October 30th, 2019 | By: Wil Schroter | Tags: Funding
We all have heard that "just getting 51% of the company will help us control the board and rule the world!"
But in startup companies, that's often not the case.
A lot of our control actually lies within the agreements that we create within the company, regardless of our percentage of control.
Startups can have many classes of stock, but the two most often created are "Common" and "Preferred" shares. There are many variants, but the most classic usage is "Preferred" have controlling rights, "Common" does not.
Investors will almost always take Preferred shares, which entitle them to specific types of rights within the company, even if they do not have the majority of those shares.
Those could include how key executives are hired and compensated, whether the company can be sold, or how the company can be diluted in the future — all things that a Founder may not want to lose control over.
If no investors exist, then no preferred rights will likely exist, in which case the 51% would be a majority voting share.
That said, there may still be provisions in the Operating Agreement that override the voting control in an attempt to protect minority shareholders from things like, "My first vote as the majority is to issue a class of stock that gives me 20-to-1 voting rights over anyone else."
It can within the areas of the business that are not subject to Operating Agreement controls and do not violate basic fiduciary duty (which is a gray area).
We can't say "Going forward all revenue to the company will be used for my salary and the company will go into insolvency!" While that would be a windfall for us, it would break out fiduciary duty to other shareholders.
Short of crippling the company for personal gain, most operational decisions like hiring, strategy and where to host the company happy hour would likely fall entirely in your hands, El Presidente.
How Early Stage Startups Assign Employee Stock Options. Stocks are a whole world unto themselves, complete with new vocabulary, confusing math, and complicated issues to consider. Check out this primer to get you going.
What is an Operating Agreement? Operating Agreements are key in helping you outline everything you need to know and do in order to successfully run your startup — and because they protect you and your Co-Founders from disputes down the line. And disputes will happen.
When Should Someone Else Run My Company? (podcast). Wil and Ryan discuss why superior managerial skills don't necessarily trump a Founder's passion and knowledge as a company scales — and how to decide what to let go of...and when.
Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes Bizplan, Clarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.