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Can a Start Up Have Too Many Shareholders with Anthony Curtin

Arin V., EA , MBA
Arin is an Enrolled Agent (EA), authorized to represent taxpayers in front of the IRS, and holds a BA and MBA (Management) degree from California State University, Northridge.
Shareholders are a major part of any growing business. From capital to strategy, shareholders can play many roles in the growth of your start-up, so it is important to ask who and how many shareholders you should have.

On the fourth episode of the Start Up Nation Podcast, Arin Vahanian chats with Anthony Curtin from Merton Lawyers about how to handle shareholders, investors, and dilution for a new start-up.

To listen to the podcast, click play below:


Arin Vahanian:  Thanks very much indeed for joining us today on another edition of Polo Tax Start-Up Nation. Today’s topic is going to be Can a Start-Up Have Too Many Shareholders? I am joined today by Anthony Curtin. Anthony, very happy to have you on the show today. Thanks so much for being here. And before we start, would you like to tell the audience a little bit about yourself what you do, sort of your background?

Anthony Curtin: Yeah, sure. Thanks a lot for having me here and really appreciate being welcomed on from Polo and obviously Asena. We work really closely with Pete Harper and yeah, we’re really grateful to be here. I’m the managing partner at Merton Lawyers in Australia, where we’ve got offices in Melbourne and Queensland and Sydney. We also we do a number of areas of law, particularly corporate litigation and property construction. I’ll look after the corporate team and really advise founders, tech companies and people that invest in those groups. My background is, you know, I’m obviously a lawyer. I’ve worked in a big law firm for a while, and then I actually went off and started my own ventures for a number of years. Some that are still running, some that are very long past. But yeah, I worked in a number of areas of tech, retail property resources, and not long ago I was also advising a number of corporates and we merged our practice into Merton Lawyers and off we go. It was a very much a startup story. It was two of us and now there’s twenty three of us and we’re doing a lot more work in the US now, a lot of our clients moving there and also a lot of inbound from the US to Australia. And it’s been an awesome journey and really looking forward to the next bit coming up.

Arin Vahanian: That’s excellent. Thanks so much for the introduction. Again, very happy to have you here today, especially today’s topic. I think it’s something that’s not covered as much as you would like to see covered. So we advise a number of startups, Anthony. And so that’s why today’s topic is especially important. The question is, can a startup have too many shareholders? What are some of the challenges that you see that startups have vis-a-vis shareholders – especially if they go through the Series A or several rounds and then there’s always the issue of dilution, right? So what are some of the challenges that you see startups face in regard to this?

Anthony Curtin:  I think it’s a great topic to talk about, and I think from my perspective. You know, there’s obviously a legal perspective, but then there’s also a practical perspective. Given a background, I tend to look at it from very much a practical perspective. And obviously, Merton, there’s myself and Dave as shareholders, but you know, we’ve got investments in other tech companies, one in particular at the moment where we’re we’re growing quite significantly and there’s around nine of us as shareholders. But yeah, I mean, look, it really comes down to, I feel, who’s in the room. And I think the limitation on on how many shareholders you have, I think you really need to reframe the question on who is actually in the room with you and are they adding value? And what does that value look like?

So the value can be anything from funds, and that’s purely all they do. We also see clients looking at strategic investors, people that can potentially bring in customers. They can open up their network to other partners, whether it be B2C, B2B. And then I’d also say that there’s, you know, opportunities there, whether people are adding value through their skills. So, you know, for instance, with Debtforce, that’s a platform where we’ve created that people can prioritize their debts by sending out really easily letters of demand. And really, we can put our skill set into three buckets. One is legal because it’s such a legal framework around it. Two is corporate. We’ve got a number of guys that are always looking at the market, putting together our pitches, running business. And then thirdly, is also the tech. And I think in that situation, and I’ll be really frank, it’s taken me a while to get to a point where it’s real fluidity in the types of shareholders that you’ve got. But everyone’s really playing their part, and everyone’s remunerated appropriately with their shareholding, and that’s how it’s worked. But but just to summarize and I can go on and on here, but I would say that the key outcome is to ensure you’ve got the right shareholders as opposed to too many shareholders.

Arin Vahanian:  That’s a really good point, I’m glad you brought that up in terms of skill sets, right? It could very well be that one shareholder is not going to lend their abilities; they just got financial capital, whereas another one might not have the financial capital, but they can add valuable skill sets. So thank thanks for thanks for sharing that. There’s something I’ve seen in some of the startups that we’ve advised. Right? They seem to be very eager in the beginning – because a lot of them are cash strapped or some of them are – and they seem to be in the beginning really eager to give away equity. What are some pitfalls there that you see with start ups maybe pre-seed funding, right? Maybe they’ve got an angel investor and then they’re keen to bring people on, but they may be a little bit too eager to give away equity. What are your thoughts?

