How to keep control of your company against all odds
My advice: read this survival guide before you really need it.
This guide is meant to help founders and bring awareness on some of the practices that hostile investors may use to take control of companies.
Almost 50% of founders get kicked out of the companies they founded or removed as CEO within 18 months following a funding event.
Sometimes this change is made deliberately, well prepared, and coordinated between the founder or the co-founders and their investors, in some other cases it is an initiative from the investors who are looking to take control of the companies they invested in. Here below, I describe some of the techniques these investors are using.
When you seek funding for your company, I recommend that you always choose investors that you love and that love you.
Your Lawyer Should be Your Best Advocate
Unless you know your company lawyer for a very long time and have been working with him or her for years, investors can easily find ways to gain information from the company lawyer at the expense of the company.
Most investors have a porto-folio of companies, lawyers will often be interested by the potential revenues an investor can bring. By making a favor to an investor they know that later down the road their services will be recommended by the investor to one or several of their porto-folio companies.
One way to avoid this from happening is to change the corporate lawyer after each new round of financing. The best way to find that new corporate lawyer is to seek introductions from other entrepreneurs.
Choose Independent Board Members
An independent board members is a person other than an executive officer or employee of the company which, in the opinion of the issuer’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Investors will often use a board role to place someone they are connected to in a non-obvious way, giving them increased leverage on the company.
For example, independent board members must not be part of any other venture capital firm that could potentially benefit from the information on the company from their position on your board.
Document Your Expenses Carefully
Company expenses are an easy way for investors to put pressure on a founder. They can claim that expenses are not documented and ask for the money back or claim that the expenses were not linked to the business.
It is typical that some investors use that trick to put pressure or even blackmail founders to reclaim rights.
Guarantee your Visa is Not Dependent on Your Company
When you loose control of the company, some investors could use their influence over the company’s lawyer or the new CEO to revoke or cancel the founder’s visa.
It is an easy way to make room for the new CEO and to make sure the founder stays far away from the company.
Choose Investors You Love & Who Love You
This is something to insist on. An investor that admires your work and loves you as a person will be much more understanding in the lowest moments and, most of the time, be supportive of their investment and the person they chose to bet on.
Investors may try to take advantage of the situation, and ask for better terms if they need to invest more money, but they won’t let you down.
Learn to Read Your Investors & Get Ahead of their Expectations
It is important to anticipate your investors expectations. Their role at the board will be to highlight the missing elements of the puzzle and to complain about the product, challenge your way of life and direct the company or your organization.
It’s hard to have all the answers to all the missing elements when you run a startup — but you can have a clear vision on what you are going to do and the timing to finding those answers.
You can lay out a list of all the weaknesses of the business, the product and yourself as a founder — then prepare a plan to address each of of these issues quickly.
I recommend you do that before each board meeting.
Keep Board Meetings On Cadence & On Agenda
I was advised by a very experienced board member on boards of some of the largest US companies. When you are at an early stage he recommended alternating board meetings between in-person and on the phone.
For frequency, aim for one board meeting every 45 to 60 days after series A.
A note on the frequency: you have to be aware that some investors will use the frequency of board meetings to put more pressure on you.
When you have to build a product and scale a team, having a board meeting once a month can monopolize a lot of your time, as well as the time of your executive team. It can have the opposite of the desired effect, negatively affecting the overall performance of the team and the organization.
I personally found that managing up was the hardest thing to do when you are not prepared.
As an entrepreneur you are often more worried about the people you are working with on a daily basis, and your head is focused on what’s ahead of you. You can become a better board manager by doing regular calls or meetings with your board members to keep them aware of what is going on and to anticipate their expectations, helping you head into formal board meetings free of surprises.
Beware of Investors Pushing their Preferred Executives Into the Company
I don’t think it is common but I have seen this tendency with more than one investor.
Get Your Legal Documents Done RIGHT
There are several important points that require a lot of attention. These three documents are: the Certificate of Incorporation, the Investor Rights Agreement and the Bylaws, which cover the following:
- the board composition, structure and its voting rights
- the appointment of directors
- the appointment of independent board members
- the required votes or conditions to agree on the sale of the company
- the rights of first refusal when it comes to the transfer of shares
Feeling the Heat? Employ some of these Founders’ Tricks
I have seen some founders become very creative when it comes to putting in place a structure that helps them keep the control of their company.
Rahul Vohra, a good friend & founder of Rapportive and more recently, Superhuman, created a tailored certificate of incorporation with specific class of stocks and voting rights enabling founders to retain control — no matter what.
Giving the majority of common stock holder(s) the ability to appoint a number of board numbers in order to retain a majority of the board, and also to vote for those seats if they are empty is another way to keep control.
These rights can be limited if the main investor(s) can decide to sell the company at any time if its value doesn’t reach a certain level within a predefined period of time.
Invest Energy with Finesse, Invest Time with Care
One of my investors once told me:
I am betting on you by giving you money.
If you lose it I will have lost money — but more important than money you will have lost time.
What takes your ideas forward is your energy. Money is energy. It helps you fuel your ideas and reach the goals of your organization faster.
Invest the fuel your rocket ship is piping in with care, but take even more care about how you’re investing your time. Great founders can always take a swing at building another great company and at raising more capital, but if you become trapped in a disadvantageous situation, know when to save your time to work on your next great bet.
You’ve got more opportunities, but you’ll never get more time.
