We continue with the second part of this three-part series, where we talk with Mike Davis, a client of Aspect Legal who has been on an interesting journey for the last 41 years. We continue to drill into his business journey where Mike shares his venture capital experience, the importance of shareholder’s agreements and some lessons learned. This is a fabulous story of Mike Davis’ zero to hero story that has a number of key takeaways for all business owners.
Episode Highlights:
- Venture Capital experience
- The VC bought out by incoming equity partners
- Conflict and breakdown of relationships between shareholders
- Mike exited the business
- How exiting the business affected Mike’s life
Connect with Mike Davis
Listen to the episode here and leave us a review:
iTunes: https://podcasts.apple.com/ph/podcast/the-deal-room/id1267098895
Transcript below!
Note: This has been automatically transcribed so will be full of errors! We are not providing it to you as a word-perfect version of the podcast but just as an easy way to provide you with a different way to be able to scan for information that might be relevant to you.
Joanna: Okay, well, this is what I was going to say you use the word we a few times. So. So just going back to this meeting in 1999, where it’s put on the table, potentially, you could have the opportunity to buy it back. So at that point, then talk me through the mechanics. Did you come back on your own then? Or did you come back with others? At that point to start?
Mike: I came back with some of the staff.
Joanna: Okay. And then but you as the sole owner, or…
Mike: Me as a majority owner with a class of shares for the employees.
Joanna: I love it. And tell me a little bit about that. How do you feel on reflection? What do you think the positives and negatives are of employees holding shares?
Mike: Well, the positives are, if it’s handled correctly, it gets by to the vision. Yeah. If they haven’t got buying the vision, but own shares, Academy nuisances? Yeah, yeah. And we did have a few who, who rolled out of the business because I went in for the long term. But there’s a couple of employees still in that business who have had a fundamental shareholding in the business. On the early days, I minus is debated, but major control. But the VC experience was like jumping out the pot into the fire.
Joanna: Well, let’s talk so let’s talk about the VC experience, then. So how did the VC experience come about what happened to?
Mike: Well, the VC frankly, didn’t offer any value for growth and business. Attended to be because he maybe that’s because it’s a specialized business. That, you know, it’s not a software company that’s making apps and that sort of thing. It’s quite specialized in what it does. It may be because also it has an element of old Well, business in it. Yeah. Basic electrical engineering. It became quite clear as we moved on, that having a VC there was a bit of a millstone around the neck. Because the cash was being throttled on his, which he didn’t put it in his equity, put it in its own funds.
Joanna: Right. I see. I see. Right. And what was the idea? What was your idea at the time of getting a VC on board was that presumably, it was about getting access to more capital at the time?
Mike: Great. Yeah. And I was intoxicated by young Kerry Packer and people like that running around town, turning, Ozzy mail into billion-dollar companies and that sort of thing. I said, maybe there’s an opportunity to do that machines. Yeah. If we got the right app to go, you could do bring controls in machines, but it’s so fragmented, that market didn’t happen. Didn’t work for us. But we needed the cash too. We needed the cash.
Joanna: And so then what happened with the VC, so that VC didn’t hold equity at that point they had simply provided, but it was more about loan funds was it?
Mike: He had equity in terms of convertible notes,
Joanna: Right. I see. I see.
Mike: He had convertible notes, which has a sword of Damocles hanging over your head. Don’t pay the loan back pay the interest. I’ll convert those notes. He was in business. He needed to protect his interests also. But, you know, we were naive in some senses of entering into that space, because it’s a very difficult space if you don’t have the growth, and you don’t make the business plan. Yeah. To be able to extract yourself from and there was no such thing and that relationship is a shareholders agreement.
Joanna: Right. Okay.
Mike: There were contracts written by the C VC. Yeah. And the contract said nothing about we’re going to do this with this business. We’re going to do this this this and when we hit this milestone, we’re experts exit and the way we will exit is for a trade sale or listing or some something along those lines.
Joanna: And have you had legal advice at that point?
