Maintaining control of ones business when others come on board

Fixing our eyes on the end…

That can always be difficult.  I keep remembering a question an entrepreneur asked the speaker during the most recent ServLed Friday.  We had reached the Q&A session of the program and questions about valuation, control and preserving the founder’s vision were being candidly asked.  And his question created a silence that was deafening.  A question that seems to have crossed the mind of every entrepreneur in the room who may have raised or is looking to raise growth capital.  His question was: “Will you (the investor) get rid of the founder as CEO if you took 90% of their company?”.

While the equity stake cited in his question may be extreme, most entrepreneurs struggle with the likelihood of losing a controlling stake in their business when investors come in.  The thought of not being in the “driver’s seat” of the entity they birthed seems unfair.  What happens to the dream?  And how do you even break the news of no longer run the show? It’s unheard of in these parts of the world.  The founder/owner/director is a lifetime role for most entrepreneurs here.

Well the speaker’s answer was interesting and insightful.
First of all, what is the dream?  Whenever one attracts money (even in the space of impact investing), the dream evolves from just a personal, ideological goal to a shared one that involves financial targets.  The financial targets must be achieved for the investor to find your venture a worthwhile investment opportunity.

Secondly, let’s assume the shared goals are absolutely clear to both entrepreneur and investor, the followup question then is: is the entrepreneur right person to lead the company to achieve that dream?  Does the entrepreneur have the right experience, training and network to achieve the desired goals.  In some cases the answer is “no” and in other cases it is “yes”.

The concern though is: what happens in the instance where the answer is no?  Well in some cases, a more experienced CEO is brought in to run the show and the founder is given another role in the organization (say leading product development or being COO).  There are other cases where the founder is left in the CEO but a more experienced executive, say a COO, is brought in to lead the growth efforts.  There are other instances where the founder just has to be taken off the management team altogether.  The founder still gets to retain a board seat in most cases and is still very much an owner of the organization.  Now all this is based on the premise that the company follows best practices in corporate governance.

Whatever the arrangement, it is imperative for both founder and investor to keep their eyes on the end goal and answer the hard questions.  The right answers may not always sit well with all.  Egos may be bruised.  Relationships may be strained.  But in the cases where business maturity prevails, the right financial end goals are reached for the entrepreneur as well as the investor.