Absurdly low valuation of a private limited company

ohsowhatever

I have some equity grief and am looking for advice / thoughts.

I co-founded a (tech) company several years back with 3 partners and invested several years of my life there. Paid the bills (most of the time) but never any more than that and last year decided it was time for me to move on. My erstwhile partners remain actively involved. I returned some equity on leaving but also retain some.

Now my partners have decided the company needs more funds and they are willing to put this in themselves. If I don't match this (and I don't have the cash even if I wanted to), my remaining equity will be diluted. This I understand.

The key then is the valuation of the company. The lower the valuation, the more I get diluted by the cash they put in. And, since they know that I won't / can't "invest", it is in their interest to get it as low as possible.

And this is what has now happened. They - the board, together with a friendly accountant - have come up with a number that is (to my mind) absurdly low. Basically just the asset value of a bunch of desks and PCs plus some cash in the bank. Nothing at all for the IP (the company's main asset) or even recurring income from product sales (not huge but still greater than zero).

Trouble is it is difficult or impossible to prove that that valuation is too low, though I do know that if someone offered 10x that number for the company, they wouldn't even dream of selling (even 100x I'm not sure).

So how can I challenge that valuation in practice (especially given it is the board that set the number)? If I had deep pockets (I wish) and offered the 10x to buy them out and they declined, would that count as "proof"? Any other options? Are there any arbitration options for this kind of stuff???

Would be hugely grateful for any advice / thoughts / pointers...

AndyJB

Hi ohsowhatever,
I certainly sympathise with you and your predicament. A few questions…

1) Do you have up to date management accounts?
2) Are management accounts healthy?
3) What are the recurring revenues vs expenses like?
4) How healthy are the accounts over the past 3 or 4 years?
5) Is the business solvent at present?
6) What’s the cash injection needed for?
7) How much cash are they putting in?
8) What sector is the business in?
9) What is the basis of their valuation? Get it from them in writing.
10) What sort of salaries/fees are the board and accountant drawing?
11) Why did you leave?
12) Is there a shareholders agreement in place? If so what does it state about your / this issue?
13) I presume you were a working director/board member prior to leaving?
14) Are you still a registered director with the CRO?
15) How much did you initially put in? Where would their new valuation leave you vs your initial equity valuation? + or – by how much?
16) Has there been an AGM or EGM convened to vote on the re-financing?
17) If AGM/EGM held were you invited along and did you go?
18) How much notice was given if meeting held?
19) Was meeting minuted? Have you a copy?
20) What was your role prior to leaving?
21) Were you getting a wage/salary or expenses prior to leaving?
22) You’ve implied that you were paying bills most of the time. Is that the case? How much was involved? Were you ever reimbursed?
23) Have you been getting any dividends / payments / fees or expenses from company since you left?
24) Small point but why did you hand back some equity on leaving? Did you get paid for this or was some other deal done with you? What was equity valuation at that stage or was any given / documented?
25) As you have no access to cash at the moment, could you rejoin business full/part time and offset wages/salary/expenses against cash injection??

I do know that if someone offered 10x that number for the company, they wouldn't even dream of selling

What’s your basis for this? Is there another valuation documented or minuted somewhere?

The above is a bit of long a list I know. I believe you have a few options
1) Put matching cash in yourself, we know this is no at the present time.
2) Get the highest valuation you can on the company then……
2a) Keep what (diluted) equity you can in the refinanced business
2b) Get them to buy you out in full and walk away.

I’m not a legal eagle so I’d strongly suggest you document the above for your own records in full and then talk to a solicitor.

On a legal point if you have been left out of any AGM/EGMs or feel that they are railroading through their valuation they will fall into the legal minefield of “oppression of minority shareholders”. So it’s important to speak with a solicitor.

Best of luck!
Keep us posted on how you get on.
Regards
AJB

ohsowhatever

Hey AJB,

Thanks for taking an interest and love the reference to "oppression of minority shareholders" - that's already a part of what I was looking for

Agree re getting legal advice. But ... heck, think I trust this board more than my solicitor...

Answers to your questions below as best I can, but apologies if a tad vague in places (yup, legal obligations).

