Control - Founder vs. VC

What the greatest technology investors say about Control - Founder vs. VC

CONTROL- FOUNDER VS VC POSTS (19 posts)

The following is a list of the post titles by author under this topic.  Scroll further down this page to find the actual blog post by your selected author.   Author’s posts appear in reverse alphabetical order.  For example, following this list, Fred Wilson’s posts appear towards the beginning of the blog page, and Chris Dixon’s posts appear towards the end of the blog page.   

 CHRIS DIXON (2 posts)

Chris Dixon:  Think of Dilution over the Company’s Life & How Much to Raise

Chris Dixon:  Nothing More Dilutive & Morale-Crushing than a Down Round 

JASON MENDELSON (2 posts)

Jason Mendelson:  Investors Only Care about Two Things

Jason Mendelson:  Investors Only Care About Returns & Control

BABAK NIVI  (3 posts)

Babak Nivi:  The Biggest Mistake Entrepreneurs make when Raising Money

Babak Nivi:  Tips When Raising a Seed Round

Babak Nivi:  The Option Pool Lowers your Effective Valuation

NAVAL RAVIKANT (1 post)

Naval Ravikant:  Valuation is Temporary, Control is Forever

MARK SUSTER (6 posts)

Mark Suster:  Dilution Benchmarks & Fundraising

Mark Suster:  The VC “Squeeze” and Dilution

Mark Suster:  Select the Highest Quality Investor Available

Mark Suster:  Fundraising Terms Pile Up with Later Stage Investors

Mark Suster: VCs Want Big Outcomes & May Block a Sale

Mark Suster:  Early Stage Technology Investments Come Down to 4 'M's'

FRED WILSON  (5 posts)

Fred Wilson:  Fred Wilson: Never Seen VC Board Control in Early Stage Deals

Fred Wilson:  Fred Wilson:  Thoughts on Well-Functioning Boards

Fred Wilson:  Fred Wilson:  Board’s Role & Responsibilities

Fred Wilson: Fred Wilson: The Reality of Founder Control

Fred Wilson:  No One Gets More Diluted than the Founders

No One Gets More Diluted than the Founders

Fred Wilson venture capitalist  and Co-Founder Union Square Ventures

 Wilson discusses employee equity and dilution in technology and high growth businesses.   

“If anyone goes to the pay window, everyone goes to the pay window. [from [] Jeff Minch, [] JLM [] an active commenter on the avc blog].”

“[] If you [] sold [your company] for $100 million and you and your co-founders are gonna make a bunch of money [] you really ought to make sure that every single person who was involved in making that success happen makes a bunch of money too.”

“[] nobody will get more diluted than [the co-founders] because [the co-founders] are there at the very beginning and the dilution will happen over time.  And the person or the investor who shows up at the very end of the process might never get diluted.  The person who was there at the very beginning gets diluted the most.” 

“[] The sooner you can stop talking about equity in percentages and start talking about it in dollars is the sooner that you are going to own more of your company than you would otherwise.” Fred Wilson  April 19, 2012  MBA Mondays Live: Employee Equity - Archive and Feedback- video;

http://www.avc.com/a_vc/2012/04/mba-mondays-live-employee-equity-archive-and-feedback.html#disqus_thread

 

Fred Wilson: The Reality of Founder Control

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

Wilson discusses company control.  “In theory, [company control] rests with the ownership split between the founder and the investors and how the Board [] is set up. If the founder/entrepreneur owns more than 50% of the company and controls more than half of the board seats, then he or she has “control” [].  But in reality [Wilson has] found things are very different than that.  And it all comes down to two things:  1) How well the Company is performing;  2) Whether the Company needs more investment capital and where it’s coming from.

[] An entrepreneur or hired CEO can own as little as 5-10% [] but [have control]” if the company is performing well with substantial cash flow and no need for additional capital.

“An entrepreneur can control 95% [] and all [board seats] but [] easily lose control” if the company is struggling, needs more cash and only existing investors would consider putting up cash. 

“[] VCs have control when things don't work. Entrepreneurs have control when they do.”  If a founder wants to keep control, the company must perform well, have plenty of cash and not risk running out of cash.     Fred Wilson Entrepreneurs Have Control When Things Work, VCs Have Control When They Don't, July 25, 2012; http://www.avc.com/a_vc/2012/07/entrepreneurs-have-control-when-things-work-vcs-have-control-when-things-dont-work.html

Fred Wilson: Board’s Role & Responsibilities

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“The Board of Directors is the [company’s governing body].  All major decisions [require Board ratification, including approval to sell, hire or fire a CEO, make major acquisitions and do major financings, including an IPO].”  All strategically significant issues need Board involvement and support.    

