Maintain Control Without Losing Your Startup to Shareholders

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Someone recently posted this question on Quora. Here are my thoughts …

I have been on both ends of this issue. As a co-founder and principal of a startup, I’ve been through multiple iterations of funding and associated dilution and at some point witnessed our business become majority owned by the investors.

At OpenView, I have been on the other side… providing multiple rounds of financing to a portfolio organization which at some point led to our ownership of the majority of the business.

So I think I can say I have a pretty well-versed perspective on these issues and how they develop. Whether I’m wearing the investor, board member or founder hat, my advice to the founder remains the same:

1. Don’t raise capital or put up as minimal as possible. I don’t believe the adage that organizations should raise as much as they can in as few rounds as possible to stay away from the cost and effort of fund raising. That is nonsense, and is a standpoint typically embraced by VCs with huge capital who need to deploy loads of money. Yes, the first round of institutional funding is expensive and demands a lot of effort (and is directly proportional to how hot your company is). But once you get the first round accomplished, succeeding rounds are much easier. Firstly, because you can secure money from current investors without lots of effort (supposing they can invest and want to). Additionally, you can raise from other investors much easier given that you already have your financial and legal house all set up after the first round.

I also believe that equity based capital on your balance sheet is an evil force… and a force that tempts you to spend more than you should.

2. Never, ever get into a situation where you are running out of resources and are frantic to raise more…ever. Part of an effective CEO’s performance involves guaranteeing that the business can sustain itself without desperation to raise more money. That doesn’t negate the necessity to raise; however, when you do, make sure you can present distinct and viable growth and capital efficiency. If you see yourself getting into a desperate situation, cut your costs and figure out how to keep going with much less. Once you learn how to grow more effectively, go out and raise.

3. Build a balanced and unified board: make sure you allocate board seats to independent board members who can provide an objective and balanced viewpoint. Efficient and engaged independent board members are the best remedy to achieving harmony between management and investors.

By the same token, the more investors you raise, the more investors you will have on your board… and the more investor considerations (and egos) you will have to manage. This is one of the primary reasons for you to raise less funds from fewer investors. By the same token, you’re better off having quite a few investors. If you have one, make sure the investor does not get the majority of your business right from the start.

4. Don’t hold on to control for too long. Know when you should step aside and permit professional managers to run the company. You will not always represent the best option for running the company.

In my role as a mentor to software CEOs, I find myself constantly dealing with these issues. That is the reality of the expansion stage software company. At OpenView Venture Partners, we try really hard to surround the founders with the mentorship they require to evolve and do well as senior managers of their organizations. Ultimately, it is up to the founders to exert the effort needed to develop their capabilities from entrepreneurs to senior managers.

Firas Raouf is a Venture Partner at OpenView.

Related articles

• The Tricks to Raising VC Money. Don’t Do It. (dohertyassoc.com)
• What To Look For In A Company Board (techcrunch.com)
• Steve Jobs’s Law: Why Founders Make the Best Leaders (theatlantic.com)
• Build Something People Need: On Raising Venture Capital And Creating Startups That Matter (fastcompany.com)

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