6 min learn
Opinions expressed by Entrepreneur contributors are their very own.
Recently, I used to be in a Zoom assembly the place a founder was panicking on the prospect of closing his Series A. I used to be greatly surprised as I anticipated him to be pleased with this achievement. Immediately, I requested him why he was involved.
“Taking on this capital requires us giving up a board seat,” stated the founder. “This means that the investor who takes a seat on the board will really be able to exercise control. It’ll be over. I don’t know what to do!”
“Calm down,” I stated. “Is this really what you are worried about?”
“Yes! I poured everything into this,” stated the founder.
I instantly responded, “you know you’re not the first to go through this and there are various mechanisms you can put in place to ensure you do not lose control over the destiny of your business.”
Unfortunately, the above alternate is nothing new for me. Many founders imagine that as their enterprise scales, they may inevitably lose control of their board — and thus the technique and trajectory of their enterprise — to numerous exterior forces like investors or different senior executives. They learn concerning the ousting of varied founders like Travis Kalanick at Uber and even Steve Jobs at Apple and naturally get nervous.
Unfortunately, the info bears this out. In a study of roughly 5,000 companies, founders usually retained solely about 45% of whole possession and had to surrender appreciable board management after the Series A spherical.
Fortunately, there are numerous methods that you could defend and management the future of your small business even because it scales to new heights and you want to convey on new stakeholders.
The first, and easiest method to do that, is to keep away from exterior capital funding for so long as you may and search to fund the corporate via cash-flow or founder funding.
Yet even in the event you require a capital increase, you may nonetheless use numerous mechanisms to stay accountable for the trajectory of their enterprise. These embody particular provisions on varieties of issued inventory and board safety clauses.
Lastly, you may recruit a set of outdoor advisors to act as advisors and even unbiased board observers or members to retain a stage of affect in the direction of the trajectory of your organization.
Don’t take the cash in the event you don’t want it
Many founders imagine that to develop, they want to increase capital. And that because of this, they want to surrender one thing greater than fairness within the transaction, like a board seat or advisory place.
While many later-stage financing rounds, particularly Series A onwards, require founders to surrender a board seat, there’s one straightforward means to keep away from this — avoid raising venture capital.
One of the primary methods to do that is to get the enterprise to profitability. This means cutting down non-essential capabilities, non-essential operations, and conducting an in depth audit. Even although you might suppose your organization is extremely lean, it could actually at all times be leaner.
Yet one other means to keep away from taking over enterprise capital is to organically fund the enterprise with founder investments. One straightforward means to do that is to tranche investments at completely different levels somewhat than making one single funding upfront.
One nice instance of the above is Mortgage Automator. The founders have prevented taking over exterior capital by specializing in each excessive profitability and multi-stage founder investments. Rather than simply investing one tranche of capital firstly, the founders have invested successive tranches of capital to develop their enterprise even additional.
Mechanisms to preserve management
Due to a wide range of circumstances, many founders have to increase enterprise capital to develop their enterprise.
Fortunately, there are numerous tried and true mechanisms that founders can make use of to guarantee they preserve some semblance of energy over their enterprise.
First, founders and buyers can negotiate board provisions within the time period sheet earlier than a deal is accomplished. Other than funding phrases, board management, board member nominations, and board observer make-up are sometimes essentially the most negotiated. Many founders don’t understand how a lot of an higher hand they’ve in negotiation; which is very true if many companies have a time period sheet out in a aggressive bidding course of.
Second, founders can alter the kind of inventory issued within the enterprise. Working with their counsel, founders can create completely different lessons of shares which have “super” voting rights permitting a small group of shareholders to successfully retain management over the enterprise whereas additionally permitting new buyers to purchase in at a good market worth.
Use advisors to your benefit
Advisors are essential to the success of any early-stage firm. From early-stage fundraising and hiring to buyer introductions and mentorship, advisors fill essential abilities and information gaps to assist firms scale upwards.
Advisors may also be essential unbiased but allied board members or observers if buyers additionally demand a board seat throughout any financing spherical. By recommending that a further advisor assume a board member or observer role, founders each even out the enjoying area and permit a person with higher information of the enterprise, not to point out a private relationship with the founders, to assume a job of higher accountability.
An amazing case examine of that is the advisory board make-up of Reframe Care, an insurance coverage know-how enterprise. Reframe targeted on assembling a gaggle of advisors earlier than elevating capital figuring out that having extra skilled voices within the room can be advantageous.
The path to safety
Many founders are understandably involved that as they increase capital, they may have to surrender management to buyers. Fortunately, there are numerous methods to keep away from this together with not elevating enterprise capital within the first place, negotiating the fitting phrases with buyers, and utilizing advisors to play essential and key allied roles.