“[][The] Board should not run a company [][but ensure] the right team is at the helm []. [Boards] must always act in the best interests of the company and its major stakeholders:  [] employees,[] customers, []shareholders, [] debtholders, [etc.]   [] The company works for the market [] and the Board and the management team work for the company.” 

Often, as director a right answer isn’t straightforward.  “There are no formulas [][nor “right answer”].  Only time will tell if the right decision was made [which can be debatable].” 

A good board is engaged, debates openly and honestly and tries reaching consensus.  The Chairman should drive the Board.

CEOs shouldn’t manage the Board. “A great Board manages itself, [] treats the CEO as a peer, [and considers the CEO's opinion,][but isn’t] a rubber stamp.  [It] pushes the CEO and the company to make the most of [presented opportunities and asks necessary hard questions]. 

[] [Boards] should evolve [with members changing occasionally, and some but not too much churn is good.] [] Boards should always be looking for new blood.”  Fred Wilson, The Board Of Directors: Role and Responsibilities, Mar 5 2012; http://www.avc.com/a_vc/2012/03/the-board-of-directors-role-and-responsibilities.html

Fred Wilson: Thoughts on Well-Functioning Boards

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“Every company should have a Board of Directors. []  [Benefits] include [] advice, counsel, relationships, experience, and accountability.

[Shareholders] elect the [Board] [] [usually via] a nominating entity that puts directors up for election by the shareholders. []

[Wilson likes] a three person Board early on in a company's life [including the founder with two others he trusts and respects].

[] [Investors sometimes negotiate a Board seat - less common for angels, moreso for VC’s].”

A founder can still control a three or five person Board.  “As a company moves from founder control to investor control, [an independent director is considered]. [] [Wilson likes] independent directors [].  The more independent minded the Board [], [usually the better].

[][Wilson argues] that an investor controlled Board is the worst possible situation” since an investor’s interest is narrowly his financial return, not a broader company perspective. “[Investor directors should not control the board.] The founder should control the board in a company he [] controls and independent directors should control a board where the founder does not control the company.

[] [Boards should evolve, recruit new members regularly and have term limits]”, preferably 4 years. 

“Most importantly, build a great board.”  Fred Wilson, The Board Of Directors - Selecting, Electing & Evolving, Mar 12, 2012;   http://www.avc.com/a_vc/2012/03/the-board-of-directors-selecting-electing-evolving.html

 

Early Stage Technology Investments Come Down to 4 'M's'

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] [Almost] all VC investments in early stage technology & Internet investments come down to just four key factors []: management, market, money [i.e., valuation] and above all else momentum [i.e., mostly product momentum]. 

[] The number one thing that investors get their checkbooks out [for is] momentum.  [Momentum has various definitions]:  user numbers, revenue, channel partners, biz dev deals, [etc.]. 

[] [Suster’s investment decision is based] 70% [on] management, 30% [on] product. 

[] [Almost] all VCs care about investing in big markets with ambitious teams.

[] Most VCs want to own between 20-25% minimum of [a] company. [] [Investors need to] own enough [equity] to make it worth their time – thus “money”. And all of this is wrapped up in forward progress that [entrepreneurs] demonstrate over time.”   Mark Suster, The Four Main Things that Investors Look for in a Startup,  October 6, 2010

http://www.bothsidesofthetable.com/2010/10/06/the-four-main-things-that-investors-look-for-in-a-startup/

VCs Want Big Outcomes & May Block a Sale

Mark Suster Partner Upfront Ventures and former entrepreneur

“VCs want big outcomes.  [VCs] will demand a veto right over [a company sale].  [A founder] might be very happy selling [his] business for $9 million and owning 50% of the company.  [A] VC is not necessarily going to be happy getting $3 million for his 33% stake for which he invested $1 million.

[While that’s] a 3x return [] it’s still just $3 million and if the VC has a $300 million [fund] it is just 1% of the money [needed] to reach his “hurdle rate” of when he’s entitled to earn carry (e.g. big bucks).  It’s just too much time to spend [] for such a small total return.  Many VC’s would still let [a founder] sell []” but some would block the sale.  Mark Suster  Do You Really Even Need VC? July 22, 2009; http://www.bothsidesofthetable.com/2009/07/22/do-you-really-even-need-vc/

