When a company was performing, but its CEO was losing the confidence of the investors who had funded it.
An investor I'll call Jeff, who I knew through an investor group we were both part of, called me one day frustrated and angry about an investment he had made with the group. I had not invested in the company.
The investment itself wasn't the problem. The company was largely executing on its business plan. But after the first quarterly report, information wasn't arriving when it should. Jeff emailed the CEO, who apologized and promised to provide regular updates. When the next report arrived two months late, Jeff followed up with the CEO, but his email went unanswered. Jeff felt ignored and he was pissed.
By the time Jeff called me, he had pulled out the Operating Agreement and identified the provisions describing management's reporting obligations. He was angry and ready to have his lawyer send a demand letter. "I'd never treat my clients like this," he told me.
Our first conversation was mostly me listening - Jeff needed an opportunity to vent and talk through what had happened. Letting him do that was an important first step in slowing things down before deciding what to do next.
On our next call, I shared some of my own experiences dealing with management teams, both as a private investor and from my years working in private equity. There are all kinds of CEOs. Some are excellent operators and poor communicators. Some understand instinctively how to manage their investors; others don't.
I asked Jeff whether going immediately to maximum volume was really where he wanted to start. As a musician, I sometimes think about conflict the same way I think about playing in a band: if you start at full volume, there's nowhere left to go.
We discussed another option. Before sending the lawyer's letter, why not ask the CEO for a conversation? Jeff arranged the call and asked me to come to his office and listen. I sat quietly while the two of them spoke. The CEO was apologetic, although he also offered an explanation. He had been hired first and foremost to build the business, he said, but acknowledged that he could have been more responsive to his investors.
Afterward, Jeff asked me to have a call with three friends whom he had introduced to the company and who had also invested. They shared his frustrations.
We discussed the different actions available to them, including involving counsel. Ultimately, the four investors decided not to have an attorney send a demand letter. Instead, they wrote directly to the CEO, copying the head of the investor group and all the other investors. Their letter reiterated their enthusiasm about the company's progress while also making clear their disappointment with the flow of information and the CEO's responsiveness.
They proposed a practical solution: a standing twice-monthly Zoom call for investors providing a regular opportunity for a brief business update. They also reminded the CEO that the reporting requirements in the Operating Agreement needed to be met.
The CEO instituted the calls, and for a while they worked. The investors' frustration subsided and the relationship appeared to be moving in a better direction. Then the CEO missed one of the calls without notifying anyone.
Given everything that had happened before, the investors didn't see this as simply a scheduling mistake. They emailed the CEO, who apologized and explained that the call hadn't made it onto his calendar. The investors didn't find the explanation credible. Whatever trust had begun to return was gone.
That became consequential when the company later needed to raise additional capital. Jeff and the three investors he had introduced chose not to participate, and the company had difficulty filling the financing round. The business continued to make progress, but they no longer had confidence in the CEO.
The four investors collectively had enough voting power to remove the CEO, and during one particularly heated conversation, Jeff raised the possibility of doing exactly that. But the CEO was integral to the business. I asked Jeff and the other investors to consider what removing him might actually accomplish. It might address their frustration with the way they had been treated, but it could also introduce significant new risk to the business and their investment. The other investors agreed. Jeff cooled down, and removing the CEO was left on the shelf.
Investors' rights under an Operating Agreement matter. So does their voting power. But neither answers the more important question of what they should actually do.
Slowing things down gave Jeff and the other investors room to consider not only what they could do, but what the consequences might be. They chose not to begin with a legal escalation and gave the CEO an opportunity to repair the relationship. Later, when trust broke down again, they resisted taking an action that might have damaged the underlying business simply because they had the power to take it.
The company was largely delivering on its business plan. But the CEO's failure to maintain the confidence of his investors ultimately had a real cost: four existing investors declined to provide additional capital.
Privacy Note: Names, identifying details, places, and certain circumstances have been changed to protect confidentiality. This case is based on an actual engagement and is presented to illustrate the nature of Resolve Advisory's work.