Fundraising · Contract negotiation

Do you have views on an investor majority consent of approving annual business plans and budgets?

Anonymous

January 4th, 2016

I am presently in the process of gaining angel investment for my startup in London. Having the right to approve our annual budget and business plan is one of the investor majority consents they want. My initial reaction was that I wanted to keep freedom and not have to get the approval, but then discovered it to be quite common. So a few questions:

a) Have any founders here had experience of this causing issues, i.e. non-consensus? Any regrets on agreeing to this right and not having tried to negotiate it out?

b) Would you agree to this being an investor director approval instead? Us two co-founders are directors so it would be a board of 3.

c) How impactful/severe is this in practice? As a startup annual plans will always be deviated on through the year as the company iterates and develops. 
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Mitchell Portnoy Healthcare Information Executive

January 4th, 2016

If you give on this issue you essentially forfeit your ability to operate effectively. Don't do it.

Thomas Kaled Business Development Consultant @ thomas.kaled@gmail.com

January 4th, 2016

Assuming you have experience founding, growing and running companies like the one you are promoting and have a track record of success (ROI established by 3rd party or a public track record) an investor will generally seek some semblance of control in the venture you are promoting either through equity or the Board or both. If you are lacking any of these achievements or the equity structure does not achieve reasonable control (e.g. you and your co-founder have cumulative voting not granted to an investor) I understand the basis of their request.

Thomas Kaled Business Development Consultant @ thomas.kaled@gmail.com

January 5th, 2016

@Joanan Hernandez 

Your response causes me to seek my safe space. 

A learned variation on the more sexist variation 'he has has the gold makes the rules' or the more earthy 'my way or the highway'. 

Steve Everhard All Things Startup

January 4th, 2016

I am surprised that they have requested to override the board in this way. To do so is to undermine the governance of the business. Majority control of the stock is not the same as control of the company and they open themselves up to actions by minority investors. If your investors want to run the company they should acquire it,


JD Ryan Downunder Toys Pty Ltd

January 4th, 2016

This is not standard practise, in my experience. 
I think everyone accepts that investors want to ensure the budget is managed effectively, but you can't give this control away without giving away responsibility as well. 
It is important you sell this aspect when you go back to them. If you are the founder and CEO, you must have executive decision-making power and the responsibility that goes with it. If they're not happy with your management, it is up to the Board to work with you on it, or replace you.

Larry Kutcher Entrepreneur. Business Builder. Operational Leader.

January 4th, 2016

I agree with the consensus - this is not standard procedure, unless the angel investor is part of the board, and even then, this is over-reaching.   I would however take this as a teachable moment and consider whether there is something about your pitch, presentations, deck, demeanor, etc. that might be eliciting this response.  I would look for a different group of investors or explore how to bootstrap without.

John Seiffer Business Advisor to growing companies

January 4th, 2016

In my experience as an angel investor this is authority remains with the board. 

In your case, the reason they may be asking for budget approval is they don't know any better OR because of the make up of the board. Having 2 founders on a board of 3 is unusual. With a board of 3 usually the founders get one member (usually the CEO) the investors get one member and they get to agree on the third. 

The reason for all this is that investors want founder's access to wealth to be aligned with their own - meaning not till they get an exit. They don't want you to be able to give yourself high salaries, take the company into debt that will dilute their ROI, have your company retreat in a fancy resort in Monaco and then not have cash to make the company grow fast enough to achieve an exit. 

I have seen where the holders of preferred shares get veto power over some of that stuff - like founder salaries beyond a certain amount, company debt. Though I have never seen anything written about resorts in Monaco [grin]. 

Mike Langford CEO - finservMarketing

January 7th, 2016

Sounds like you are talking to the wrong investors OR they really don't feel comfortable with you as an entrepreneur. 

You mentioned that you "discovered it to be quite common." As you can see from the comments here it is actually anything but common.

Investors put their money to work in businesses in which they believe the entrepreneurs and management teams will create value. They get a say in the business through their ability to participate in the selection of board members who will represent the interests of all investors (including the founders).

Jeffrey Weitzman Consultant at Space-Time Insight

January 4th, 2016

Never had this in terms from angel investors. I wouldn't do it. As Michael notes, this is a board function. Investor majorities can elect board members, that's their protection.

Don Ross Managing Partner Digital Health at Life Science Angels

January 4th, 2016

Investor approval of the annual budget is not a standard term. Information rights to receive quarterly financial statements and a copy of the annual budget are standard. 

You did not indicate the stage of your company. In very early stage companies (friends and family stage), such a condition could make sense if the investor does not have a board seat. 

More typical is for the investor to have a board seat. Budgets are the purview of the board. It would be common to have the board approval requirement to read "a majority of the board, one of which is the investor director." In other words, the investor director must approve the budget.  

If you must grant investors the right to approve the budget, be certain to insert a "sunset clause" that this right expires with next financing round of $XXXX minimum dollars. You don't want this hanging over your head as you add larger investors and professional money.