Why Your 51% Ownership Guarantees You Nothing
You know the scene in The Social Network where Eduardo meets with Peter Theil’s attorney for the first time. The attorney casually mentions that Mark Zuckerberg's equity will be over 50% ownership, and Eduardo, sagely, says, “That’s good because Mark needs to be protected?”
Yeah, that scene.
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I’m certain every entrepreneur that’s ever watched that scene has said, “Yeah, that’s right. I have to have at least 50% ownership, so my investors will not kick me out as CEO.”
You certainly aren’t alone in thinking that having 51% ownership gives you control.
It makes sense. You have the most votes if you’ve got 51% ownership. You can break any ties if there are any because you always have more votes.
But let’s say that it’s just you and your cofounder. You want to proceed in one direction and your cofounder wants to proceed in another direction.
Your cofounder is adamant that her direction is the right direction for the company to go. You disagree strongly, so you keep going the direction you want to go.
Your belief that you have control is an illusion. Here’s why.
Now what happens? Your cofounder believes so strongly that you are wrong that she quits.
Sure, you still have control of the company, but you just lost your cofounder. Did that 1% ownership really help?
Hmmm.
A few years pass. Your cofounder has been replaced, and your business has grown, but you need funding.
You manage to find investors who want 30% of the company for their investment. You’re still above your magic 50% number, so you feel there’s nothing they can do to replace you. You feel secure that you’re in control.
Then the business starts faltering. You’re running out of cash, so you need to raise more money. You review the fundraising strategy at the next board meeting.
That’s when your board drops the hammer on you.
Your best bet for keeping control of your company is executing your plan.
The board tells you that they are willing to invest more money in the company, but one of the terms is that you step down as CEO. “You can’t do that,” you argue. “I own more of the company than you do.”
One of the board members says to you, “You’re right. You do own more of the company, but we have the money, and those are our terms.
“We will let the company fold if you don’t agree. You have 24 hours to tell us what you want to do.”
You’re not thinking straight if you think this can’t happen to you. Ask Travis Kalanick, former CEO of Uber, if you’re safe just because you control the votes because that didn’t save him.
And, remember, Uber was, arguably, the most successful startup ever. Yet, the investors got fed up with Travis and pushed him even though he had voting control of Uber.
Having control of the votes will not save you either. The way you stay CEO is really simple. You execute to your plan and don’t be a jerk.
That’s it. So stop worrying about silly things like having to keep at least 51% ownership of your company. Instead focus on building a great team, building a great collaborative culture for your team to work in, and executing your plan.
That’s a much safer way, and a much more enjoyable way to stay CEO for a long time.
For more, read: What's The Most Important Thing You Can Do Running Your Startup?