Startups · Fundraising

How do I keep control when seeking investment?

Joe Thomas Founder/CEO:UPDTR

September 26th, 2016

What do I have to do in order for me to always make sure I have more board seats than everyone else to make sure I have the final say. Will VC's ever allow this or do I have to start out with an angel investor and negotiate founder friendly terms?
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Arthur Lipper Chairman of British Far East Holdings Ltd.

September 27th, 2016

The skill required in starting a company are very different than those required in efficiently running a company. Professional investors frequently organize a change in the role of officers of an investee company. Directors of companies are required to take actions benefitting all shareholders and the Boards primary function in many companies is to decide when management should be changed. Maintainance of control is dependent on achievement of objectives. You as the entrepreneur and initially laggest owner of the business should want what is best for the business and your being CEO may not be that.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

September 26th, 2016

VCs rarely insist on control during the first round. As you add rounds and more investors, they too may want to be on the board.  Sometimes you need to stare the VC down during negotiations. Just because they want board seats does not mean that you have to give it to them.

Scott McGregor Advisor, co-founder, consultant and part time executive to Tech Start-ups. Based in Silicon Valley.

September 26th, 2016

If this Is a concern for you, I recommend you avoid equity financing. Focus on debt financing instead as the debt holder gets no votes.

David Martin

September 26th, 2016

Joe I understand the basic law aspect of investors with corporations.  That is not what I meant, sorry.  But if you have already incorporated then it doesn't matter anyway.  I was just curious as to your decision to incorporate.  As long as you know your reasons then it doesn't matter.  


The only other thought I have is stack your team in your favor.  If you have qualified leaders in your business who support you (not yes men though), then it at least lessens the chance that a VC will feel the need to load up your board with their own for fear of you being able to lead to profitability.  Obviously, Im not suggesting family and friends but qualified leaders.


Its a legitimate concern, and I think you are right to have it.  I wouldn't be focussed only on a controlling number of board seats but all.  If you have the wrong investor and they even have one, it can cause problems.  But a positive way to look at it is seek an investor who can bring a board seat with solid connections  and experience that will support you.


Example, a few years ago I was in MBA school reading these Harvard Case Studies and listening to classmates and a few professors regurgitate all their book smarts. The studies were stale and limited to me.  You study something and then listen to thoughts of people who had nothing to do with the company.  I'm one who really wants to see the example, not just read about it.  The study was on a man who was at the time the Director of the Board for Apple.  So I reached out to him and connected, got him to agree to come speak.  I occasionally go back to him with updates.  I did in fact ask him to be on my board at the time.  He was tied up with a dozen other boards understandably.  But I think my point is, if you have people that are that smart, and they believe in you, you will be fine.  

Arthur Lipper Chairman of British Far East Holdings Ltd.

September 27th, 2016

Royalties are simply the better wan of financing easy stage companies.

David Martin

September 26th, 2016

Scott and Arthur give great food for thought if your company can be financed that way.  Out of curiosity, what is the main reason you have chosen to incorporate as opposed to registering as an LLC?

Martin Omansky Independent Venture Capital & Private Equity Professional

September 27th, 2016

Joe: the fact is that you never have complete control anyway. (1) A majority of seats on the Board are no guarantee of control, because shareholders can usually override the decisions of the Board. (Laws and regulations may differ on this, depending on jurisdiction.) The actual control of management activity rests with (a) the amount of equity held by each of the shareholders; and/or (b) the terms set forth in the Preferred Stock Agreement - which is used by most investors to protect their investment. The Preferred Stock Agreement is an enforceable contract that sets forth what conditions are agreed to by the parties in exchange for investment dollars. Here is an example: "The company cannot borrow more than $5,000 without the permission of the majority of the Preferred Stock shareholders." The only guarantee that you can retain absolute control is to finance the enterprise yourself. Any time you raise money from others, especially from professional investors, you can expect limits to your independence. There are some exceptions - having to do with the kind of stock you issue and/or the structure of your enterprise, but most entrepreneurial firms don't take advantage of such exceptions. If I were you, I would consult an experienced securities lawyer for advice on this matter.

Arthur Lipper Chairman of British Far East Holdings Ltd.

September 27th, 2016

Royalties do not have a vote and royalty investors cannot influence management. If the maintaining of control is important to you then do not sell securities to those who may together make decisions with which you do not agree.

Arthur Lipper Chairman of British Far East Holdings Ltd.

September 27th, 2016

An LLC is a corporation, which is just taxed as a partnership. Investors are better served if they bet on a company revenue growth than profitability.

Arthur Lipper Chairman of British Far East Holdings Ltd.

September 27th, 2016

The Golden Rule persists and entrepreneurs will usually do what the VC requires. Successful serial entrepreneurs do not use VC money due to the normal demands of VCs.