6 ms·

Founder Control

302 points by peter123 16y ago

yurylifshits 16y ago
Zynga Founder Mark Pincus - Control Your Board http://www.youtube.com/watch?v=r0lUNFHD-iM http://www.youtube.com/watch?v=r0lUNFHD-iM (from Startup School 2009)
- rexreed 16y ago
  Great video -- but how exactly did the Marks (Pincus and Zuckerberg) manage to retain control of their boards? What are the specific things that need to be done in the negotiation phase that will lead to that outcome?
  - ssclafani 16y ago
    This Venture Hacks article explains how to go about it: http://venturehacks.com/articles/board-structure http://venturehacks.com/articles/board-structure
snewe 16y ago
Perhaps the ycfounders list is a selected sample: it produces or selects above-average quality founders that are more likely to get a good Series A price (in terms of both control and pre$). I suspect that YCombinator's focus on founders for investment decisions also results in start-ups with assets closely tied to the individuals who run things (rather than say a patent). This leaves future VCs with less bargaining power when forming boards.
- jdp23 16y ago
  It's an excellent point that YC founders' experience may not be typical ... a different way of looking at this, though, is that YC and other tech incubators have changed the dynamic to give founders in general a much better shot at keeping control. Which, as a serial entrepreneur, I see as a very good thing.
  - patio11 16y ago
    I think YC is also responsible (with others) for radically improving the information disparity between, e.g., fresh college graduates with a gleam in their eye and partners at firms with 9 figures under management.
- brlewis 16y ago
  Considering that not all YC companies who want VC funding get it, it would be surprising for all of the YC companies that do get it to be above average in whatever metric drives board control. I think this has to be a trend that goes beyond YC.
- pg 16y ago
  While I would like to believe it's because YC-funded startups are better, the fact is that for any startup to raise Series A, the VCs have to believe they're so good they could one day go public. So my guess is that the reason so many YC alumni have been able to retain control is that they are so well connected. They have the other alumni (many of whom are very sophisticated about fundraising) to give them advice, they get hooked up with the best lawyers, etc.
  - snewe 16y ago
    Now that is one area the academic literature on venture capital and entrepreneurship hasn't studied: the social networks of entrepreneurs and bargaining power. Putting that on my list.
  - denisonwright 16y ago
    All these things that YC-funded startups have going for them (screened teams and ideas, network, support, etc) probably create more demand for them from VCs, giving them better leverage than non-YC-funded ones.
- shafqat 16y ago
  Some anecdotal evidence that its not just YC startups. My company, NewsCred, raised a seed round of approx 1M this summer. We raised it from "top tier" super angel funds. We are not YC, and were not even based in the US. We also were not serial entrepreneurs, although I'd like to think that we're "above average founders!" Long story short: we did not give up any board control but did not worry too much about price. We got a fair valuation, but nothing crazy.
GavinB 16y ago
Is this happening because start-ups are getting series A financing later in the life of the company? It used to be that you needed VC just to build and launch a business, but these days the business can be much more real and the founders more proven by the time they're ready for VC. Startups are getting further and further on seed and angel funding due to advancing technology.
uuilly 16y ago
On the flip side, I've seen founders cling too tightly to control. Sometimes the guy that is really good at getting a version 1 out of the garage is not the same guy that is good at calling the shots once it's a 60 person company. Taking the stance that "I want to retain control," is obstinate and egotistical. The proper stance is, "I want to retain control until someone better comes along." That may be never. But it's the right attitude to have. In the end, it's not about who controls what, it's about who's more likely to make all the time and money that's gone into the company worth more.
- brlewis 16y ago
  Is it really possible to get VC funding when all you have is a version 1 out of the garage? I was under the impression that investors wanted to see traction before putting in serious money.
  - gyardley 16y ago
    Yes, it's possible - a serial entrepreneur with a good track record can often raise money on an idea. For us mere mortals, it can be done if you're raising a small amount of money and you're in an exciting space.
  - uuilly 16y ago