Anthony Curtin:  Yeah. I mean, look, I’ve been on both sides of the table with this. And yeah, it’s a really, really good question because, you know, you can get to a point where everyone is forever hoarding shares, they’re forever wondering looking at the finish line, looking at, you know, if there’s going to be a potential rise, if there’s going to be a potential exit. But the reality is to really fast track a business quickly because, you know, depending on the market, you need to get out there and get moving quickly. There does come a time where you have to balance it out. And again, it’s the practicality of whether you do allocate shares for certain skill sets to come in to fast track it. Or sell down some shares or you keep them and you maintain the shareholding as is. And you just bootstrap it and you keep going around and around. I can speak personally about this. You know, I spent many years in a start up where we had that, you know, perspective and it was really, really tough and we got to a point. But in all honesty, you get many years down the track and you know, you don’t have that acceleration that you really wanted. You’ve got a lot of shares, but you probably don’t have the business that you’d really wanted it to be. And I mean, I look at other scenarios where businesses such as, you know, like even Debtforce – the business that we’re involved in at the moment, – we allocated shares really out to people that we wanted to bring into the business.

Now,  we’ve got our Web developers and our front end guys. There’s no way in the world; we’d still be putting together wireframes two years down the track if we hadn’t given away these shares. Now I’m not suggesting that you have to give away shares, but I do think, you know, if you’ve got the right people in the room that can accelerate your business. You know, it’s better to have 20 per cent of something than 100 per cent of nothing. And I think that people can really get burnt out as well. Like I say, a lot of founders come through that bootstrap the work out of their parents study and they go back living at home and they eat two minute noodles and everything like that. And I, to be truthful, I find it very isolating. And I think really, from a holistic perspective, shareholders can be really good because, you know, they can bring in a skill set, but they can also be, you know, great advisors on the side there to be giving you an idea around what needs to be done, but also it’s good to have someone else in the room. It can be quite lonely as a founder or a CEO. And it’s good to have someone there to take some of the the weight as well.

Arin Vahanian: Yeah, thanks for that, Anthony, that’s just such a great point. And I know that that’s true because, Paul Graham of Y Combinator has talked about that in great detail, saying: Look, is a startup is so intensive. It’s one of those things where you you’re going to want to go it alone. So that’s pretty much that’s pretty much what you’re saying. Now related to equity – looking at it from the standpoint of venture capital, right, you hear it bandied about that the startups that they’re looking to invest in, they want to see a good balance, obviously, of team members, one. Two: that, the founders are not paying themselves too high of a salary. Right? Versus what they have in equity. What are your thoughts around that? What sort of the most prudent approach in this situation?

Anthony Curtin:  I mean, yeah, look, it’s one of those things. And again, you know, I’ve seen it. I was having the same discussion with the founder yesterday and around paying themselves a wage and giving over equity. And look, I mean. You know, people have responsibilities. I remember I left a corporate job to work with a start up that I’ve been tinkering with for three years. And then all of a sudden, we’ve got a government contract. And I had to leave my corporate job, and fortunately, my wife was incredibly supportive. But she was also seven months pregnant with our second child. So it was quite a responsibility there. So I understand people do need to be paid and at different periods of their life. But I think it really needs to be reiterated as well, I mean, there’s obviously one whether or not how that’s going to be perceived by venture capital, but also you’ve got to take a step back. You know, it’s a kind of opportunity cost of if we offset our salary for a period of time, can we accelerate this business even more? And can you retain some shares so that when you go to the VCs, you’ve got a more accelerated product that you can potentially – Well, one, if it’s a more accelerated product, the VC is going to have a higher chance of actually taking the meeting. Secondly, it doesn’t hurt to go through this. I’ve done it numerous times with my own businesses and where I haven’t taken a wage. Dave and I, my business partner at Merton Lawyers we laugh at like how long we didn’t take away for. But I think it also builds a lot of, intricacies in the way that you work. There’s nothing like working on something, not getting a wage and just having hope in it. So back to the initial question, I think it’s a real personal decision. But I think if you are paying yourself a wage, you’ve got to think, well, if that is the case, then most likely the business won’t accelerate as much. So that isn’t going to put you in a better position for VCs on assumption, but understand that people have responsibilities.

