Common Myths About Hiring a Professional Shareholder Representative

Myth: My Deal is Clean

Speaker 1 (00:02):
As clean as you think your company is, assume something happens that is completely unforeseeable, government regulation, tax, outside litigation, buyer changed circumstances. Something's going to happen.

Speaker 1 (00:17):
My name's Jason Mendelson and I am a former lawyer, software engineer, multi-company starter, venture capitalist, and I've been involved in mergers and acquisitions for the last 22 years of my life. A lot of people think that, well, my deal is clean. I know my company better than anybody else, and there's nothing wrong. And a lot of times that's the case, the big problem, that's only half the problem, right? You've got two parties, you've got the buyers and you got the sellers and the seller knows everything about their business. We're clean. We've done everything right, but you don't know about the buyer. The buyer is probably a newer relationship. You get acquired by the company. Your sponsor gets fired. The company has another division that goes down the tubes. Suddenly overnight, the buyer's circumstances have completely changed and how's it going to affect you?

Speaker 1 (01:00):
Then you find out that you're at personal risk for some things. My favorite was when I was living in California, I was getting ready to move to Boulder, Colorado. I was a shareholder rep on a deal. The buyer had buyer's remorse and was coming after the escrow. So suddenly I'm oh my gosh, I got to hire lawyers. I don't know where the money is coming from. I'm not a litigator. Oh my God. And one day I get served that they've sued me as a shareholder rep for a whole bunch of stuff, which I was like, this is preposterous, I haven't done anything wrong. I decided I want to get a new cell phone number, and I walked into the Verizon store, and I go get the nice new, shiny phone. They come back and they say, Mr. Mendelson, we can't give you service because you have no credit. And I say, what do you mean? I have no credit? It's a $200 cell phone. My bank accounts are pretty flush, I'm in good shape and they go, yeah, apparently you have a hundred-million-dollar lawsuit against you. I drop my head and I go, I can't believe this.

Myth: The Cap Table is too Small for a Professional Shareholder Rep

Speaker 1 (00:02):
So one thing to consider when hiring a shareholder rep is how many shareholders you have. There's some people that say, well, I don't have a lot of shareholders, so I don't need a shareholder rep in my experience, it's actually irrelevant.

Speaker 1 (00:16):
It's not the shareholders who are driving you nuts. It's the buyer and how they're going to act that's going to bring the issues that you need to hire a rep. Besides, if you have only a few shareholders, then your share of the escrow, or earn-outs greater, it's not diluted between hundreds and hundreds of shareholders. So I would actually argue that it's either irrelevant or it's even more important to you to hire the best people you can, even if there were only two shareholders, it actually didn't change my job. I still had this buyer that was better equipped, better capitalized, more money, more firepower with these issues. What was interesting is when I was just one of two shareholders, you realize, oh my gosh, my portion of this escrow or my portion of this earn-out is much larger than if there'd been 10,000. In fact, sometimes when there were 10,000 shareholders and I was the rep, I cared a little less because whatever the outcome diluted me very little. So when you actually have a smaller set of shareholders, sometimes that's when it's most important to hire a shareholder rep. My name's Jason Mendelson, and I am a former lawyer, software engineer, multi-company starter, venture capitalist, and I've been involved in mergers and acquisitions for the last 22 years of my life.

Myth: I’ll Lose Control Over Decision Making

Speaker 1 (00:02):
I know one of the concerns that a lot of CEOs have is, Hey, do I lose control when I hire a shareholder rep? And the answer is no.

Speaker 1 (00:13):
My name's Jason Mendelson. And I am a former lawyer, software engineer, multi-company starter venture capitalist, and I've been involved in mergers and acquisitions for the last 22 years of my life. It's very similar to hiring your executive team, right? You're hiring great people to do a great job, but you're setting the strategy and ultimately the buck stops at you. You didn't get where you got to by doing everything yourself. So you have advisory committees for the shareholder rep that take those directions. They never do anything that's not authorized by those folks. All you're doing is hiring a professional service organization like you would in a whole bunch of other cases to solve your problems.

Tips for Hiring a Shareholder Rep

Speaker 1 (00:02):
Hello, my name's Jason Mendelson and I am a former lawyer, software engineer, multi-company starter, venture capitalist, and I've been involved in mergers and acquisitions for the last 22 years of my life.

Speaker 1 (00:17):
Ask your potential shareholder rep: so when something happens, how are you going to solve my problem? Not how you're going to manage the problem. How are you going to solve it for me? Do you have people on staff who can do all these things? Do you have expertise greater than everybody else in the market? What type of things have you done? What things have you solved? Those are the questions you should be asking. Yeah, the relationship is going to last somewhere between two to seven years. By the way, long time. Are they going to be here in two to seven years? Are the principals who are important to the organization going to be there in two or seven years? Ask these questions. This is what matters.