Fundraising Terms Pile Up with Later Stage Investors

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] any [early stage terms] will certainly be asked for by future investors in [] later funding rounds so all of these terms pile up [after] 3-4 rounds of funding over a 5 year time frame. And by the time most companies get to an exit [which realistically is still 8-10 years,] often the founders own very little of the economic upside."  Mark Suster, Want to Know How VC’s Calculate Valuation Differently from Founders?  July 22, 2010

http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/

Select the Highest Quality Investor Available

Mark Suster Partner Upfront Ventures and former entrepreneur

 Suster advises entrepreneurs to select the highest quality and most experienced investors available.   It’s generally better for the company long term to have the right investors vs. optimizing every last piece of equity up front.  “Worrying about giving up an extra 10% [equity] at [an early] stage can be meaningless if the ultimate outcome is either success or failure.”  Mark Suster, Raising Angel Money, July 19, 2009; http://www.bothsidesofthetable.com/2009/07/19/raising-angel-money/

The VC “Squeeze” and Dilution

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] most VCs have a 20% minimum [equity threshold] so bringing in multiple VCs can be very expensive in terms of dilution. [] The biggest problem [with 2 VC’s in a deal] is the “squeeze.” All VCs want to own between 25-33% [equity]”, above their internal 20% minimum.  A founder with co-founders can quickly get very diluted once an option pool is included.  “[]There are [] VCs [] who don’t cling to the old “20% or the highway” mentality [] and [Suster] suggest[s] [founders] seek them out.” Mark Suster, How Many Investors are Too Many? February 22, 2011http://www.bothsidesofthetable.com/2011/02/22/how-many-investors-are-too-many/

Dilution Benchmarks & Fundraising

Mark Suster Partner Upfront Ventures and former entrepreneur

Negotiations between entrepreneurs and investors include dilution and other fundraising terms.  “[] the “fairway” of [investor’s equity] is 25-33% per round [i.e., entrepreneurs’ dilution]. [] If [the entrepreneur is] “super hot” or “super experienced”, [he] can end up with much less dilution –in some cases 12-15%.  But this is the exception, not the rule.”

“[] [These] dilution numbers don't take an option pool into account [].  Options are additional dilution.”

“[] [Valuation can be driven up] ONLY if there’s [] competition [for] a deal.  [Investors stay honest when entrepreneurs] talk with multiple parties.”

Fundraising also requires considering how many future rounds are needed and expected total future dilution.  It’s not an arbitrary spreadsheet-driven exercise reflecting attaining profitability.  It requires “understanding [industry norms necessary] to build a successful Internet business and where [the company falls] on that spectrum given [its business type].”   Mark Suster,  8 Questions to Help Decide if You Should be Raising Money Now, February 17, 2011 and comments;  http://www.bothsidesofthetable.com/2011/02/17/8-questions-to-help-decide-if-you-should-be-raising-money-now/

Valuation is Temporary, Control is Forever

Naval Ravikant angel investor, Co-Founder AngelList and Venture Hacks and former entrepreneur

“Venture Hacks’ [] tagline was ‘Valuation is temporary, control is forever.’   It was all about [] mak[ing] sure [the entrepreneur] keep[s] control.  And if [the entrepreneur] ha[s] control then it’s [his] company.  And the day [the entrepreneur] loses control [] [he’s] an employee.”  Naval Ravikant, This Week in Startups: Naval Ravikant of AngelList - TWiST #244 Published on Apr 6, 2012,  @ 1:08 hrs http://www.youtube.com/watch?v=lWfGw7serN0

The Option Pool Lowers your Effective Valuation

Babak Nivi Co-Founder AngelList and Venture Hacks and angel investor

“The option pool lowers your effective valuation.  Your investors offered you a[n] $8M pre-money valuation. What they really meant was, “We think your company is worth $6M. But let’s create $2M worth of new options, add that to the value of your company, and call their sum your $8M ‘pre-money valuation’”. [] Slipping the option pool in the pre-money lowers your effective valuation to $6M. The actual value of the company [] is $6M, not $8M. [] The [option ‘shuffle’] puts pre-money [valuation] into your investor’s pocket. [] the option pool only dilutes the common stockholders.  [] [The] investor’s norm is that the option pool goes in the pre-money.”   Nivi recommends using a specific hiring plan to more accurately determine option pool size vs. allocating some arbitrary percentage.  Babak Nivi  The Option Pool Shuffle  April 10, 2007;  http://venturehacks.com/articles/option-pool-shuffle

Tips When Raising a Seed Round

Babak Nivi Co-Founder AngelList and Venture Hacks and angel investor

When raising money in a seed round: “[] Take as much money as you can while keeping dilution between 15-30% (10%-20% of the dilution goes to investors and 5%-10% goes to the option pool).

