We Rarely "Control" Our Startups

Keeping control of a startup has nothing to do with owning the majority of it.

You can own 90% of your startup and still have to answer to someone else.

We hear this all of the time from Founders when raising money "I want to make sure I don't dilute too much of my company to investors because I want to maintain control of it."

Ah, the illusion of control.

In our minds, it means that we have enough ownership interest that no one can tell us what to do. We believe we can raise capital and take on outside investors without also having to be driven by them.

As it turns out, we can lose control of our startups in a lot of ways that have nothing to do with owning a majority share.

What is Control, Really?

Let's first define what controlling a company really means. The broadest definition of course is "I can do whatever I want, and no one can tell me otherwise!" But what we really mean is "There are certain aspects of this business that I want to run my way without something else stopping me."

So when we talk about control, we really have to be hyper-specific about what we want to control.

That might mean the company's strategic direction, its growth rate, or simply who we hire. All of those controls have different controls and rights when we take on investors. There are very few instances where someone can be a minority equity shareholder, and we can do whatever we want. There are fundamental protections against this behavior called fiduciary rights, which prevent us from harming others.

The point is that the moment more than one person owns a company, what any one person can absolutely control changes dramatically.

How Control Actually Works

Control in a startup, especially with investors, but even with co-founders, usually has little to do with the amount of stock we own and more to do with what we call "Voting Rights."

Within our Operating Agreement, which is essentially the user manual for the company, there are a bunch of provisions that state how major decisions will be made, whether it's selling the company or hiring an employee over a certain salary amount. Once investors come on board, this is where they exert control — regardless of how much equity they have.

Investors will create a Board that typically has 5 or 7 members. This Board will vote on key control points. Often, that could be our ability to hire someone over a certain dollar amount. But it will most definitely include things like whether we can sell the company without their vote, or whether we can be fired by them. Yes, that happens.

So control isn't about ownership, it's about votes. When we take on a Board, our

Supreme Leader of the Universe status goes to zero.

The Golden Rule

Then, of course, there's the "Golden Rule" when it comes to investors: "She with the gold rules."

While we may have done an incredible job protecting our equity, that equity is useless if we don't have the cash to operate the company. Nothing reminds a Founder of how little control they have in a company until they run out of money.

When we're profitable, we actually have a fair bit of control over how we operate. But when we're out of money, the only person whose vote matters is whoever can cover payroll. So even in cases where we may have protected our equity as well as our voting rights, the investors can still hold all the cards.

Also, this happens a lot, so... there's a reason it's a golden rule.

Protect What Matters

That doesn't mean trying to protect our rights and direction of the company is in vain. It simply means that we don't have quite the iron grip on control of our startup like we think we do.

What we have to focus on are the rights that are most important to us. For example, if we want full hiring authority or final say if the company is sold, we can negotiate that into our Operating Agreement.

But we have to know ahead of time exactly what rights matter to us so we're not boxing out the prospect of bringing on investors or co-Founders just because "they might impact a decision someday."

Control isn't a factor of hogging equity; it's a factor of successful negotiations every single time we give away a single share to align with our goals. It ain't easy, and it ain't pretty, but it's sure as hell worth fighting for.

In Case You Missed It

If We Want Power, Create Power A lot of us are used to hearing people telling us what we should and shouldn't do, what we can and cannot achieve, just because these people have tried it or have been in a similar situation. What they don't realize though, is that what works for them may not work for you, and vice versa.

Growth Isn’t Always Good In many cases, our focus on growth runs counter to what our goals really should be: becoming a better startup — not just a bigger one.

Startup Culture is a Reflection of the Founder Everything you do has implications and if you let instigators of negativity be, you're allowing a nasty culture to spread.