I can name a few. But, it mostly comes into play in small-scale stuff:
- In a small acquisition, not paying investors 1x or 2x or whatever the notes state. Or variants hereof. Convertible notes become a sucker bet in small M&A in many cases.
- Not honoring commitments to early investors. Not honoring terms of notes. Not honoring pro rata rights. Amending notes in a negative way without the consent of the noteholders, or most of the noteholders. Etc.
- Issuing very large equity grants to themselves, creating high un-agreed dilution.
- Taking cash out of the company for themselves without disclosure or agreement. This is not THAT uncommon. Sigh.
- Gaming the terms and valuation with The Next Investor. Ultimately, the New Investor and the Founders can game VC terms in many ways to disadvantage the last guys. You can cancel the option pool and reissue it right after the deal closes. You can subordinate the early stock in unanticipated ways. A New Investor can do this all and bribe / grant the founders extra equity to smooth it over, while only the earlier investors suffer. This is kind of common in companies that have some traction, have something, but are struggling.
This stuff isn’t ultra common, but it’s not as uncommon as you might think. I know of several pre-nicorns that basically wiped out the stakes of seed investors in collaboration with Big, Later VCs.
The best remedy is having at least one investor on the board to represent this group of investors. At least there’s a witness then. Even if you are outvoted.