    It is, but it's less likely. I should have phrased that better. What I meant by out "of the garage" was the end of the really dynamic period of the company. You can be physically out of the garage with an angel investment but still be constantly changing your mind on macro decisions. By the time you're at a series A, you're generally more certain of your direction. From what I've seen, the person who is good at the really dynamic thinking part is not necessarily good at the focus and execute part and vice versa. Being a CEO of a larger company can actually be really boring for a dynamic, hyper-inventive type. I used to fancy myself as a technical CEO until I got a better understanding of the role. A great CEO is priceless and a great inventor is priceless. If it's the same person, then great. But there is no need to force it if it's not.
- webwright 16y ago
iamwil 16y ago
"VCs will still be able to convince; they just won't be able to compel. And the startups where they have to resort of compulsion are not the ones that matter anyway. " I excepted some sort of footnote for this one. It's not immediately obvious to me this is true. Hypothetically, the founders are the ones that know their business the best, and hence tend to have a longer term vision. Given that the founder executes on the long term vision, those are the companies that matter. Is that the line of thinking?
- shimon 16y ago
  If an investor disagrees with a founder so much that they are willing to take actions that force that founder to act against his/her own will, then things must be in pretty bad shape. When a company is doing great, nobody picks fights with its leaders. On the other hand, there may be cases where a generally positive opportunity, such as a possible sale, is valued very differently by a founder and VCs. I'm not sure how common these cases are, or whether there are existing rules about the board's obligations to shareholders that reduce the likelihood of conflict.
kapitti 16y ago
Isn't a dozen a small percentage of total YC companies?
- pg 16y ago
  It's a large percentage of those who've done series A rounds though. Around half. And practically all the pre series A companies still have board control, because most startups do at that stage.
  - jedc 16y ago
    Two dozen is only about 10% of the 208 YC startups to date. I'm surprised that that few have done a Series A. I would have thought it would be a much higher percentage.
tptacek 16y ago
10 years ago, we had a "2 VC, 2 founders, tiebreaker CEO" board structure that I think was probably more common than simply "conceding the board to the VC". (I'm aware of the pitfalls in that structure, too). My sense of it --- and someone with more recent experience please correct me if I'm wrong --- is that the shareholders agreements matter as much as the board structure does. Point being, you wouldn't want to see "founder control" becoming cosmetic, a fig leaf around the real power the VCs wield.
gcheong 16y ago
Minor typo: resort of compulsion --> resort to compulsion
- pg 16y ago
  thanks; fixed
gms 16y ago
This essay makes VC's seem like a necessary evil that founders have to tolerate through gritted teeth, as opposed to something more benevolent like, say, YC. Do I have the wrong impression?
- pg 16y ago
  A lot of VCs are good guys. The difference between us is largely that we're in different situations. VCs invest 100x as much as us. Larger amounts of money will inevitably have more constraints attached.
fleaflicker 16y ago
In a dozen companies we've funded, the founders still had a majority of the board seats after the series A round. Out of how many series As total?
- fleaflicker 16y ago
  Answered here, he says "around half": http://news.ycombinator.com/item?id=1976417 http://news.ycombinator.com/item?id=1976417
grellas 16y ago
A few observations: 1. I would say that, even as of 5 years ago, it was rare for a startup to go through a Series A VC round without the VCs taking at least shared control. 2. Founders of reasonably strong startups can usually do angel rounds, also denominated Series A, without giving up board control and have been able to do so for some years now. These rounds used to be for smaller dollar amounts, often capped at $500K or so, but this has changed today in an era where founders can often turn to angels and superangels for larger fundings. VCs want to stay competitive with the angels at this early stage because, if they lose out at that level, they find themselves sitting on the sidelines as their deal-flow shrinks and they lose out on potentially strong investments made at an optimum stage in promising ventures. To stay competitive, therefore, the VCs must perforce bend a little on their traditional terms, including their former obsession with gaining board control right out the gate. 3. Founders themselves are far more savvy today, on average, than was the case a decade ago. In the bygone days, only a relatively few serial entrepreneurs had the sophistication to sit on a reputable board and still add value to it as founders. Today, the average founder is far better versed on what it takes to drive a company than was the case before. Thus, it is easier for VCs (and other investors) to accept the idea of a "founder-driven company" than it used to be. (Over the years, I have seen all too many "control-freak" founders and other variations that could only be labeled an embarrassment to sound management; based on this, I can understand the historic VC attitude, though of course this all must be counter-balanced by the many ills that the VCs themselves brought to the process when they would sometimes abuse the founders in whose startups they invested.) 