- Source link https://www.forbes.com/sites/timyoung/2019/06/23/maintaining-control-of-your-company-what-all-founders-should-know/#15be189c57a5
Maintaining control of the company is as important as the company’s valuation in an investment round. There exist many legal strategies to maintain control of the board and experienced legal advisors will be able to analyze courses of action. It is important that founders negotiate while keeping some leverage.
- How helpful? Scale of 1 to 5
- Topic Tags
Board control, VC-founder negotiation, founders’ strategies
- Relevant questions addressed
How can a founder maintain control of their company?
- Summary bullet points
- Board structure is a key aspect in the growth of a company and yet many founders overlook it and lose their leverage.
- Lawyers experienced in matters of governance are instrumental in adopting the right legal strategies to maintain control of the board.
- Board control is generally in the hands of the founders if there are more common seats than preferred + independent seats.
- During each round, new board seats can be created. Usually, they are created for investors, but the founders might also manage to create more common seats that they can either fill or control. This allows leverage in later rounds
- Independent board members are important but can bring uncertainty to the board or side with investors. It is important for founders to find independents that will support their vision
- Investors are likely to want veto rights or separate voting classes to have more of a say. If these are given out at an early stage most future investors will get and use these special rights hurting the company and early investors
- Founders can establish supervoting stock classes for themselves to gain more leverage and control
- Founders can gain proxy voting rights from a number of investors. If this happens they can have more control than they have ownership as a % of shares.
- These strategies can help founders overcome the information asymmetry between them and VCs
- Follow-up links
Proxy vote - https://www.investopedia.com/terms/p/proxy-vote.asp
Independent outside director - https://www.investopedia.com/terms/i/independent-outside-director.asp