I read last week’s New York Times article, “Obama and the Myth of Presidential Control” with interest. In it, Brendan Nyhan points out the fallacy in our common public perception that US Presidents control events that occur while they’re in office. A similar “illusion of control” traps many entrepreneurs into counter-productive actions based on unfounded worries about control of their company. Counter-productive actions I’ve seen entrepreneurs take to preserve their illusion of control include:
- Over-negotiating your prospective investors’ rights,
- Sub-optimizing your Board in favor of having more management team representation on it,
- Refusing appropriate capital infusions into your company,
- Putting red-flag terms into employment or founder’s agreements.
Read Venture Deals for the standard investors’ rights and what is and is not worth negotiating. Read Start-up Boards to understand the best way to structure your Board of Directors. Of course, no book (or blog!) can replace good judgement and discernment. First and foremost, your Board should add value to your company. Your management team already works for the company, so by definition, management team members don’t add any additional value by being on your Board. Startup boards begin stacked with management, but shouldn’t stay that way.
Most (not all) worries about control are over-blown or completely unfounded. Your concern may be,“Will I lose my C-level job at the company I founded?”
You can control your destiny on this point only by performing well. As a shareholder in your company, you should not want yourself running the business if you’re not producing results. Even if you’re not able to see it that way, be aware that every other investor in the business does, and no amount of maneuvering can change that. In fact, almost all maneuvers make your fears more likely to happen. Focus on performance. Period.
The other common concern is“Will my Common Stock become less valuable than the investor’s Preferred Stock?”
It might, but that’s also highly dependent upon your performance and that of your team. At the end of the day, major differences in value between Common and Preferred result from the deal you negotiated when you raised the financing and your performance at growing the company. If all goes well, Preferred Stock converts into Common Stock. If things don’t go according to plans, your company will probably have to raise more money, possibly at less desirable terms. Once you’ve closed with an investor, focus entirely on maximizing growth without running out of cash. That’s what you can do to alleviate your fears constructively. Remember that every Board member has an equal fiduciary responsibility to every class of shareholder of your company. Fiddling with Board construction (or anything else for that matter!) out of fear is never advisable. Most things that don’t help your company grow are at best a waste of time and energy.
There is one notable exception – a form of control that is both positive and completely necessary for your success – Governance. Shareholders elect the Board of Directors and one of the Board’s principle duties is to provide Corporate Governance.“Governance mechanisms include monitoring the actions, policies and decisions of corporations and their agents. Corporate governance practices are affected by attempts to align the interests of stakeholders.” – Wikipedia
Appropriate governance must be provided by Directors that are independent of the management team. Investors and/or at large Board members with appropriate expertise and experience provide this benefit. Proper governance keeps you out of jail and out of lawsuits. When done correctly, governance helps you keep your job and preserve the value of your stock.
Make sure you have Board members helping you with Governance, focus on performance (making your company growth as fast as possible), and never run out of cash. If you can do these three things, you can let go of fear. The rest will take care of itself!