4. Founders today have far more control over timing on when to do their Series A rounds. The cost of launching is far reduced today and the options for deferring larger rounds are greater, as for example by taking bridge funding from angels or F&F to allow the company to build value and minimize dilution before it goes for larger forms of funding. When all these factors are combined, it seems clear from the trenches that a profound change is occurring by which founders have more control than ever before over their ventures. Of course, having this validated by someone such as PG, who is at the heart of this activity in Silicon Valley, goes a long way to letting the VCs themselves see it as respectable to accept as a fait accompli as they move forward.
- dkasper 16y ago
  > "3. Founders themselves are far more savvy today, on average, than was the case a decade ago." I've heard this a bunch of times. Why is this the case? Is it the information available to founders, the quality of people choosing to do startups, or something else?
nlavezzo 16y ago
I think one of the main factors pushing the trend in the direction of more founders retaining control is the increased availability of angel money. If it came down to my cofounders and I having to give up control to raise a Series A (or any series for that matter) I'm sure we'd turn to Angel List to raise a similar amount from well connected and useful investors, without having to give up control - if that were a viable option. Increasingly it seems like raising a large angel round is an option, which is great for entrepreneurs.
samd 16y ago
The switch to the new norm may be surprisingly fast, because the startups that can retain control tend to be the best ones. They're the ones that set the trends, both for other startups and for VCs. Are they the best ones because they can retain control or can they retain control because they are the best ones?
jaekwon 16y ago
2 Questions: Are there cases where a non-CEO founder controls the board? What are the mechanics whereby the minority stake founder(s) control the board? Some sort of skewed voting system? If so, what sort of legal entities allow this structure?
- faramarz 16y ago
  Yes, there is precedent. I mentioned Frank Stronach in the comments, See http://news.ycombinator.com/item?id=1976711 http://news.ycombinator.com/item?id=1976711 I'm not sure if this is universal, but Stronach (a non-executive chairman of Magna Int.) had control over the board because of his Class B share structure. Every 1 of his B share converted to 100 Common Stock (and he had over 700 Class B shares, before he decided to give up control and convert) That's quite remarkable, considering Magna is a publicly traded company.
chrisduesing 16y ago
Can someone explain the power dynamics of a board, vs that of the shareholders? I always assumed that retaining a majority of shares between the founders would keep them in control of the company, but is it the case that the board has more actual power. For instance; 2 founders hold 60% of the shares of their company collectively after a Series A. The investors hold 40% (lets ignore option pools etc). Now if each side had 2 board seats (plus a 5th seat held by a brought in CEO), does that mean the founders can in fact be outvoted?
- 3pt14159 16y ago
  Yup. Shareholdership only matters in so much as your shareholders agreement dictates that it does. I could have 1 share of your company and control a hundred board seats, it doesn't matter. There are some things in law that make ownership of a certain % of shares important, but really its all about the shareholders agreement.
matt1 16y ago
As I'm reading this article and nodding my head, I realized that I don't understand what controlling a board actually means. It sounds like its written in the term sheet somewhere--what does that look like? Joe Startup will maintain control of the board...? Would it be correct for a founder to say "I have control of the board so..." or is it more of a perceived power as a result of other negotiated terms?
- drusenko 16y ago
