US Corporate Law 20 Episodes (6)

A big taboo for start-up companies - husbands and wives should be cautious about holding shares | Tudou, Real Kungfu, Dangdang, Amazon's lessons learned | Why husband and wife holding shares are easy to fail when starting a business? Why is it that many Chinese couples start their own business in the United States, but few couples start their own business?

In the last issue, we talked about the differences between Chinese and American startups in the corporate law level. One of them includes the shareholding of husband and wife. Today I will Let's talk about this topic in detail.

It is common for husband and wife to start a business and jointly hold shares in Chinese startups, but it is rare in the United States. We will analyze the reasons at the end of the program. Today, we will illustrate from the examples of China's Tudou, Zhenkung, Dangdang, and Amazon in the United States. Although we often say that men and women are not tiring to work together, but from the practical case, it is often more trouble than good for husband and wife to start a business, especially holding shares.

Tudou

Today, you can no longer see Tudou, but more than ten years ago Tudou was more hopeful than Youku to become the No. 1 video website in China.

Wang Wei, the founder of Tudou.com, also has experience in the United States, and has a background similar to that of many of our technology entrepreneurs. He returned to Shanghai in 2002 and founded Tudou in 2005.

Tudou has received five capital injections in just five years. By 2010, China was a video site with comparable strengths to Youku and Tudou, and Tudou had obvious advantages at that time. Just after Tudou had submitted its listing application to the SEC, Wang Wei’s ex-wife Yang Lei filed a lawsuit with the Shanghai Xuhui District Court, demanding that the property of the three companies under Wang Wei’s name be divided, including the core of Tudou’s corporate structure— Shanghai Quantudou Culture Communication Co., Ltd.

By the time Wang Wei had dealt with the divorce lawsuit and sorted out these matters, he had already missed the opportunity to go public, and Youku had already succeeded in overtaking.

It was after this incident that the famous "potato clause" was born, that is, the divorce of the company founder requires the approval of the board of directors. Such terms are absolutely unthinkable in the United States. But especially in the few years when Tudou just came out, this rule has basically become a must-have for startup companies to accept investment. Due diligence should also include an investigation of the relationship between the founders and their spouses.

Real Kong Fu

This dispute, which once hoped to become the real kung fu of KFC in China, is even more troublesome. Not only the conflict between husband and wife, but also the brother-in-law.

At the beginning, Cai Dabiao and his wife Pan Minfeng opened a small hardware store, which did not do well. On the other hand, Pan Minfeng's younger brother Pan Yuhai opened a fast food restaurant and was very prosperous. Under Pan Minfeng's persuasion, his brother-in-law, Pan Yuhai, agreed that Cai Dabiao and his wife would also invest in the business together. Within a few years, they opened seventy or eighty branches. Pan Yuhai 50%, Cai Dabiao and Pan Minfeng 25% each. Here, everyone will find that they also stepped on the pit of equal shares.

Later, after the business expanded, the brother-in-law Pan Yuhai was still in power, and Cai Dabiao wanted to gain more power. The brother-in-law Pan Yuhai also felt that his brother-in-law had management skills, so the two agreed that the position of president would be rotated every 5 years, and Cai Dabiao would do it first. President. Later, Cai Dabiao and Pan Minfeng divorced, and Pan Minfeng gave up 25% of his shares, that is 50% of each of Cai Dabiao and Pan Yuhai. Cai Dabiao was also unwilling to give up his position as president. Later, Pan Yuhai secretly disturbed Cai Dabiao's 100 million loan. Later, when Cai Dabiao misappropriated more than 30 million yuan of funds from the company, Pan Yuhai and his sister Pan Minfeng took Cai Dabiao to court on the grounds that Cai Dabiao misappropriated 30 million yuan of public funds privately. It can be said that this time Cai Dabiao fell into the trap of his ex-wife and ex-brother-in-law. In the end, Cai Dabiao was sentenced to 14 years in prison.

Dangdang

When Dang.com started relatively early in the domestic Internet and they started selling books, many people had not heard of JD.com. Founded in 1999, it was successfully listed in 2010. Li Guoqing and Yu Yu were once regarded as a model of husband and wife entrepreneurship.

Among them, in 2005, Dangdang has achieved an excellent performance of 440 million annual sales, ranking second only to Taobao. Until Dangdang is a book seller, Taobao sells everything, and Dangdang can still reach the second place, which is very remarkable.