From the VC perspective, they’re very, very, very founder focused. But I think a lot of VCs want to see the sacrifice of, you know, leaving the job, working on it full time, really getting behind the business. And I think that is in some parts, part of their checklist. If you don’t have that, well, then there’s a higher risk that you know you might not get a meeting or or even get considered. And from the VC’s perspective, they want to see that someone’s really committed to it because you’ve got to remember VCs is not a, you know, a bottomless well of money. They’ve got a fund, they’ve got a certain level of investment that they can make, but they’ve got to get to a position where they are confident in investing in it and that they’re probably going to have a higher threshold of backing a founder on the basis of the sacrifices have made. But when it comes to that series A chances are – I mean, we say it a lot because we represent both sides, the founder and the VC – A VC can come in and really say to the founder: we’re rewriting the shareholders agreement. We’re going to start with new terms, there’s new dilution terms and this is how it’s going to go. And if you accept these terms, well, then you get our money.

But on the flip side, we see also founders that have just got absolutely great products and really accelerated products that have got huge traction, big market opportunity that have actually got three or four VCs that are trying to put money into it and it’s a bidding war against them. So it really does come down to the quality of the product, the quality of the business and how they can leverage that in negotiating the type of investment that they make. It’s a common question, but I think people get stuck in the minutiae of the structure of their shareholding and what the rights are and everything like that and what the business would look like if they did a raise. The thing I always go back to, unless you’ve got a good product and something that’s really going to change world, you’re not even going to get a meeting or, you’ve got to become customer obsessed and you’ve got to be really product focused to get to that point.

Arin Vahanian:  Great points. Thanks so much for sharing. There was a lot of valuable advice there. Obviously, they’re investing not just in the company but also in the founders, right? Equally and maybe even more so? What have you seen from your experience there?

Anthony Curtin:  You know, you can have the most beautiful sailing ship, but you’ve got to have a good captain, and I think the same analogy goes for a start up. I’ve had businesses end where we couldn’t get to a point where there was the right person running it. And I think, a VC will look at the potential of the product. You know, you look at all the ideology statements of all the Big VC firms here and overseas, like Blackbird, for instance, talks about how they want to back founders that are just, you know, obviously changing the world. And that’s not word for word, and they’re redefining markets.

They’re not just backing something that is going to satisfy a market of a small regional town. It’s going to go global or it’s going to go to big territory. And to do that, they need to understand one, whether the products are good enough. But then secondly, there needs to be a visionary behind it; a founder, someone that really speaks to that business and I think there’s a great story, actually, I was reading yesterday about Sequoia had when they set up in Latin America and there was a guy, his name was David Alves, and he was from Colombia.  He had just finished his MBA at Stanford, and he’d gone to Sequoia to do a presentation on the opportunities in Latin America. And it was just such a interesting presentation, because one, he came in as a potential partner of Sequoia, where he was pitching to them to say, Look, I want to set up the office there. And they said, Look, this guy is like way ahead of what he is, but we want to back him whatever he does. And then, anyway, they really pigeonholed him to become a partner, but it just didn’t work out. So he went off and became a founder overnight and then started New Bank, which is a new type of contemporary bank in Brazil, and they came in and I think they were one of the groups that wrote the first cheque. But I think it’s a good example of, you know, they had many options to back this guy, whether it be a partner, whether it be a founder or whether it be just an individual. And regardless of the business that came in, they will back and David Villa lives as opposed to the actual business, and I think because he was just one of those guys that could just see a huge market opportunity and he could potentially lead it. And in that situation, it’s a very personal thing. But you need someone that’s going to be really driving the actual vision.

Arin Vahanian:  Now, I guess maybe for the startup founders who aren’t like a super founder, like David, from your experience, what are some mistakes that startup founders make when discussing the VCs now, whether it’s mistakes on the term sheet, mistakes in terms of dilution? What are some common mistakes that that you’ve seen startup founders make, especially when they get to the negotiation phase that you think they should be approaching different? Perhaps.

Anthony Curtin: Yeah, no. It’s a really good question. So I mean, I’m assuming that the question is more, the VC has given them the opportunity to invest and they’re now down to the nitty gritty of negotiation. Look, I think, yeah, it’s a really good question because generally at that point, we find that once they’ve done the position, they’ll send out the term sheet, and it can go either way. Generally, if you’re doing a series A the VC and depending on the size of the base, they’ll send out the term sheet. So let’s just say you’ve done your pitch. They’ve really enjoyed it. There’s been email communication, post it and they said, Look, and then there’s a note from one of the partners that you’ve been pitching to says, we are going to engage in this series A – please note, there’ll be a term sheet coming shortly. And really from there it gets sent over and away we go. And that will have the key terms in there. And look, I think one, it’s always good to get a term sheet because you might see very, upfront, very closely what types of VCs you’re dealing with here.

