Killing the Golden Goose?

By Nandini Vaidyanathan

Much has been written about the typical mistakes entrepreneurs make. They have become part of entrepreneurial lore. I would like to discuss a use case which was as unusual as it was shocking.

Three fairly seasoned corporate professionals working in a large IT company decided to join hands with one of their customers to start a new company. The customer was a well-known industrial group who also promised to give a large volume of his group business to the new entity. The company was formed.

Whilst the three techpreneurs owned the majority stake, the industrial group owned 26 percent. All the documentation was handled by the industrial group and the techpreneurs never bothered to get them validated by their own legal contacts. They signed everywhere on the dotted line and in effect, wrote their epitaph.

They gave away 26 percent as equity without the industrial group bringing in capital to the table. The money that the group invested was treated as debt, repayable over a three-year period with market rate of interest and stringent penalty clauses for non-payment. There was no bank signatory from the techpreneurs' side, so the entire treasury management was under the investor's control. The team handling accounts, audit and statutory and legal compliance were men trusted by the investor. The investor promised a certain volume of business over a three-year period, but there was no 'what if' clause in the eventuality that the promised business was not forthcoming. And to cap it all, the techpreneurs signed an agreement which said that they could be terminated with a month's notice!

Checks and measures
Whilst the techpreneurs were experienced technology professionals, not one of them knew how to build an organization. In the early days, they left everything in the hands of accountants and focused only on bringing in the business. Since they came from large organizations, they had no clue to thinking and behaving like a startup. So they rented fancy offices, hired large teams and generally went to town in spending the money that they had access to, by way of debt. Whilst they had a good order pipeline, cash flow was an issue as they were all projects with long gestation from start to 'going live'. I also suspect there wasn't enough discipline in the founding team to make sure money was collected in time. So when the investment dried up the first casualty was interest and statutory payments!

The investor then decided to use strong arm tactics. Salaries of teams were held up. The techpreneurs had to plead every month to get the salaries released. Then the techpreneurs' salaries went unpaid and every expense was scrutinized. The board meetings became diktats from the investor. The techpreneurs suddenly found themselves in the midst of balancing between their unhappy teams and the unhappy investor and willy-nilly, customer focus was lost. The company ground to a standstill as disgruntled employees bad-mouthed it to the customers too. At this point, the investor sent a termination notice to the techpreneurs! There was little they could do as they had signed documents that permitted it! There are lots of obvious lessons to be learnt from this use case. But the biggest is: don't sign any document without getting it validated by experts on your side.

Â© Entrepreneur India December 2012
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