  Usually, important decisions in a company require a majority vote of the board of directors to approve them. Control of the board is then defined as a majority voting ability for an individual or aligned group of individuals. For example, 2 founders with equal equity stake will usually have the same incentives. Therefore, a board that has 2 founders and 1 investor is "founder controlled". Between being completely founder controlled and completely investor controlled, there is a "split board". That means equal number of founders to investors, and one mutually agreed upon independent party that could technically vote either way -- often times a person previously very successful in business with insight into the startup's market. In practice, a split board usually means investor-controlled, for a couple reasons: - The independent board member is usually suggested by the investor - The independent board member usually has a stronger incentive to side with a powerful investor
faramarz 16y ago
I wish PG would go into the details of structuring a board control. Perhaps that's an essay for a another day. Some context: Founder of Magna International, Frank Stronach, who started his business some 30 years ago made a lot headlines this past summer due to the sale of his "special" founder-class shares. I found it remarkable that even though the company is public, he still had majority interest over the board due to his share structure. EDIT: Every 1 of his B shares converted to 100 Common Stock (and he had over 700 Class B shares, before he decided to give up control and convert) Wikipidia explains: Stronach, who is currently the non-executive chairman of Magna International, holds multiple-voting shares of the company, which gives him majority voting power over issues brought to shareholder vote. Although he controls the voting power among Magna's shareholders, Stronach owns only 4% of Magna's equity.
Scott_MacGregor 16y ago
With an equal number of founder elected Directors and VC elected Directors, if your outside tiebreaker director is brought in by the VC's you will be in danger of losing control because you cannot control the situation. Especially if the tie breaker is planning on doing some additional business with the VC in the future, you may not have a truly neutral person casting the vote. So, how is founder control typically structured? For instance, do founder Stockholders get 2 votes per share to elect Directors with, and VC's get 1 vote per share with a guaranteed VC director seat on the board? Or are Directors elected by founders getting 2 votes on a particular decision item A and 1 vote on decision item B, and VC Directors get 1 vote on A and B? Does anyone know what is currently going on with this?
pama 16y ago
"Founders retaining control after a series A is clearly heard-of. And barring financial catastrophe, I think in the coming year it will become the norm." Would a financial catastrophe simply stop new series A rounds, or would it rather change their terms? Are there any examples of changes related to the adventures in 2007--2008?
lkozma 16y ago
I wish PG would write more about painting and hacking and education and lisp and history and psychology and philosophy and literature and politics and a bit less about investments. Seriously, quite a dry topic..
- jswinghammer 16y ago
  I like reading smart things on any subject. Not sure why this stuff is dry considering what's at stake for the people involved.
- ShardPhoenix 16y ago
  I find these investment posts interesting, but I do miss pg covering those other topics as well.
- pg 16y ago
  So do I. But you have to write about what you're thinking about, and this is what I end up thinking about lately.
  - deleted 16y ago
    [deleted]
EGreg 16y ago
I definitely would like to control my own company. That said, my philosophy is simple: Your first company should SUCCEED. You should be prepare to give up control, equity, etc. as long as it succeeds. That gives you a track record AND money. Think about it. If you had $10 million dollars 2 years from now, and a 5% stake in your first venture, contacts lots of happy people and a reputation for succeeding with your first venture, don't you think you could own the shit out of your next company? Like 100% ownership in pretty much anything you want, with $5 million of your own money in it. You could try 30 different ideas or set up a nice lab. Wanting to own your first venture is kind of like saying this will be your only idea, ever. It might sound unproductive, but my advice to fellow entrepreneurs would be: listen to what investors want, and then give it to them. Put together a great team. Find VC firms who like to invest in your kind of thing. Develop just enough to get them interested. Set up appointments. Get funded. Exit with $10m or more in the bank. Do your own thing. Your first business can be all about the $$ exit. It seems I myself am going a different route, though.
JVerstry 16y ago
Good insight information, thanks !

