wherefore art thou, shareholders agreement?

Most of you have already seen the news about eBay’s claim again Craigslist repor­ted in Wired and other places. Appar­ently, eBay is con­cerned about some action that the Craigslist folks took that diluted eBay’s hold­ings. Which left me scratch­ing my head a bit, given the little I know about Craigslist, which is that I found it sur­pris­ing that they would have sought fin­an­cing (as I couldn’t see why they would want or need it given Craigslist par­tic­u­lar approach to its site). How­ever the Wired art­icle explained:

EBay, the world’s largest online auc­tion­eer, was an unso­li­cited suitor to quirky Craigslist in 2004. An unnamed former Craigslist share­holder sought out eBay and sealed a deal whose fin­an­cial terms were never disclosed.

Ouch. Pre­sum­ably, the folks at Craigslist either did not have that share­holder under a share­hold­ers agree­ment, or they did, but it did not have pro­vi­sions that would, for example, allow for the right to repur­chase shares in cer­tain situ­ations, such as when the share­holder is think­ing of selling to someone else, who might, for example, be a com­pet­itor, or become a competitor.

Which is why the first piece of advice I give to star­tups and other early stage com­pan­ies is that they should be very, very, very care­ful when it comes to issu­ing stock or options. Its great that com­pan­ies want employ­ees and oth­ers to share in their prosper­ity as they grow, but very often what is over­looked is that shares (or stock as those Yanks call it) in addi­tion to provid­ing an eco­nomic bene­fit as they appre­ci­ate, also provides for a whole host of rights that you may or may not neces­sar­ily want to give out. And which don’t require a major­ity to exer­cise (but which can still be a royal pain to deal with), as eBay’s claim illus­trates (I should emphas­ize that I’m not com­ment­ing on whether or not eBay’s claim has merit, but rather the cir­cum­stances that allowed it to hap­pen in the first place).

Share­hold­ers, even small share­hold­ers, have the poten­tial to cause a lot of dif­fi­cu­ties for com­pan­ies (par­tic­u­lar smal­ler com­pan­ies) through not only their vot­ing rights, but also stat­utory rights, such as claims of oppres­sion or the abil­ity to require a com­pany to be audited. For those con­sid­er­ing option plans or share own­er­ship plans, its usu­ally a good idea to invest­ig­ate altern­at­ive but equi­val­ent forms of com­pens­a­tion (profit shar­ing, phantom stock) before going with option or share plans. And if even if you do decide on options or shares, please, please, please get a share­hold­ers agree­ment in place — trust me, you won’t regret it.

related:

1. vc mon­ster
2. con­ver­sion of data (and not the con­ver­sion you’re prob­ably think­ing of)
3. Shares and How Not to Give Them Away
4. ebay and buyer’s remorse
5. the (not so) long arm of the tax authorities