Why Your Investors Don’t Need Control Of Your Board
“Brett, I need to have control of the board.”
Who do you think said that to me? Was it a startup CEO, or was it an investor? Or was it both parties?
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It seems logical, doesn’t it as a first time CEO. You want control of the board, right? Because, if you control the board, then you control the company and you can’t be fired.
And, I’m sure you’re thinking that if the investors control the board of directors, then they control the company. Then, they can tell you what to do, and they can fire you whenever they want.
The reality is much, much different.
So, which group has told me, over and over again, that they need control of the board? It’s always the CEO, never the investors. I’ll explain what investors know that you don’t in a second.
Investors don’t need control of the board of directors.
Investors are a pretty savvy bunch. And they realize something you don’t realize. They realize that they have control of the company the second they invest in the company.
The reason is really, really simple. In order to grow your startup, assuming you are going the Venture Capital route, you need more cash to keep on growing.
Let me give you an example of how this works. You start a company, and the company is wildly successful.
Revenue and customers grow at an unbelievable clip. The valuation keeps going up each round. And because you were smart, you created a separate voting class of stock that you control 100%.
The company still needs more funding because it is not yet profitable. That’s okay. You can’t be voted out as CEO no matter what you do. That sounds like a great place to be.
But, you’re a jerk. You mistreat employees. There are rumors of sexual harassment. And despite the company’s great success, the investors have had enough.
So the investors meet with you, and give you a choice. Resign or we will not support the company any more.
You try and fight the investors, but your investors stand firm in their decision. A couple board members meet with you again and tell you that you have to resign.
You resign as CEO because you realize you have no choice.
Ask Travis Kalanick, former CEO of Uber, if you don’t believe having all the voting rights will save you. The scenario described above is what happened to Kalanick.
You should be very, very nervous if your key investors don’t want to be on the board.
Now, I’m not talking about if you’re raising angel funding or bootstrapping. You can have a one person board (just you), and you’ll make your life a lot easier. In fact, I’d advise against giving a board seat to an investor unless you absolutely had to.
However, as I was saying, you want your investors to be on your board when you’re raising large sums of money from VCs. The reason is every board member has a fiduciary responsibility to act in the best interests of the company when they are on your board.
So, investors that aren’t on your board don’t have to act in your best interests. They only have to act in their best interests. As time goes on, their interests and your interests may not be the same. That’s much more important than who controls your board.