302 points by peter123 16y ago

Zynga Founder Mark Pincus - Control Your Board http://www.youtube.com/watch?v=r0lUNFHD-iM http://www.youtube.com/watch?v=r0lUNFHD-iM (from Startup School 2009)

rexreed 16y ago
Great video -- but how exactly did the Marks (Pincus and Zuckerberg) manage to retain control of their boards? What are the specific things that need to be done in the negotiation phase that will lead to that outcome?
- ssclafani 16y ago
  This Venture Hacks article explains how to go about it: http://venturehacks.com/articles/board-structure http://venturehacks.com/articles/board-structure

snewe 16y ago

Perhaps the ycfounders list is a selected sample: it produces or selects above-average quality founders that are more likely to get a good Series A price (in terms of both control and pre$). I suspect that YCombinator's focus on founders for investment decisions also results in start-ups with assets closely tied to the individuals who run things (rather than say a patent). This leaves future VCs with less bargaining power when forming boards.

jdp23 16y ago
It's an excellent point that YC founders' experience may not be typical ... a different way of looking at this, though, is that YC and other tech incubators have changed the dynamic to give founders in general a much better shot at keeping control. Which, as a serial entrepreneur, I see as a very good thing.
- patio11 16y ago
  I think YC is also responsible (with others) for radically improving the information disparity between, e.g., fresh college graduates with a gleam in their eye and partners at firms with 9 figures under management.
brlewis 16y ago
Considering that not all YC companies who want VC funding get it, it would be surprising for all of the YC companies that do get it to be above average in whatever metric drives board control. I think this has to be a trend that goes beyond YC.
pg 16y ago
While I would like to believe it's because YC-funded startups are better, the fact is that for any startup to raise Series A, the VCs have to believe they're so good they could one day go public. So my guess is that the reason so many YC alumni have been able to retain control is that they are so well connected. They have the other alumni (many of whom are very sophisticated about fundraising) to give them advice, they get hooked up with the best lawyers, etc.
- snewe 16y ago
  Now that is one area the academic literature on venture capital and entrepreneurship hasn't studied: the social networks of entrepreneurs and bargaining power. Putting that on my list.
- denisonwright 16y ago
  All these things that YC-funded startups have going for them (screened teams and ideas, network, support, etc) probably create more demand for them from VCs, giving them better leverage than non-YC-funded ones.
shafqat 16y ago
Some anecdotal evidence that its not just YC startups. My company, NewsCred, raised a seed round of approx 1M this summer. We raised it from "top tier" super angel funds. We are not YC, and were not even based in the US. We also were not serial entrepreneurs, although I'd like to think that we're "above average founders!" Long story short: we did not give up any board control but did not worry too much about price. We got a fair valuation, but nothing crazy.

GavinB 16y ago

Is this happening because start-ups are getting series A financing later in the life of the company? It used to be that you needed VC just to build and launch a business, but these days the business can be much more real and the founders more proven by the time they're ready for VC. Startups are getting further and further on seed and angel funding due to advancing technology.

uuilly 16y ago

On the flip side, I've seen founders cling too tightly to control. Sometimes the guy that is really good at getting a version 1 out of the garage is not the same guy that is good at calling the shots once it's a 60 person company. Taking the stance that "I want to retain control," is obstinate and egotistical. The proper stance is, "I want to retain control until someone better comes along." That may be never. But it's the right attitude to have. In the end, it's not about who controls what, it's about who's more likely to make all the time and money that's gone into the company worth more.

