The context

The company Earth SA has been co-founded by 2 associates: Mr. Tulip with 45% who is running the operations and acting as CEO and Mr. Marigold with 55% who is sitting on the board as chairman and sole board member.

Mr. Marigold is not following closely the activities of Earth SA, he is not really into good governance practices and he is not responding to the solicitations of Mr. Tulip. Often traveling around the world, it is difficult to reach him, make him sign official documents and asking him to call for board meetings. When he comes to Earth SA, he is often in conflicts with Mr. Tulip considering he is not the right person to run the company.

The teams at Earth SA are suffering from the lack of vision and divergences between shareholders. The operations are often paralysed by the incapacity to validate decisions and the company is not able to scale. Mr. Tulip is in a difficult position as minority shareholder and “at the mercy” of a board constituted of a sole person with no counter-power nor independency. The highest risk for the company is that Mr. Marigold could potentially fire Mr. Tulip, who is key in the commercial activities and customers acquisition process.
There is no shareholder agreement in place.

Actions Taken

Mr. Tulip proposes to buy Mr. Marigold shares. To proceed with the offer, he secures first an LBO operation with a mix of equity and senior debt and get the help of the investors to define a fair price for the company’s valuation. This helps the company’s price negotiation.
Luckily Mr. Marigold understands that if he does not sell, he has a risk to see Mr. Tulip leaving the company; the short-term consequences being a potential loss of revenue and need for Mr. Marigold to come back in Earth SA activities.

The operation is led by an independent advisor who helps both parties and investors to agree.

Earth SA is now owned 75% by Mr. Tulip and 25% by the investors. The goal is to sell the company in 5 years.

A very clear and detailed shareholder agreement is put in place including exit timing, board composition and important board matters.
The board is chaired by the independent advisor who is a professional board member. The investors have 2 representatives on the board and Mr. Tulip has the right to appoint 2 additional board members of his choice.

Results

The company has a clear goal of an exit in 5 years and the strategic decisions made at a board level are discussed under this clear objective. The board is constituted of 5 persons with diverse backgrounds (financial, legal, industry knowledge, technology, top management). Mr. Tulip is not part of the board, but he is invited to each board meetings.
The company is now more efficient in term of operations and financial results and has few KPIs under control that are helping the CEO to manage the company and take the right decisions at the right time. The independent chairman makes sure the investors and the CEO are in a balanced relation and helps to clarify respective positions and expectations. The margins have been improved by 20%. The teams are working in a positive work climate and strongly motivated.

Lesson learned

  • The non-alignment of shareholders’ interests can badly hurt a company
  • The absence of shareholder agreement and unbalanced governance can lead to blackmailing positions and damaging power games that ultimately will have negative impact on the teams
  • The lack of clarity in the governance and delegation of the operations can block a company
  • The motivation of the teams is affected by board and shareholders level conflicts, especially in small companies
  • The presence of independent board members can strongly help the relations between investors and founders
  • The involvement of independent board members and external board members can help founders in the decision process. This lighten the burden of loneliness that is often experimented by founders
  • The diversity of a board can help improving the management of a company and ultimately the financial results of a company:
    • One of the board members is super senior in the market and brings his global understanding of the trends and competition
    • One of the board members has a deep understanding in companies’ scale-up and helps to implement the right processes
    • Most of the board members have a deep understanding in financial management and help to set up the right dashboard and keep the financial KPIs under control
    • This board does not have any senior commercial skills as this part is fully covered by the expertise of the CEO