Mike: No lawyers.. uhhh.
Joanna: you were not in love with them right then?
Mike: Yeah. Well, it wasn’t so much like that. Legal people put the contracts with the VC together. But lawyers in terms of Aspect Legal with due respect, I’ve been converted now, I am a new man.
Joanna: Hahaha, I am not paying you to say that Mike. Hahaha
Mike: No. It is true. Hahaha. Lawyers, they know where you went to buy a house. Not how to run a business. That’s the thinking. And I’m sure that thinking remains in the majority of small businesses across this country at the moment.
Joanna: When was it that you started to change your thinking on that approach to lawyers was it was just right at the end?
Mike: That was in 2010. Right? in 2010. The VC said I’m closing up the fund, you go out and get some under buy might take my place. So there I was, again, I wasn’t in a position to go to a bank and say, give me so much to get rid of this VC. So I had to find equity partners. I told you, I was a slow learner.
Joanna: We are back to equity partners. And so how did you find them?
Mike: Through the industry? And through context? It turned out the equity partner that I had was a lawyer.
Joanna: Right? I see. Yes. Uh-huh. And so talk us through the process there. Obviously, you’ve had these experiences in the past where you’d had ideas of bringing people on board in a number of different ways that hadn’t quite worked. So so you’re coming at it from this position of having seen, you know, some of the learnings from the past? Was there anything that you did differently this time in terms of evaluating, you know, who to bring on board as partners? Or what does that like as you progress through to, you know, the next deal bringing on the next partners?
Mike: Well, in 2010, it didn’t contain any of that sort of thinking, in my mind. In my mind was we needed to keep this business going. We had a whole lot of families dependent on our business going, we could have, we could have liquidated the business. But we needed to keep this going. And so I wasn’t desperate but I was pretty close to it. Because I was under a lot of pressure from other nominees of the VC company taking coming in. Who knew nothing about the business? So I wanted at least to choose the type of person I had coming in the business. But once again, that old bottled red wine and dinner.
Joanna: Oh it was red wine again. Hahaha That is classic Mike. I can see here one of our lessons, something about red wine when we…hahaha.
Mike: Haha I don’t touch it now.
Joanna: Red wine on its own is okay. I guess it’s just a partnership and entering into business deals.
Mike: And as a whole lot of enthusiasm and so on. But the partners that I chose, on the way around this time, the company started to grow. We won big contracts with multinational companies, some contracts in the USA. So we’re, we’re doing quite well. But the two partners were non-exec directors. But they were very involved in day to day operations.
Mike: Yeah, right. Okay. Yep.
Mike: And that and that lead to conflict.
Joanna: Yeah, conflict. But do you think part of that, once again, comes from you know, the difficulty when you’ve run a race so long on your own and you have really strong feelings about what it is that drives the success of a business? And then having that issue that maybe you don’t always have the same vision of what it is that is fundamental to the success of a business than others?
Mike: Well, I think it’s a priority on vision. My conflict, I’m sure I knew it was a time in the business when I used to start to call myself the old man. They would go, “Don’t let the old man hear you say that.”
Joanna: And you felt that was perhaps a that was a signal?
Mike: That was a signal. But the good thing about it Joanna is there’s not a lot of scopes, in the type of industry that I’m in. In electrical engineering. for creativity. Electrical machines have always and always will obey the laws of physics. Whereas businesses tend to obey the laws of man. And that’s where the major conflict came, in my mind in the business is that I was focused on doing the right thing around the machines and the knowledge I’d had over 50 years of working with those machines. I had a reasonable understanding of the customer’s expectations. Yeah. And how to make them satisfied that we were doing the best for them. Yeah. And they were priorities for me in the business. Our people, even though you have a shareholders agreement, it doesn’t address the fact what is the priorities of your equity partner? In the business, is his priority to get enough have no in no data’s over 60 days? Well, that’s a notable priority but isn’t the most important thing. Because he could be one of our company that’s got a problem. And it could be a problem. Yeah. So getting people there, who didn’t have the customer focus, but only saw the business in one dimension tended to dislocate the management team of the business. And that intervention, on behalf of directors into those little pockets of the business, when our non-exec directors created a whole lot of tension in the business. And eventually, I feel I’m not an old man but I should do what old men do.