I think one mistake that a lot of founders make in that scenario is that, look, they just need to they need to get a lawyer involved because I know that everyone’s really tried to bootstrap through that period. But at this point, it’s super, super important because you’re getting down to significant money. You’re also potentially giving away an enormous amount of rights in the business to new partner. And it’s important that you know you’re not giving up certain personal guarantees or anything like that in the business, but you also want to ensure that if there are a strategic partner, that potentially you’re ensuring that they’re living up to their responsibilities as well.

So I think understand the terms that are being sent through. Secondly, I think a lot of founders just feel totally obliged that no matter what deal comes across their desk, they have to agree to. I think we had in the last financial year around, you know, close to a billion dollars worth of transactions under our table, but I think the one thing that a lot of founders underestimate is that there is scale to negotiate. And I think don’t underestimate your position as a founder and that you have the ability to to negotiate. One – Get your lawyer. Two – Don’t just fold, go in and understand the documentation and where you are able to negotiate.

But from a another point I’d say is also understand that it’s very much a give and take relationship and understand that you’re going to have to potentially fold on some parts in order to get that money. You know, we’ve got a great founder at the moment. Very early days had had an amount of money that was for 50 percent of the business. He was giving away too much in some eyes, but he accelerated really quickly. He negotiated good terms, and he’s now doing pitches to all the big VCs in town. But he understood his responsibilities, he understood the rights he’s giving away on dilution. You know, we do argue for the founder to retain as much dilution in terms of rights there, but the VC will go hard at that because, depending on the V.C., they’re going to say it a different way.

Another point I’d say that that’s important is. Yes, there are certain skills that a VC can bring or a strategic investor. I think one thing that really gets underestimated is whether or not the certain values whether or not they really align with you, you’re going to be making really key decisions with these guys. And to be honest, these guys will probably have a lot of ability to make decisions over you. So you really need to ensure if they align with what you really want to do. So I think a lot of people underestimate that. They think that they’re going to bring in someone that can build the product really quickly or scale it because they’re going to plug into customers. But I think it’s important to question whether or not you want to have those customers on your book and whether or not that is going to really align with the business. So they’re, I suppose, the four areas that I see a lot of businesses falling over in.

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Arin Vahanian: Yes, thanks so much for that again. A ton of useful advice there, and yes, of course, it becomes so important to have a good attorney on your side to help you navigate these sometimes murky waters. Definitely. So thanks for that, Anthony. I think I think we’ve got time for some final points. Is there anything else you’d like to share with the audience specifically in regard to shareholding in a startup?

Anthony Curtin:  I mean, look, I really do think it’s important for people just to get out of the weeds on how you structure your business in terms of like, it’s really important to get that done. But it’s very important as well to get your shareholders agreement in place. We see more blow ups in the early days with businesses once there’s a bit of value in the business. So I would say start getting your terms together amongst your business partners or other shareholders as early as you can. Because when a VC comes around, they want to see that document because they want to understand what rights are on the table. I’d also just say, get your shareholding right, but also don’t get paralyzed by it. Really, go and focus on your product. Get it to a point where it understands the market it’s going to go to.    Because that’s going to bring in a much more quality investor rather than just someone with a load of money that may not understand the area and demand high rights in terms of being a shareholder. I think that’s that’s really the practicalities of it. As I was saying before, you can have the most beautiful structure and you can have all the, you know, the rights and retain all the right amounts of equity. But without really giving something away, you may not have a product at all and you need to bring the right people in there. And it can be a lonely role and people really need to get on top of it.

Arin Vahanian:  Thanks so much for that. In the end, it does come down to people We could look at all this stuff like a great product, great technology and so forth. But in the end, it does definitely come down to people. So I think we’re just about out of time for today, Anthony, but I’d like to thank you once again for joining us and imparting all this great knowledge and wisdom and experience. And I think it will be hugely helpful for our clients and anyone who’s tuning in, who is either a startup founder or was thinking of being one. Thanks very much indeed for today. We really appreciate it.

Anthony Curtin: Thanks, Arin. And thanks to Polo and Asena, you guys have been amazing to work with and thanks for looking after our clients. Well, they’ve they’ve had an amazing experience with you guys, too. So thank you very much.

Arin Vahanian: Thanks for the kind words. We do all we can. Thanks for joining us today. in Polo Tax Start-Up Nation. And we’ll see you next time.



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