Compare this to a Series A which might have 30%-55% dilution. (20%-40% of the dilution goes to investors and 10%-15% goes to the option pool.)

A seed round can pay for itself  if the quality of your investors and progress brings your eventual Series A dilution down from 55% to 30% (for the same amount of Series A cash).

Don’t over-optimize your dilution.  Raising money is often harder than you expect, especially for first-time entrepreneurs.”  Babak Nivi, Venture Hacks  How do we set the valuation for a seed round?  April 17, 2008;  http://venturehacks.com/topics/dilution

The Biggest Mistake Entrepreneurs make when Raising Money

Babak Nivi Co-Founder AngelList and Venture Hacks and angel investor

Nivi says “the biggest mistake entrepreneurs make when [] raising money” is that “[they] focus on valuation when they should be focusing on controlling the company through board control and limited protective provisions.   (Protective provisions let preferred shareholders veto certain actions, such as selling the company or raising capital.)

Valuation is temporary, control is forever.  For example, the valuation of [a] company is irrelevant if the board terminates [the founder] and [he] [loses his] unvested stock.

The easiest way to maintain control of a startup is to create good alternatives while [] raising money. If [the founder is] not willing to walk away from a deal, [he] won’t get a good deal.  Great alternatives make it easy to walk away.

Create alternatives by focusing on fund-raising: pitch and negotiate with all [] prospective investors at once. This may seem obvious but entrepreneurs often meet investors one-after-another, instead of all-at-once.

Focusing on fund-raising creates the scarcity and social proof that close deals.  Focus also yields a quick yes or no from investors so entrepreneurs can avoid perpetually raising capital.”  Babak Nivi, What’s the biggest mistake entrepreneurs make? , October 14th, 2007  http://venturehacks.com/articles/biggest-mistake; Why do investors want protective provisions? August 2nd, 2007;  http://venturehacks.com/articles/understand-protective-provisions

Investors Only Care About Returns & Control

Jason Mendelson venture capitalist and Managing Director Foundry Group

Generally investors only care about returns and control when making investments.

“[Entrepreneurs] should focus on terms like pre-money valuation, liquidation preferences, board of director elections, drag-along rights and protective provisions.   Most [other standard term sheet terms] aren’t really all that important.  [] Many of these terms have interdependencies and it’s important [to] understand how terms such as option pools, warrant grants and  the election of independent board members will affect returns and control.” Jason Mendelson, Do More Faster  by David Cohen & Brad Feld  copyrt 2011, Get Help with your Term Sheet  pg 238

Investors Only Care about Two Things

Jason Mendelson venture capitalist and Managing Director Foundry Group

“In general, there are only two things that investors really care about when making investments: returns and control.  Returns refer to the end-of-the-day financial return the investor will get and the terms that have direct impact on these economics.   Control refers to mechanisms that allow the investors to either affirmatively exercise control over the business or to veto certain decisions the company can make.”  Mendelson says that if an investor resists terms that don’t impact returns or control,  it may be a negotiating tactic, he may not be savvy or could just be a jackass.  Jason Mendelson, Do More Faster  by David Cohen & Brad Feld  copyrt 2011, Get Help with your Term Sheet  pg 238

Nothing More Dilutive & Morale-Crushing than a Down Round

Chris Dixon General Partner Andreessen Horowitz, angel investor and former entrepreneur

“[] if [an entrepreneur] expect[s] to raise more money (and [he] should expect to), make sure [the] post-money valuation is one that [he’ll] be able to “beat” [exceed] in [the] next round.  There is nothing more dilutive and morale crushing than a down round.” Chris Dixon, Ideal first round funding terms August 16, 2009;  http://cdixon.org/2009/08/16/ideal-first-round-funding-terms/

Think of Dilution over the Company’s Life & How Much to Raise

Chris Dixon General Partner Andreessen Horowitz, angel investor and former entrepreneur

“I prefer to think of dilution over the life of the company. Sometimes you give up more now to give up less later. []    I gave up 50%+ of SiteAdvisor to investors in the first round but in the long run was happy for it.”  That said, Dixon recommends raising “as much as possible while keeping [] dilution under 20%, preferably under 15%, and even better, under 10% [especially] for founders who aren’t experienced “developing and executing operating plans”.” 

“[] I know it sounds self serving as a seed investor but the path to least dilution is investors aligned with you on seed round where you don't raise too much money, and then raise the bulk of your money later.” Chris Dixon, What’s the right amount of seed money to raise?  Comments, December 28, 2009;  http://cdixon.org/2009/12/28/whats-the-right-amount-of-seed-money-to-raise/