Joanna: And what’s that?
Mike: Hand this business over to someone else. And I exited the business. Yeah. So there’s a vein that ran from 1981 in that business, right through to 2021 40 years of history, that I knew that the exit button needed to be pressed. Yeah.
Joanna: And how did you feel after exiting? What is that feeling? Is that, you know, is it a feeling of, you know, because I feel that there’s a lot of emotion at sale in terms of, you know, there’s something that’s been your business baby, you know, that you’ve grown all this time? And then now you’re not there at the helm anymore? That is how it feels to talk me through that.
Mike: Yeah there is the emotional side, you can’t change history. Am I never a founder of businesses in the past is the past in the future. It doesn’t belong to you, but it does now. Yeah. And it’s closing of a double there, but that can be liberating. And in my case, it’s been tremendously liberating.
Joanna: Oh, isn’t that fabulous? That’s great.
Mike: Do I close the door on 40 years of business experience, an additional 10 or 15 years of engineering experience at the front end of it? And just go off to the beach house?
Joanna: Well, my guess is no because I know you that’s not the Mike Davis way. Right?
Mike: And I think a lot a lot of people do that. And it’s great for three months. But then what? There’s a whole lot of value and experience there. And I think Albert Einstein put it succinctly. “There’s only one place, you get knowledge. And that’s through experience.” And it just can’t shut the door on knowledge. And experience in your life, you need to share it now by I’m heading off in new directions of sharing that knowledge and mentoring people who need to understand the laws of physics and what goes on. So it’s, I’m starting another business, but you’ll be happy to know Joanna there is 100% equity mine, and there’s none available for anyone else.
Joanna: Got it? Okay. All right. And if there is, well, we’ll sit down together. That shareholder’s agreement? Before you get near the bottle of red wine.
Mike: Well, the interesting thing about the shareholder’s agreement in the last chapter of business that I’ve just recently exited is that it really didn’t, in my view function as designed. It had shortcomings. So there are shareholders agreements and shareholders agreements. You need to seek independent advice on this. And you need to face up and look at the worst-case scenario and see if that document is robust enough to protect everyone’s interests.
Joanna: I completely agree. And of course, I’m a lawyer. So, of course, I would say that but You know, this is from experience, isn’t it, Mike? And it’s hard, isn’t it? Because I think the very essence of what, what makes for a successful entrepreneur, that willingness to back yourself that optimism about the future is quite often exactly what prevents us from taking the right advice and steps when we’re entering into these sorts of deals. Right. It’s almost behind our blinkers. You know,
Mike: It’s about emotion. You know, remove the emotion, you’ve got to be cold and objective. You need to cover objective information on how these sort of things kind of happen in and it took me 40 years to come to that realization.
Joanna: Yeah, right. Well, you got there and one good story to tell along the way.
Mike: Well if the cart came before the horse. And I knew all that back then. I can’t tell you what the business would have looked like. Because you can’t tell the future.
Joanna: Of course. No, absolutely. But of course, you know, it may have been different.
Our Business Sales and Growth by Acquisitions Services
Aspect Legal has a number of great services that help businesses prepare for a sale or acquisition to help them prepare in advance and to get transaction ready. And we’ve also got a range of services to help guide businesses through the sale and acquisition process.
We work with clients both big and small and have different types of services depending on size and complexity. We provide a free consultation to discuss your proposed sale or acquisition – so see our show notes on how to book a time to speak with us, or head over to our website at Aspectlegal.com.au
Disclaimer: The material contained on this website is provided for general information purposes only and does not constitute legal advice. You should not depend upon any information appearing on this website without seeking legal advice. We do not guarantee that the contents of this website will be accurate, complete or up-to-date. Liability limited by a scheme approved under Professional Standards Legislation