brlewis 16y ago
Is it really possible to get VC funding when all you have is a version 1 out of the garage? I was under the impression that investors wanted to see traction before putting in serious money.
- gyardley 16y ago
  Yes, it's possible - a serial entrepreneur with a good track record can often raise money on an idea. For us mere mortals, it can be done if you're raising a small amount of money and you're in an exciting space.
- uuilly 16y ago
  It is, but it's less likely. I should have phrased that better. What I meant by out "of the garage" was the end of the really dynamic period of the company. You can be physically out of the garage with an angel investment but still be constantly changing your mind on macro decisions. By the time you're at a series A, you're generally more certain of your direction. From what I've seen, the person who is good at the really dynamic thinking part is not necessarily good at the focus and execute part and vice versa. Being a CEO of a larger company can actually be really boring for a dynamic, hyper-inventive type. I used to fancy myself as a technical CEO until I got a better understanding of the role. A great CEO is priceless and a great inventor is priceless. If it's the same person, then great. But there is no need to force it if it's not.
webwright 16y ago

iamwil 16y ago

"VCs will still be able to convince; they just won't be able to compel. And the startups where they have to resort of compulsion are not the ones that matter anyway. " I excepted some sort of footnote for this one. It's not immediately obvious to me this is true. Hypothetically, the founders are the ones that know their business the best, and hence tend to have a longer term vision. Given that the founder executes on the long term vision, those are the companies that matter. Is that the line of thinking?

shimon 16y ago
If an investor disagrees with a founder so much that they are willing to take actions that force that founder to act against his/her own will, then things must be in pretty bad shape. When a company is doing great, nobody picks fights with its leaders. On the other hand, there may be cases where a generally positive opportunity, such as a possible sale, is valued very differently by a founder and VCs. I'm not sure how common these cases are, or whether there are existing rules about the board's obligations to shareholders that reduce the likelihood of conflict.

kapitti 16y ago

Isn't a dozen a small percentage of total YC companies?

pg 16y ago
It's a large percentage of those who've done series A rounds though. Around half. And practically all the pre series A companies still have board control, because most startups do at that stage.
- jedc 16y ago
  Two dozen is only about 10% of the 208 YC startups to date. I'm surprised that that few have done a Series A. I would have thought it would be a much higher percentage.

tptacek 16y ago

10 years ago, we had a "2 VC, 2 founders, tiebreaker CEO" board structure that I think was probably more common than simply "conceding the board to the VC". (I'm aware of the pitfalls in that structure, too). My sense of it --- and someone with more recent experience please correct me if I'm wrong --- is that the shareholders agreements matter as much as the board structure does. Point being, you wouldn't want to see "founder control" becoming cosmetic, a fig leaf around the real power the VCs wield.

gcheong 16y ago

Minor typo: resort of compulsion --> resort to compulsion

pg 16y ago
thanks; fixed

gms 16y ago

This essay makes VC's seem like a necessary evil that founders have to tolerate through gritted teeth, as opposed to something more benevolent like, say, YC. Do I have the wrong impression?

pg 16y ago
A lot of VCs are good guys. The difference between us is largely that we're in different situations. VCs invest 100x as much as us. Larger amounts of money will inevitably have more constraints attached.

fleaflicker 16y ago

In a dozen companies we've funded, the founders still had a majority of the board seats after the series A round. Out of how many series As total?

fleaflicker 16y ago
Answered here, he says "around half": http://news.ycombinator.com/item?id=1976417 http://news.ycombinator.com/item?id=1976417