After six years of listing, Dangdang could no longer survive. In September 2016, Dangdang completed its privatization and was delisted from the US stock market. When Dangdang was delisted, the market value was only US$530 million, which was less than a quarter of when Dangdang was listed in 2010. The privatization price was also strongly questioned by small and medium investors.

Later, in an interview at the end of 2019, Li Guoqing mentioned that his wife Yu Yu forced the palace and threw a water glass on the radio scene, frightening the host and staff, and now the scene can still be found on the Internet.

Amazon

We will come to the time when the second phase of equity should be divided. Amazon can also be regarded as the only big company among all the big cash companies in the United States. At the beginning, the founder was married, and it was such a giant company of a mom-and-pop shop.

Since Bezos and MacKenzie did not sign a prenuptial agreement when they got married, the couple jointly held 16% of Amazon's shares. When they divorced, MacKenzie could have taken 8% of the stock, but she finally signed the agreement. The choice took away only 4% of Amazon's stock.

In fact, there is a more interesting phenomenon here. Dangdang is generally called China's Amazon, and it is a benchmarking company. Dangdang and Amazon are both founders and divorced (Dangdang Li Guoqing and Yu Yu are leaving, and the case is still under trial in Beijing.) But the outcomes of the two are so different.

Summarize

After talking so much, everyone will find that the program in this episode has little to do with the law, and is just a bunch of short-lived things among parents.

Let's take a look at why it is easy for husband and wife to jointly hold shares? I think the first point is mainly that after reading these examples, people find that it is difficult to summarize the problems of these husband and wife startup companies, but this is precisely the biggest problem of husband and wife startups. You don’t know how to get into trouble . Unlike other classmates, friends, and other startups, it is often a matter of benefit distribution. As long as the distribution is done well and the contract is written correctly, then nothing too outrageous will happen. But couples are different. Couples often have no way to completely separate conflicts between work and life. We all know that no matter what we do, there is more trouble than joy. As a result, it is often not easy to create a virtuous circle, but it is easy to lead to a vicious circle. The contradictions in life exacerbate the contradictions in work, and the contradictions in work further exacerbate the contradictions in life. The second point of husband and wife shareholding is that in general, husbands and wives start a business with an equal share of equity, 50% of each person. We talked about this in the first issue. This method is prone to problems, let alone a relationship like a husband and wife. Next, that is to add contradictions in life to the shareholding structure that is prone to problems, and it is basically nothing to blame.

Why are there few examples of husband and wife entrepreneurship in the United States, but there are many in China. I think it is mainly because firstly, entrepreneurs in the United States tend to be younger. In China, very young representatives of very successful entrepreneurial projects are Ele.me, college students who start their own businesses. Most of the other companies we have seen start their businesses with their founders in their thirties and forties, and when they succeed, they are in their forties and fifties, so of course they already have a family. The second main reason is that the domestic business credit environment is not particularly good, and outsiders cannot trust it, so many people still choose to start a business as a couple and hold shares by themselves.

Does that mean that the husband and wife are two people, one person starts a business, and the other person has to stand by? It's not like that. Like Zuckerberg, everyone knows that he is a successful entrepreneur, and his wife Priscilla Chan is also a great help to Zuckerberg in her career. However, his wife is not a major shareholder of Facebook, nor is she actually involved in the day-to-day operation of the company. She only has some auxiliary help. For example, Priscilla has many charity projects that can help Facebook. The problems that we mentioned earlier are often the husband and wife who jointly hold shares and jointly operate a business. Some people may say that legally speaking, the husband and wife are jointly owned, so no matter whether the other half holds shares in name, isn't the result equal to one person and one half? But if only one person in a husband and wife holds shares, the other person will often give him some suggestions, make suggestions, and work hard. However, if the shareholder structure of the company is such that both husband and wife are shareholders, and they are one and a half, each shareholder meeting will vote for two people to go to this seat, which will easily become a counterparty mentality. We often say that behind a great man is a greater woman, but often no one says that a great man sits next to a woman as great as her. This may be more of a human and psychological reason.

Finally, to sum up, it is definitely possible for husband and wife to help each other, and it is human nature, but husband and wife start a business together and do the daily operation of the same company, which is more prone to conflicts. If you add the joint stock holdings of husband and wife on this basis, especially if it is to be divided equally, then basically it will not be possible not only in time but also in the future.

See you in the next issue.