How Do You Keep From Losing Control Of Your Company When You Raise Your Next Round Of Funding?
There is this false belief that the way to keep control of your company as an entrepreneur is by owning a majority of the stock or creating special classes of stock so you control the voting rights. The concept is pretty is simple: You control the votes, so you can’t be voted out of being CEO.
I think the Uber story debunks the myth that controlling the voting rights will keep you in control.
Travis Kalanick, Uber’s CEO, created a dual share class structure that effectively gave him control of the voting rights for the company. Yet the investors still were able to fire him.
Here was this Uber-successful company that one of its investors thought could be worth over $100B due in large part the CEO’s vision and drive, and the CEO was fired.
The particulars of what Travis did or didn’t do aren’t really important. What is important is understanding that nothing will protect you if screw up.
If you take venture funding, you need to understand that your investors (rightfully) will do whatever they need to do to protect their investment. Period.
Nothing you will protect you if screw up. Nothing.
The remedy to keeping yourself CEO is simple: Don’t screw up.
Here’s some things you need to keep in mind:
A. Your investors do not want to replace you.
Most venture investments are not successful. And investors have to spend an inordinate amount of time trying to save failing companies.
That’s why, contrary to popular belief, your investors want you to do great. They want you knock it out of the park. The last thing in the world they want is to have to deal with another problem company with a problem CEO.
B. Your company culture really does matter.
Creating the right type of culture is actually the most likely indicator of success. And it turns out a commitment culture where your team never wants to leave is the by far the most successful for startups (read: Why Your Startup Culture Is The Key To Your Company’s Success).
More importantly don’t create a culture that is sexist, xenophobic, homophobic or in any way isn’t respectful of others. Diversity is a virtue, not a curse. You will not attract the best and the brightest if you do not respect others.
C. You should focus on execution.
You are likely to stay CEO if you execute your plan. Too many entrepreneurs believe that being CEO means they are the king.
Not really. Because you will not stay king very long unless you execute to your plan. Remember your investors are expecting a return on their investment.
D. Your next round of funding is never guaranteed.
One of the classic lines you will hear investors say is, “Don’t worry about the next round of funding, we will support you.” And they’re right they will support you, but there is something they’re not saying, and that is…
“Until we decide not to support you any more.”
In other words, things change. And the investing climate can change too. Don’t assume there is a bottomless pit of money that will come. The money will eventually dry up unless you get to cash-flow positive.
There are some investors unfortunately that have a Ponzi-scheme type approach (read: Why You Should Ignore The Rise Of The Unicorns) to investing where they believe there will always be another investor willing to value the company at a higher valuation as long as you grow the top line.
Uber, despite its incredible top line growth, was wickedly unprofitable. The only way to feed the beast was through more and more investment.
Eventually every company has to turn a profit and start making money. You need to have a plan to get cash flow positive.
E. You shouldn’t be so obsessed with crazy ways of keeping control of your company.
If anything, trying to keep control of your company through voting rights will make it harder, not easier to raise money. Remember that because it’s unbelievably difficult to raise money.
And, even if you are successful getting 10:1 voting rights in your favor like Travis did, it will be like a speed bump for investors if they want to fire you. He who controls the money controls you because they have the power.