Dear Founders, How Much Control Do You Want Over Your Startup?

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At some point in time, a startup founder has to consider raising funds from new investors to help scale their enterprise or speed up growth. But how much control does the founder want to keep in exchange?

As a founder, you’ll want to be able to raise as much money as your business needs at different stages of growth. At the start, you may have funded your enterprise by yourself or with the help of family and friends, so you are in complete control. If you have a board, you might even be the only person on it.

As your startup grows and the need for investors who can put in crucial capital grows along with it, you’ll have to give up shares of your company and allow for changes in voting power and board membership.

This article explores how founders can balance attracting the necessary funding while retaining the right amount of control.

Trade-off 

Before allowing an investor to get a stake in the company, a founder should consider several things. Aside from funding, how much added value can the investor bring to the business? Can the investor provide expertise in the areas where the company needs help? Do they have connections that can open the doors to critical markets?

After the second round of financing, getting an “independent” board member with essential industry knowledge and valuable contacts is also common.

As a startup goes through several funding rounds, the board may expand to provide additional seats for the latest investors. You may then have a situation where independent directors and representatives of investors occupy most of the board seats.

Control of the board may be a significant issue for a founder, as the board makes many vital decisions: the appointment of top management, compensation levels, borrowing and capital raising, mergers and acquisitions, option grants and vesting schedules. A founder-CEO will also have to face the scrutiny of the board when reporting on the company’s performance and plans.

While it may seem risky to a founder to have outsiders take board seats, it is also an exciting opportunity to welcome people who can provide insights, know-how and networks to enable your startup to accelerate to the next level.

Keeping control 

Even with diluted ownership, a founder can still wield plenty of control over the company through board provisions and voting rights. A founder does not need to insist on a majority stake in the company to ensure control over the company’s future.

In the current market environment, where a lot of money is chasing a limited number of attractive startups, founders have got the upper hand in negotiating board provisions such as board control and board member nominations in the term sheet.

Founders can also keep control by issuing classes of shares with different voting rights. When issuing additional shares to accommodate the entry of investors, founders can negotiate to get a class of shares with more voting rights than another class of shares. The number of votes of the “super-voting” shares can be two or more, but the most common multiple is 10 votes per share.

Typically, a dual-class structure implemented before a startup’s initial public offering (IPO) gives founders and pre-IPO holders super-voting shares.

Real-life examples

The increase in founders’ ability to dictate the governance in their firm is also partly seen in the rise of dual-stock IPOs, with Airbnb, Zoom Video and Pinterest examples in recent years.

While there are instances where founders have lost control of their businesses after taking venture capital money, one need only look at some of the largest firms by market capitalization to see the ones that have benefited from the support of venture capital before their IPOs: Alphabet, Apple, Amazon, Facebook and Microsoft in the US, and Alibaba and Tencent in China.

 The amount of control a founder can negotiate with investors may ultimately depend on the buy-in for their vision, capabilities and character, just as investors had for Facebook’s Mark Zuckerberg. The more investors trust a founder to steer the business, the more they are likely to agree to terms that would keep the founder in control.

Enjoyed this? You may also want to learn how you can find the right investors or how to get your startup through a global crisis

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