Trust, but verify: Why investors want control by Babak Nivi

Investors, who are well versed in the startup environment, use contracts and the rule of law to protect their interests. Founders should do the same to be clear on what the founder-investor relationship will be built on.

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  • Topic Tags

Control, investors’ motivation, founder control

  • Relevant questions addressed

How do investors protect their interests?

How can founders protect their interests?

  • Summary bullet points
  • In the U.S., unlike in other countries, there are laws protecting both founders and investors. It is a trust and verify system.
  • Investors are experienced in this realm and take advantage of contracts and the legal system to protect their expectations.
    • The vesting schedule is meant to motivate the founders to stay
    • The liquidation preference is meant to ensure investors are paid first at exits
    • Protective provisions and board seats are meant to ensure the company will protect investors’ interests
  • When unforeseen situations arise, investors use the control they have to protect themselves
  • Founders should use the same contractual tools to protect themselves
    • Accelerated vesting at termination is meant to verify the investors will not fire the founders
    • Protective provisions suspension in case of adequately large offers are meant to ensure the investors won’t sell for too cheap
    • Board control can be used by founders if the investors trust them to run the company
  • Contracts come out of trust, not distrust
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