One of the delegates in the audience loved the story and told me that I should turn it into a blog. As a regular blogger, constantly looking for material (and being susceptible to having my ego massaged) I took the suggestion to heart. So here goes.
About ten years ago a client of mine who owned 100% of a small high-street retail company told me that he'd been approached by a regular customer who came into the shop and said he wanted to invest £100,000 into the company for 50% of the shares. My client wasn't particularly looking for investment and certainly didn't know what his company was worth. It therefore seemed to me to be difficult to know whether £100,000 for 50% was a good deal. I asked my client whether he needed £100,000 and he said he could make good use of it. I asked him whether he thought it represented good value and he said that he was comfortable with it. I asked him whether the investor had any skills or contacts that could be useful to the company and he said he wasn't aware of any. I asked my client whether the investor could afford to lose £100,000 and he said that the investor was going to add £100,000 on to his mortgage and effectively borrow it from his bank. The eagle-eyed amongst you will have noticed that the answer to the last question didn't really answer the question. The correct answer was "no, he can't afford to lose it. It belongs to the bank and it's not really his to lose". I warned my client about the risks inherent in 50/50 companies and said that I was sceptical about the wisdom of the whole idea, so my client invited me to have a coffee with him and the investor and see what I thought.
To cut a long story short, I didn’t like the investor, he didn’t know what he was doing and he had nothing (apart from £100,000) to bring to the company. He simply liked my client's merchandise and, as a regular customer, wanted to invest (which I suppose is fair enough). After the coffee, my client asked me whether I liked the investor and I told him (truthfully and tactfully, of course) that I didn't but that that didn't matter as I didn’t have to work with the investor. I pointed out that the investor couldn't afford to lose the cash, he'd probably be asking for a return on his investment almost immediately, and my strong suspicion was that he'd be more bother than his £100,000 was worth. My client promptly left.
About six months later my client called me out of the blue, a bit sheepishly, to ask for a meeting. He then proceeded to tell me that after the coffee six months earlier, he and the investor had cobbled together some documents themselves (downloaded from some American 'DIY Legal' website), signed them and then paid the money over. The deal was done. I looked at the documents and they were (in legal jargon) 'mince'. The only thing I could say with any certainty was that the investor had 50% of the company and so did my client. Beyond that there was no workable shareholders' agreement or meaningful constitution for what had become an utterly deadlocked company where the two shareholders couldn't stand the sight of each other and were about to start tearing each other limb from limb. Because I'm a miracle worker (joke) I was asked to sort things out. The investor was annoyed that he hadn't had a dividend in 6 months and was losing face with his wife (and presumably the bank that advanced him the £100,000 in the first place).
After many weeks of painful negotiations the investor finally agreed to sell his shares back to my client for £120,000 (even though the company was arguably worth less than when he invested). My client moved heaven and earth to raise that sum to save his company but at the eleventh hour, the investor sacked his lawyer and emailed us from a foreign business trip to say that he would only sign when he was back in the UK if we agreed to pay him an additional £10,000 for the shares. My client's head was about to explode when out of the blue, the investor's wife arrived in our reception area clutching a power of attorney that her husband had signed in her favour just before he went abroad ('just in case'), and insisting that she sign the documents to complete the deal at the originally agreed price of £120,000. She was so utterly fed up and embarrassed by her husband's shenanigans that she just wanted the whole sorry affair out of the way. After double and triple-checking that she didn't want to take separate legal advice, she signed everything, we gave her a banker's draft for £120,000 and that was that. When I asked her, as a matter of interest (even though it was none of my business whatsoever) what her husband would think when he came home, she stared me coldly straight in the eye, didn’t blink, and said quietly 'leave him to me'. I gulped, terrified, and said in a slightly squeaky voice 'OK, thanks'. Off she went, £120,000 in her handbag.
So, as you can see, the moral of the story is that the wrong investor is worse than no investor at all.