grellas 16y ago

A few observations: 1. I would say that, even as of 5 years ago, it was rare for a startup to go through a Series A VC round without the VCs taking at least shared control. 2. Founders of reasonably strong startups can usually do angel rounds, also denominated Series A, without giving up board control and have been able to do so for some years now. These rounds used to be for smaller dollar amounts, often capped at $500K or so, but this has changed today in an era where founders can often turn to angels and superangels for larger fundings. VCs want to stay competitive with the angels at this early stage because, if they lose out at that level, they find themselves sitting on the sidelines as their deal-flow shrinks and they lose out on potentially strong investments made at an optimum stage in promising ventures. To stay competitive, therefore, the VCs must perforce bend a little on their traditional terms, including their former obsession with gaining board control right out the gate. 3. Founders themselves are far more savvy today, on average, than was the case a decade ago. In the bygone days, only a relatively few serial entrepreneurs had the sophistication to sit on a reputable board and still add value to it as founders. Today, the average founder is far better versed on what it takes to drive a company than was the case before. Thus, it is easier for VCs (and other investors) to accept the idea of a "founder-driven company" than it used to be. (Over the years, I have seen all too many "control-freak" founders and other variations that could only be labeled an embarrassment to sound management; based on this, I can understand the historic VC attitude, though of course this all must be counter-balanced by the many ills that the VCs themselves brought to the process when they would sometimes abuse the founders in whose startups they invested.) 4. Founders today have far more control over timing on when to do their Series A rounds. The cost of launching is far reduced today and the options for deferring larger rounds are greater, as for example by taking bridge funding from angels or F&F to allow the company to build value and minimize dilution before it goes for larger forms of funding. When all these factors are combined, it seems clear from the trenches that a profound change is occurring by which founders have more control than ever before over their ventures. Of course, having this validated by someone such as PG, who is at the heart of this activity in Silicon Valley, goes a long way to letting the VCs themselves see it as respectable to accept as a fait accompli as they move forward.

dkasper 16y ago
> "3. Founders themselves are far more savvy today, on average, than was the case a decade ago." I've heard this a bunch of times. Why is this the case? Is it the information available to founders, the quality of people choosing to do startups, or something else?

nlavezzo 16y ago

I think one of the main factors pushing the trend in the direction of more founders retaining control is the increased availability of angel money. If it came down to my cofounders and I having to give up control to raise a Series A (or any series for that matter) I'm sure we'd turn to Angel List to raise a similar amount from well connected and useful investors, without having to give up control - if that were a viable option. Increasingly it seems like raising a large angel round is an option, which is great for entrepreneurs.

samd 16y ago

The switch to the new norm may be surprisingly fast, because the startups that can retain control tend to be the best ones. They're the ones that set the trends, both for other startups and for VCs. Are they the best ones because they can retain control or can they retain control because they are the best ones?

jaekwon 16y ago

2 Questions: Are there cases where a non-CEO founder controls the board? What are the mechanics whereby the minority stake founder(s) control the board? Some sort of skewed voting system? If so, what sort of legal entities allow this structure?

faramarz 16y ago
Yes, there is precedent. I mentioned Frank Stronach in the comments, See http://news.ycombinator.com/item?id=1976711 http://news.ycombinator.com/item?id=1976711 I'm not sure if this is universal, but Stronach (a non-executive chairman of Magna Int.) had control over the board because of his Class B share structure. Every 1 of his B share converted to 100 Common Stock (and he had over 700 Class B shares, before he decided to give up control and convert) That's quite remarkable, considering Magna is a publicly traded company.

chrisduesing 16y ago

Can someone explain the power dynamics of a board, vs that of the shareholders? I always assumed that retaining a majority of shares between the founders would keep them in control of the company, but is it the case that the board has more actual power. For instance; 2 founders hold 60% of the shares of their company collectively after a Series A. The investors hold 40% (lets ignore option pools etc). Now if each side had 2 board seats (plus a 5th seat held by a brought in CEO), does that mean the founders can in fact be outvoted?

3pt14159 16y ago
Yup. Shareholdership only matters in so much as your shareholders agreement dictates that it does. I could have 1 share of your company and control a hundred board seats, it doesn't matter. There are some things in law that make ownership of a certain % of shares important, but really its all about the shareholders agreement.

matt1 16y ago

As I'm reading this article and nodding my head, I realized that I don't understand what controlling a board actually means. It sounds like its written in the term sheet somewhere--what does that look like? Joe Startup will maintain control of the board...? Would it be correct for a founder to say "I have control of the board so..." or is it more of a perceived power as a result of other negotiated terms?

