Giving Up Control
Originally posted on 10/10/19
Collin Gutman is a Co-Founder and Partner at SaaS Ventures, with over a decade of cumulative experience as both an investor and a startup founder. Prior to founding SaaS Ventures, Collin co-founded Acceleprise, the world’s first pure enterprise tech accelerator. Collin also has been an entrepreneur, having founded WorkAmerica, a social impact workforce development startup. Collin holds a BA cum laude from Yale University, and is an avid DC sports fan.
Most entrepreneurs fear giving up control of the business – they’re only willing to sell 49%, so that they can always do what they want.
I get it, it’s your baby, and you want to make sure it doesn’t get put up for adoption.
But generally speaking, this isn’t a principle that is conducive to building a great venture style business. I can’t name a single startup that went from 0 to IPO with the founders still owning a majority of the equity. Generally, you should accept (early on) that at some point, your board will control the majority of the equity in the company.
But, don’t despair. This is a GOOD thing. Generally two things have happened if you’ve sold more than half of the company.
Generally, it means the company has succeeded. The valuation has continued to increase and you’ve continued to grow the overall pie. As one of my mentors once told me “it’s better to own 5% of $1B than 100% of nothing.” So as long as the business is growing and the founders’ stock continues to appreciate in value, the notion of control should be a secondary concern.
Secondly, as you’ve raised money and added investors, you’ve likely built up a board and investor set that has far more experience than you do. Maybe they don’t know your specific business as well as you do, but they’ve seen many businesses come and go, and seen the ups and downs. Generally, good investors will let you run your business regardless of the “control” dynamic, except when they foresee a pitfall from their experience. More often than not, you’ll be grateful they intervene in these situations.
If control really is a major issue for you, and despite everything I’ve said, you absolutely won’t give up control of your company, there’s a way to accomplish that goal as well. There’s a difference between economic shares and voting shares. If you truly have an exceptional business and can generate enough competition among investors to get an investor to agree to these terms (it’s uncommon and it generally lowers your valuation, but it happens), you can have your cake and eat it too. You can sell an economic stake in your company, allowing investors to participate in the financial rewards of your success, while allowing you to maintain control. You can sell “non-voting” shares, or give your shares 5x/10x/etc voting power. In this way, you control the company, but share the economic gains. Again, this is rare, but not unheard of.