Corporate Control/Ego Control

Some businesses are meant to be one person shows. The owner has all the tools, expertise, and financing to own and control it 100%. That is not the subject of this article. High growth companies usually take a team effort.

We encourage founders to protect their equity and use it judiciously to build the company. Most growth companies require substantial outside investment and a team of dedicated employees. Outside investors will require equity for themselves and usually for the whole management team. Building a management team is a competitive exercise in itself. Issuing equity is one of the best tools a founder has to do team building.

How much control founders retain and how much they share with others will always be a judgment call. It will depend on market conditions, and it will change over time as the value of the business changes. What constitutes control is also a moving target. Control may mean 100%, two-thirds, or majority ownership. In a widely-held public company, effective control may mean 20% or less of the outstanding stock.

Control in a startup is usually shared among founders and investors. Shareholders agreements that spell out board representation and voting on key business decisions, like sale of the company, are common. These agreements establish who will have control or how control may be exercised. They usually reflect a negotiated balance between founders and investors.

Employees with equity in the form of stock options or restricted stock usually are subject to "vesting" of their rights over time. In this way they may share in the economic benefits of growth in return for a multi-year commitment to work for the company. They may leave, but if they do, they may have to give up a substantial equity stake and a lot of value. For this reason, equity tied to multi-year vesting is sometimes referred to as "golden handcuffs."

Founders are not always the best judges of their own capabilities. Having an independent, experienced board of directors with a financial interest in the company is a useful balance to a founder's ego. Asking for advice, listening, and actually following it is a good remedy for "founder's folly" — unrealistic self-confidence. Experienced professional advisors offer another protection against this malady.

In making a judgment as to how much equity to share a founder might ask:

• What are my goals for the company?

• Can I get there by myself?

• What help do I need?

• What does the market require me to pay to get that help?

The answers to these questions will help the founder make business judgments on sharing ownership.

Finally, ask two other questions:

• How many companies fail to realize their potential due to the founder's limitations?

• How many companies fail because a founder loses control?

Remember, 100% of nothing is nothing.