drusenko 16y ago
Usually, important decisions in a company require a majority vote of the board of directors to approve them. Control of the board is then defined as a majority voting ability for an individual or aligned group of individuals. For example, 2 founders with equal equity stake will usually have the same incentives. Therefore, a board that has 2 founders and 1 investor is "founder controlled". Between being completely founder controlled and completely investor controlled, there is a "split board". That means equal number of founders to investors, and one mutually agreed upon independent party that could technically vote either way -- often times a person previously very successful in business with insight into the startup's market. In practice, a split board usually means investor-controlled, for a couple reasons: - The independent board member is usually suggested by the investor - The independent board member usually has a stronger incentive to side with a powerful investor

faramarz 16y ago

I wish PG would go into the details of structuring a board control. Perhaps that's an essay for a another day. Some context: Founder of Magna International, Frank Stronach, who started his business some 30 years ago made a lot headlines this past summer due to the sale of his "special" founder-class shares. I found it remarkable that even though the company is public, he still had majority interest over the board due to his share structure. EDIT: Every 1 of his B shares converted to 100 Common Stock (and he had over 700 Class B shares, before he decided to give up control and convert) Wikipidia explains: Stronach, who is currently the non-executive chairman of Magna International, holds multiple-voting shares of the company, which gives him majority voting power over issues brought to shareholder vote. Although he controls the voting power among Magna's shareholders, Stronach owns only 4% of Magna's equity.

Scott_MacGregor 16y ago

With an equal number of founder elected Directors and VC elected Directors, if your outside tiebreaker director is brought in by the VC's you will be in danger of losing control because you cannot control the situation. Especially if the tie breaker is planning on doing some additional business with the VC in the future, you may not have a truly neutral person casting the vote. So, how is founder control typically structured? For instance, do founder Stockholders get 2 votes per share to elect Directors with, and VC's get 1 vote per share with a guaranteed VC director seat on the board? Or are Directors elected by founders getting 2 votes on a particular decision item A and 1 vote on decision item B, and VC Directors get 1 vote on A and B? Does anyone know what is currently going on with this?

pama 16y ago

"Founders retaining control after a series A is clearly heard-of. And barring financial catastrophe, I think in the coming year it will become the norm." Would a financial catastrophe simply stop new series A rounds, or would it rather change their terms? Are there any examples of changes related to the adventures in 2007--2008?

lkozma 16y ago

I wish PG would write more about painting and hacking and education and lisp and history and psychology and philosophy and literature and politics and a bit less about investments. Seriously, quite a dry topic..

jswinghammer 16y ago
I like reading smart things on any subject. Not sure why this stuff is dry considering what's at stake for the people involved.
ShardPhoenix 16y ago
I find these investment posts interesting, but I do miss pg covering those other topics as well.
pg 16y ago
So do I. But you have to write about what you're thinking about, and this is what I end up thinking about lately.
- deleted 16y ago
  [deleted]

EGreg 16y ago

I definitely would like to control my own company. That said, my philosophy is simple: Your first company should SUCCEED. You should be prepare to give up control, equity, etc. as long as it succeeds. That gives you a track record AND money. Think about it. If you had $10 million dollars 2 years from now, and a 5% stake in your first venture, contacts lots of happy people and a reputation for succeeding with your first venture, don't you think you could own the shit out of your next company? Like 100% ownership in pretty much anything you want, with $5 million of your own money in it. You could try 30 different ideas or set up a nice lab. Wanting to own your first venture is kind of like saying this will be your only idea, ever. It might sound unproductive, but my advice to fellow entrepreneurs would be: listen to what investors want, and then give it to them. Put together a great team. Find VC firms who like to invest in your kind of thing. Develop just enough to get them interested. Set up appointments. Get funded. Exit with $10m or more in the bank. Do your own thing. Your first business can be all about the $$ exit. It seems I myself am going a different route, though.

JVerstry 16y ago

Good insight information, thanks !