How do startup founders protect their company from investors in the shareholders’ agreement?
Should they? Protect from what?? Seriously, think about it for a moment. The startup community is flooded with people who ‘don’t want VC,’ think, ‘investors will take over,’ and fear the influence or control of investors.
This paranoia is a problem in the startup ecosystem because you can’t (or won’t) effectively consider investors if you start afraid that they’ll take over. Will they? Should they? Is that really a bad thing if they do?
Let me ask you something, if you are taking on investors (who, as investors, own the business with you), I presume you want an exceptional return on everyone’s investment of time and effort, yes?
You have invested a lot of time, work, and likely some money, and you want a lot of wealth from that, correct?
Do you think they don’t want the same??
Now tell me, do you have a greater priority? Is it more important to you that you, say, remain in charge? Why???
Is it more important to you that you keep the job? Why? If you can instead get wealthy in the process, why is a mere job so important?
Is it that you want to keep your baby? That’s a natural and understandable tendency. Maybe, control everything and be the boss??
Now one more thing to noodle on. Why would anyone give you money (invest in the startup), when your priority isn’t delivering the best return possible?
Let’s play this out, you call me…[Action!]
“Hey Paul, I’d like you to invest a million dollars for 30% of the company. We’re crushing it!”
I reply, “hey internet person! Good to hear from you, I’d love to invest in you! The way you read my article is so exceptional that you must be a great investment. How could I not?!”
“Okay, great Paul, thanks! Oh, one thing though, um, you can’t replace me, you can’t tell me what to do, you can’t take over, you can’t sell the company, you can’t tell anyone anything.”
My reply, “so, you just want my money, I get to own some of the startup, and then, you want to do whatever you want, and I just hope it works out for the best. That sound about right? That, you have my money, I own part of the company (just as you do), but I don’t get any controlling interest, and you do whatever you want.”
“Yeah, sounds great!” you exclaim.
Me, “… … … … fricken a ! Where do I sign up?!”[And scene]
Okay, so I embellished the last part because let’s be frank, there is no way I’d take the deal.
- If you want free, few strings attached money, file for a grant.
- If you want to give a little up but not lose control, call a bank.
- If you want investors, they OWN part of the company, just as you do, and for that, just as you have, they get a say. If you don’t want that, that’s fine, no one makes you take money from anyone, just don’t waste investors’ time, please.
The whole notion that “I’m afraid of investors because they’ll take over my company… to get a better financial return on their investment,” doesn’t make any sense at all. You should want the same outcome and will do what’s best to achieve that — or you don’t want investors.[image created by Dall-E 2, an AI system that can create realistic images and art from a description in natural language]
Would you rather be king or get rich?
I never got any sort of investors or debt… Reinvested in my business over time. Would not suggest going any other way for LONG time. If you need to start out with someone else’s money, that raises some serious red flags in my mind.
Agreed, and the odds are so slim, you need to focus elsewhere anyway. What I want to stave off is that mere opposition to investors, causes founders to miss the possibility of that being a capital source. Don’t let that happen. Set that as the high bar and empower yourself to say, “No Thank You,” when they want to invest, rather than having to say “Pretty please!!” when you need capital.
DiD wE jUsT bEcOmE bEsT fRiEnDs?!?!
Joking aside, it reminds me of a friend I had who got approved for an auto loan (in my estimate, not hard to obtain) celebrating like his team just won the Super Bowl. Cheering. Fist pumping. All of it. By himself, for himself.
I agree, a lot of startups focus on the wrong things instead of perfecting their concept. And they get eating alive before they know they’re finished.
Hopefully, I’ll soon be able to give you some feedback regarding my experience vs your observations!
All really good points Paul O’Brien for that 1st or maybe even 2nd time entrepreneur. On the flip side the choice of Investor, both skill wise, character, business approach style, and even philosophical or spiritual dimension of beliefs can be a +’ve or a -‘ve. Those deep conversations need to be had, some common ground agreed upon, and really difficult conversations may need to be had. It might piss them off, enlighten them (something new to learn), and the reverse is true too.
I’ve found that some successful people who invest have “their winning formula”. It may not be yours at all, or you may want to follow it for a variety of reasons. But a winning formula is deep and complex and will affect everything that you do. Can you build a formulae based on a a hybrid? Maybe. Can you take the best from multiple? Maybe. But then that’s integration an integration issue.
People play a game style because they can often predict the outcome of this move or that. They are formed over long periods of time, but each micro move needs to be put in play at the right time for it to win. Sure there are cross overs in tactics or strategy, but an Accountants view vs a Neurosurgeon or a Record Label owner might create some discord autotune cant fix.
Get to know them intimately. A great Aussie tradition and colloquialism is, “Lets go to the pub for a beer.” These open the kimono frank discussions are THE deciding factor of the future, based on each others values and style. And have a few of these said beers… (maybe on different days though:-)
Otherwise it could be like falling in love with a Vegas Stripper and waking up in your Hotel room with the Elvis celebrant still drunk on your couch… 😉 “Yeah – this will work…!”
You can want the same outcome, but if the financials become rocky investors may start thinking about a new CEO… if they have the board votes. Giving up control for cash is a very high risk strategy for a founder.
Hmm, classical example of: everyone wants something and everyone is afraid of something.
Yes, though I like to think it’s more, “Do not let fear overcome your efforts.” — Gordon B. Hinckley
Well said! I worked with a CEO who always said 10% of something was better than 100% of nothing.
Words I live by. Make it work out so it doesn’t tap out
I was watching the Netflix Vs World story on Amazon recently. In the documentary, it talks about how Reed Hastings initially invested $2M in the company. They were losing millions but growing at a rapid clip. They needed to raise more money. Long story short… Reed now owns 2% (worth Billions) of Netflix. 2% works out well with a $100 Billion + market cap. Not such much for a $100M exit. Personally, I think entrepreneurs should waterfall out the Cap Table to set expectations for the team. That way everyone knows the revenue target for each round of funding. My 2 cents.
I also see this as an opportunity for VCs. Founders have legitimate concerns. Perhaps the founding team can get a BOD seat and/or some sort of dilution protection to alleviate their concerns. I would also ask to speak to another founder or two the VC has invested in just to see what type of people I’m working with. Perhaps that would get more deals across the finish line.
Brian Teague founders have legit concerns but in my experience, that’s almost entirely driven by:
A) crappy mentors
B) bad startup programs
C) business investors claiming to be VCs
That, founders are often horrifically misled. Not necessarily out of mal intent, but ignorance or inexperience with *good* intentions.
No one (few people) have the guts to call out the bad actors
That, for example, THAT is not an accelerator, despite what they call themselves. Or, they shouldn’t be a startup mentor, they’re a business consultant. Or, they’re not an Angel Investor, they own restaurants and have never invested in a startup.
When people don’t clarify what/who people are, Founders take such people at their word. As a result getting bad experiences and bad advice.
Well said. Thanks for sharing!