11. Understanding Control and Power in Your Startup

As founders, our companies are like our children, and we don’t want some stranger to take them away from us. Without control, someone might be able to replace you or overrule some key decision. It is completely natural to want to keep control of your businesses, which often leads to an intense focus on keeping 51% ownership of the company.

In a successful startup, keeping majority ownership is unlikely.

Consider a company with a single founder going through a number of funding rounds.

Typically, the founder sees 25% dilution in each round.

You start off owning everything, but you only own 75% of the business after the pre-seed round. After the Seed round you are down to 56%.

By the time you reach the B round, you are probably down to owning less than a third of the company.

But, in many ways this is a great problem to have. You don’t get to a B round unless the company is robust with rapid growth.

There are some ways of keeping more control. Facebook founder Mark Zuckerberg created a special class of stock, for himself and a few other insiders, that gets ten votes per share. All the other stock only gets one vote each. However, Facebook was going through unprecedented hyper-growth at the time and everyone wanted in.Unless you are in the same boat, investors are likely to walk away at that request. If you are in that boat, call me.

One way to limit dilution is to set a very high valuation for the business. This will have two effects. First, it will make it much more difficult to raise money. Second, it will drive away the most experienced and knowledgeable investors, who are exactly the ones you want helping you.

Another approach is to take as little investment as possible and to bootstrap the business. This approach can work, but has risks. There is a significant chance that the company will run out of funds and either fail or be forced to take investment at a ruinously low valuation. Also, bootstrapping is slow and in many cases other competitors are racing for market domination. By bootstrapping, you are letting them get far ahead.

All this focus on ownership clouds an understanding of the real decision making process in companies. On a day to day basis, almost all decisions are made by the people working in the company. At the start that might be just you, but eventually you will have staff, who will be under your authority.

After that, the CEO (you) handles major decisions and tactics. This is where you steer the ship. There is a reason that people look at the CEO as the person in charge.

The Board of Directors has responsibility for charting the general course, it sets the corporate strategy. The makeup of the board does not necessarily track ownership in the company. In a privately held company, seats are generally allocated through negotiated agreements with the investors and are not directly tied to ownership percentages.

Finally, there are the shareholders. They mostly vote on issuing new stock, changing stockholder rights, acquisitions, and the like. These issues don’t come up too often and are generally uncontroversial.

So, the board is where to power struggles are most likely to happen, but I don’t remember any board vote in my company, or any I have been involved with, that was not unanimous (other than abstentions for conflict of interest). It is important to remember that the board members all have a fiduciary responsibility to the shareholders, not to the CEO. Even if you picked most of the board, they are not required to go along with you. More important than control is ensuring that you have a good working relationship with the other BoD members, and that you share a vision for the company.

But, it turns out that 51% ownership is actually not that important anyway. Suppose you do find yourself facing a contentious shareholder vote after the B round when you only have 31% ownership. In my experience many (most) of the other shareholders will not bother to vote, but suppose they do. If 100% of the shareholders vote, and only a third agree with you, you win.

If everyone disagrees with you, but only 45% actually vote, you also win. Even if 75% of them vote and only 20% vote with you, you still win.

Clearly 31% ownership implies more power than you might at first assume. You only lose if basically everyone takes the trouble to vote and almost all of them think you are wrong. If that ever happens, maybe it should tell you something. If everyone feels strongly that you are wrong, you probably are.

Much more important than seats on the board or percentage ownership is my golden rule.

Don’t work with Jerks! Don’t let them invest. Don’t let them on the board. Be picky about who you let have a piece of your company.

Stop worrying so much about maintaining absolute mathematical control. As long as you are the biggest single shareholder, you are basically in a great place.

Also, if you are visibly worrying about this, it is a big red flag for investors and advisors. It suggests that you are expecting a fight and may not take advice, or be coachable If your plans and execution are good everyone will want you to lead. If you lead through consensus, when trouble does happen, everyone will have made those decisions along with you.

So focus on making your business amazing. There is too much else that you actually do need to stress about. Leave this worry behind.

Till next time … Ciao!