The founder of a brand new startup begins their endeavour with a clear vision for their company in their head. The ones that are smart will create an action plan as to how they will transform their innovative idea to a billion-dollar enterprise. Or should that even be the goal?
After all, not every entrepreneur runs a business purely to make a profit. Whatever the reason, it is vital for entrepreneurs to establish their WHY right from the get-go. Generally speaking, the WHY can be simplified into two things:
- The desire to become wealthy. 💰
- The drive to create and lead an organization. 📋
A prime example of an entrepreneur benefiting from establishing their WHY early on is Pierre Omidyar, founder of eBay. As eBay started gaining significant momentum in 1998, Omidyar was willing to give up his role as CEO of the company. He trusted his investors and did what he knew was best to help grow the business; he allowed for Meg Whitman, a revered business executive, to step in as the new leader of the company.
His decision paid off dramatically. Whitman joined eBay in March 1998, when it had 30 employees and revenues of approximately $4 million. During her time as CEO, the company grew to approximately 15,000 employees and $8 billion in annual revenue by 2008. And now Pierre Omidyar has a total net worth of $12.4 billion.
In the beginning, it’s common for founders to refer to their business as “my baby” and using similar parenting language without even noticing. For entrepreneurs running their business is a true labour of love and that is evident in the relatively low salaries founders pay themselves.
So when founders begin to seek funding, they are signing up to pay a heavy price: They often have to give up total control over the enterprise. Angel investors may allow entrepreneurs to preserve control to a greater degree than venture capital firms do, but in both cases, outside directors will join the company’s board.
Once the founder is no longer in control of the board, his or her job as CEO is at risk. The board’s task is straightforward: if the founder underperforms as CEO, find a new one. Although even when founders are struggling, boards can have a hard time persuading them to put their child up for adoption.
As the company grows founders have to start making more difficult decisions. They have to raise resources in order to capitalize on the opportunities before them. If they choose the right investors, their financial gains will soar. According to a report by Harvard Business Review, founders who give up more equity to attract investors build a more valuable company than founders who part with less — and end up with a more valuable slice, too.
In most cases, the reason investors bet on a startup is that they believe in the founder’s vision for the product/service they are pitching, not the founder’s ability to manage and scale the company to a billion-dollar exit. It’s very rare to find investors that are willing to give founders the control that they want to run their company.
The internet boom of the 1990s and early 2000s produced thousands of ambition startups across the US, primarily in Silicon Valley. According to the same report by Harvard Business Review, most founders of the internet boom surrendered management control long before their companies went public. By the time the ventures were three years old, 50% of founders were no longer CEO; in year four, only 40% were still in the corner office; and fewer than 25% led their companies by the time of an IPO. This example shows that, more often than not, founders end up with less control of the companies they created.
Then there are the exceptions to the rule. We’re talking about renowned founders like Bill Gates, Jeff Bezos, Mark Zuckerberg, and Elon Musk. The founders were able to keep executive control of their company while also retaining significant equity. For most up-and-coming entrepreneurs this is the dream scenario, but it’s one that is arduous to attain.
In the end, entrepreneurs face a choice, at every step, between making money and leading their venture. Those who don’t figure out which is more important to them often end up with neither the wealth or control.
So as an entrepreneur, are you doomed to choose between this ultimatum… or is there another option?
Corl is an investment company that provides funding for early-stage, high-potential startups. Revolutionizing the traditional funding industry through revenue sharing provides founder-friendly growth capital.
No equity. No board seats. No personal guarantees.