1) Do you have up to date management accounts?
In summary form yes
2) Are management accounts healthy?
See #3
3) What are the recurring revenues vs expenses like?
More going out than coming in
4) How healthy are the accounts over the past 3 or 4 years?
Peaked in 2008, downhill since
5) Is the business solvent at present?
Yes
6) What’s the cash injection needed for?
To stay solvent until new product magically changes all
7) How much cash are they putting in?
Can't say
8) What sector is the business in?
Tech
9) What is the basis of their valuation? Get it from them in writing.
Basically just vanilla assets
10) What sort of salaries/fees are the board and accountant drawing?
Not insignificant, especially given #3 and #4
11) Why did you leave?
Burnout
12) Is there a shareholders agreement in place? If so what does it state about your / this issue?
Nothing.
13) I presume you were a working director/board member prior to leaving?
Yes
14) Are you still a registered director with the CRO?
No
15) How much did you initially put in? Where would their new valuation leave you vs your initial equity valuation? + or – by how much?
Can't say
16) Has there been an AGM or EGM convened to vote on the re-financing?
No. It has been scheduled for after the event.
17) If AGM/EGM held were you invited along and did you go?
n/a
18) How much notice was given if meeting held?
n/a
19) Was meeting minuted? Have you a copy?
n/a
20) What was your role prior to leaving?
Employee and director
21) Were you getting a wage/salary or expenses prior to leaving?
At the beginning no, later yes
22) You’ve implied that you were paying bills most of the time. Is that the case? How much was involved? Were you ever reimbursed?
D'oh! I meant, as a job, it paid my bills.
23) Have you been getting any dividends / payments / fees or expenses from company since you left?
No
24) Small point but why did you hand back some equity on leaving? Did you get paid for this or was some other deal done with you? What was equity valuation at that stage or was any given / documented?
Can't say.
25) As you have no access to cash at the moment, could you rejoin business full/part time and offset wages/salary/expenses against cash injection??
No (for practical and emotional reasons).
26) "I do know that if someone offered 10x that number for the company, they wouldn't even dream of selling." What’s your basis for this? Is there another valuation documented or minuted somewhere?
Directly no, indirectly ... kinda ...

antoinolachtnai

Unfortunately this is how being a minority shareholder in a private company works. You are saying the company is worth more, but you are unable to act on that belief by getting someone to put the money in.

Your basic legal option here is to argue that you are an oppressed shareholder. Unfortunately this would be a very expensive thing to do. There could be other options, but I really can't think of any. You would need to get legal advice on this.

It sounds to me like this chapter of your life is over. You will not get anything from this company. You might be as well to ask the others to buy your shareholding out completely, even if for only 500 or 1000 euros and draw a line under it.

TheCostumeShop.ie: Ronan

You could look at bringing in a new shareholder at their pro-rata. Problem is if things are sour and they really want you out they will just wind down that business then start a new one.

Either way your in for a fight. I would guess the new shareholder option would be your best play, maybe go to them saying your new lower equity amount isn't agreeable and so you'd like to sell your stake at a reasonable valuation. A valuation is whatever someone is willing to pay for it and its quite possible a competing or related firm with deeper pockets could be interested in acquiring your stake (and seeing the business plan for future expansions). Whether or not you can do this will depend on your original partnership agreement.

Obviously your first action is to get the best accountant you can afford with experience in this type of deal and then a solicitor.

randomer

Go to one of the local business schools and get a team of MBA students to put together a valuation based on the available information. I am sure they would love the opportunity to put their academic learning into practice, and would likely do it free of charge.

The valuation method used appears to be skewed very unfairly in favor of the current management.

askthedust

An old trick for a majority shareholder is to say you want to sell,
let them get an absurdly low valuation, then buy them out at that price.

Not sure how to play your situation.

Is there any way you could sell your share to someone else, or at least threaten to do so.
Maybe get someone else to cough up the cash and split the equity between you.

CompanyBureau

Get a 2nd independant valuation, an independant accountant to mediate, and make sure you insert a 3-5 year 'sell on clause' into any share purchase agreement should you decide to sell...

antoinolachtnai

I don't see the point in any of these valuation manouvers unless you are prepared to put in money yourself.

I would be concerned that you are standing in the way of the financing of the company.