Balancing Control and Investment: What Happens When Outside Investors Step In
“The best leader is the one who has sense enough to pick good men to do what they want done, and the self-restraint to keep from meddling with them while they do it.” – Theodore Roosevelt
Ownership and Control: The delicate balance between ownership and control in a startup can be a pivotal factor in its success. Often, concerns arise about the degree of control a founder might lose when bringing in outside investors. The threshold at which control starts shifting typically occurs when outside investors collectively own over 50% of the voting shares in the company.
Covenants and Decision-Making: While majority ownership is a key factor, it’s important to consider the presence of “covenants” in investment agreements. These covenants can outline specific actions that require investor approval. Even traditional banks request certain approvals. In practice, the outside investors’ collective ownership of 50% of the remaining shares becomes significant.
“Unity is strength… when there is teamwork and collaboration, wonderful things can be achieved.” – Mattie Stepanek
Unity in Management: Management teams tend to vote cohesively, particularly in the absence of severe internal conflicts. If, for instance, the management team collectively owns 33% of voting shares, and outside investors possess 66%, substantial unity within the investor group is needed to override decisions made by the founder’s board and management. In such a scenario, the outside investors would need to command approximately 75% of those external shares to control 50% of all shares.
“In times of change, learners inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists.” – Eric Hoffer
Navigating Challenges: The issue of control is often accentuated when a company faces challenges or transitions. One common challenge is the need to bring in seasoned leadership, often described as “bringing in adult supervision.” This entails replacing a younger founder, who might have taken the company to a certain point but is now grappling with scaling and managing a larger organization.
“Leadership is not about being in charge. It is about taking care of those in your charge.” – Simon Sinek
Entrepreneurship vs. Scaling: Entrepreneurship and scaling a business are two distinct phases that require different skill sets. Younger founders, while innovative and passionate, may find themselves out of their depth as the company grows. It’s not uncommon for them to be replaced by a more experienced CEO who can navigate the complexities of scaling. In such cases, the founder might retain a symbolic role, with day-to-day control shifting to the new leadership team.
“The best leaders are those most interested in surrounding themselves with assistants and associates smarter than they are.” – John C. Maxwell
In Conclusion: The question of control in a startup’s journey is nuanced and context-dependent. While outside investors typically exert significant influence when they collectively own over 50% of voting shares, unity within the management team can also play a crucial role. Challenges and transitions may necessitate changes in leadership, with experienced professionals stepping in to steer the company toward growth and scaling. Ultimately, the focus should be on what’s best for the company’s long-term success, rather than on individual control.
Bob Norton is a long-time Serial Entrepreneur, CEO and investor who founded six companies with four exits that returned over $1 billion to investors for a 25X ROI. Two others are still in development. He has trained, consulted and advised thousands of Entrepreneurs, CEOs and boards since 2002. Mr. Norton works with companies to 2X to 10X growth rates and valuation using AirTight Management™, the world’s most comprehensive Leadership Operating System. He also helps companies raise capital to fund growth. He is also the Founder of The CEO Boot Camp™ and Entrepreneurship University™ for early-stage companies that have not reached product-market fit and $1M ARR.
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