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. 

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.

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.

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,


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'. 

Michael Brill Technology startup exec focused on AI-driven products

January 4th, 2016

This is a board function and if they don't trust the board they shouldn't invest. Agree 100% with Mitchell.

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.

Edwin Carlson CEO Bitsmart | Fintech | P2P Loan Marketplace| Financial Services | Entrepreneur | Blockchain

January 4th, 2016

I agree with NOT giving up control of annual plans and budget; approval of this is a board responsibility.  If an angel investor thinks they know more about your business than you do then why are they investing in you?

Mark Lieberman Chief Startup Officer and Director, Advantage Accelerator at Oregon State University

January 4th, 2016

I would assume that Angels and Angel groups vary in their documentation.You might want to review standard seed investment documentation that are published throughout the internet (Y-Combinator, for example).
I could understand an investor wanting control over the use of funds or a business plan (however useless that document is) if the entrepreneur has never had an investment, demonstrated poor fiscal responsibility or unable to manage the startup project. You also do not state how much of the ownership the angel owns.
However, I would never recommend that an investor provides that much control to one individual not running the business. Bottom line is that you need investors and advisors that are in alignment with the strategic intent of the startup. One bad apple will spoil the startup.

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.