the contract via solicitor and possibly see a pr person about preparing a statement for social media. Something along the lines of:
Some years ago I invested in a friends business, she didn’t have other ready sources of capital and needed some to start a business, any founders know searching for seed capital is hard graft and she didn’t have to go the rounds of vc firms because of me. Like most providers of seed capital we drew up a contract. It is to my great shock and disappointment that I find that despite the clear nature of the investment and contract that she regards the money as a gift not an investment and plans to return only what I put in. My lawyers will be handling the buyout process so it is legal and fair. I have learnt a great lesson about money and friends.

She has to buy you out at 20 percent of current value of the business. That's all there is to it.

I agree that @hangingonfordearlife1 has given good advice.

And also she was smart enough to set it up innher gavour so she must have understood the terms (which are pretty fair! Tbh)

Dont get dragged in to any chat / mudslinging.

Presumably you currently are receiving 20% of profits? If not its even more laughable she wants to just "pay you back" your investment

I suspect that she’s found a buyer for the company and wants 100% of the sale value as in her eyes she’s done 100% of the work to achieve it.

In your place I would request the total value of your shares in the first instance but be prepared to accept whatever interest you would have received had you had that money on deposit just to be rid of her. She’s probably in a position to compromise whatever value has been achieved to date and to leave you with sweet f a. She sounds that ruthless and deluded

Are you an executive or non-executive director @Bungybungy ?

CFs should always receive their solicitor's letters at 6.30pm on a Friday😉

You obviously don't have to accept a lower settlement.

I think this kind of issue can look very clear cut when you aren't experienced in understanding shares, investment and cap tables. But you didn't take the huge risk you're implying, as you would have been able to claim back most of your money via SEIS if the business had folded.

My guess is that your friend hadn't had proper business advice about the impact of so many shares being owned by an individual not associated with the business, and I wonder if she now feels she was taken advantage of? Of course, you may not have understood this either.

Ultimately, she needs her own business advice. She can take further investment and dilute your shares. Reaching a compromise is generally better for both parties.

i am not 100% sure she has to BUY YOU OUT. you can stay as a shareholder and just receive 20% when she sells.

she can't take away your shares or dilute them easily (though she'd need only 80% agreement of a share class to alter share rights or issue new ones so she may be able to do that).

claiming unfair treatment of shareholders is costly though

https://en.wikipedia.org/wiki/Unfair_prejudice_in_United_Kingdom_company_law

Stay calm, polite and factual. And get legal advice asap.

you’ve invested 20% which allowed her to start this business. This was a genuine risk (especially due to her lack of previous experience) and very generous. You have already done her a (massive) favour. Which is why she went to you - a friend. Aka somebody who wanted to genuinely help her.

if she wants to buy you out the payout will have to equal 20% of the current value (that would be the initial demand, at least)…

If she wants 20% of the business then she can buy it at 20% of the value.
Simple

The 'friend' has distanced herself from the OP and is no longer categorised as a 'friend'.

A legally binding contract was signed; lots of people who know each other go into business together and sign legally binding contracts which they have to keep to the terms of. No difference here just because they are women and used to be friends. Business is business and if she doesn't understand that she should go back to whatever she was doing before setting up the business.

OP is entitled to her investment back at the terms agreed.

What about the principle of keeping to a contract? That principle seems to have escaped your former friend.

I agree with the majority of the thread, she signed up to the deal, so now needs to stick by it.

i don;t think she is "entitled to her investment back at the terms agreed."

The contract seems to be - if the founder wants to buy the OPs shares, it will be at a rate agreed here,

Not that she MUST sell to the founder. - i also assume if she wants to sell, she can ask the founder first (right of first refusual) and that will be at the agreed rate but the founder doesn't have to pay that. She may be able to sell to another person at any amount she wants (if the orginal shareholder won't buy her out, that would be a normal clause).

However, all this needs a company law specialist, who can study the articles and the shareholder agreement and work out options.

as the company could be made worthless by the founder (if its based on her providing services, that they can be withdraw) then agreeing a compromise between 5 times something and what you paid is probably best.

if we are speaking say company worth £100k, then 20% worth £20k when you imvested £5k at the start then its really NOT WORTH much legal costs to pursue this. (beyond obviously getting legal advice on your options and making a reasonable compromise offer to them)

But if its £1m value, then its worth pursuing things more agressivly (though she could still make THIS company worthless if its affectivly HER as the service)

In your shoes I think I would probably sell my share to someone else - a competitor or something. That will teach her.

Letter coming her way at 5pm x

This is amazing. Well done for fighting her, she sounds absolutely vile.

Outrageous behaviour. Well done you for getting it all properly agreed in a contract in the first place, now she can't worm out of it.

Well done OP, we could all learn from you!