Control - Founder vs. VC

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

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

 

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