Why You Don’t Have To Worry About Owning Less Than 50% Of Your Startup
“I have a dilemma,” “Oscar”, the CEO of a startup that I’m working with said to me Friday.
“Right now, my percentage ownership is around 70% of the company. I’d like to take some money off the table, so my family is financially set.
“The problem is that I will likely drop below 50% ownership if I sell right now. Then, I’ll lose control of the company.”
“Why are you smiling?” Oscar asked me.
“I’m smiling because you’re in a great place. Let me get this straight. You want to sell some stock now, so you’ll never have to worry about money again.
“But the problem is that you’re worried that you could be booted out as CEO. Do I have this right?”
“Yeah. That’s exactly my problem. I’m really torn about what to do.”
You don’t have to worry about losing control if you sell shares of your company.
The reality is you never really had control of your company. I know, you had the majority ownership, and you’d win any vote to keep yourself CEO.
However, that’s a false belief because your belief that you had control was only in your mind. The reality is that you lost control of your company the second you took money from investors.
Your investors, not you, always control your company regardless of your percentage ownership or voting rights.
Just ask yourself this simple question: How are you going to continue financing your company (if you’re losing money) without your investors support?
So, if your investor want you to quit, and you need money to keep your company alive, then you’re going to have quit as CEO.
All you need to know is one word: Uber.
Uber. The most valuable startup ever. But Uber is a money-losing startup, and the only way for Uber to keep going was with an injection of money.
Uber’s CEO, Travis Kalanick, had control of the votes. He literally couldn’t be voted out. My goodness, if that wasn’t enough, look at the tremendous value he had created for his investors.
Travis should be safe regardless of what he did. Right?
You know what happened to Travis. His management style was so problematic that his investors gave him a choice: The only way the investors will give Uber more money is if you resign.
You need to execute (and not be a jerk) to keep being CEO.
Fortunately, Oscar is no Travis. Oscar is a super nice person, and his company is executing really well.
In other words, Oscar has nothing to worry about. So, in my mind, the decision was an easy one for him.
I said, “If I was in your shoes, I’d sell the shares and put yourself and your family in a great position. You’ll still have plenty of stock for upside.
I reminded him about Travis and what happened to him. Then I said, “The good news is you’re doing really well, and you’re not a jerk.
“You’ll be fine as long as you keep executing and your investors don’t do something stupid.’
You need to do what’s right for you and your family.
Every situation is different. And your situation might be completely different than Oscar’s situation.
Just bear in mind that there are plenty of stories (especially here in the Silicon Valley) of people who were worth millions on paper and then lost it all.
For more, read: Five Reasons Why You Should Avoid Raising Venture Capital