Control Depends More on Results Than Term Sheets
Fred Wilson of Union Ventures writes Entrepreneurs Have Control When Things Work, VCs Have Control When They Don’t on his AVC blog.
This is one of those ideas that seem completely obvious but only after I’ve heard them. Whether we’re founders or investors, we focus on terms and percentages as determining control. But in the real world, as Fred points out, strength and power are about who holds what cards, and who needs whom. He says:
An entrepreneur or hired CEO can own as little as 5-10% of a Company but they can control it like a dictator if they are doing a great job running the business and the company is making a lot of cash flow and has no need for additional capital.
An entrepreneur can control 95% of a company and all the seats on the board but they can easily lose control of the business if they company is floundering and they need more money and the only investors who would consider putting up money are the existing investors.
Exactly.
I’m not suggesting either investors or founders get glib about it and pretend the terms aren’t extremely important. You have to do your job. It’s just that, on the other hand, when you think of all those stories about investors wresting control from founders, many of those stories are true. But ask yourself: were those companies doing well?
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This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.