1. I would say that, even as of 5 years ago, it was rare for a startup to go through a Series A VC round without the VCs taking at least shared control.
2. Founders of reasonably strong startups can usually do angel rounds, also denominated Series A, without giving up board control and have been able to do so for some years now. These rounds used to be for smaller dollar amounts, often capped at $500K or so, but this has changed today in an era where founders can often turn to angels and superangels for larger fundings. VCs want to stay competitive with the angels at this early stage because, if they lose out at that level, they find themselves sitting on the sidelines as their deal-flow shrinks and they lose out on potentially strong investments made at an optimum stage in promising ventures. To stay competitive, therefore, the VCs must perforce bend a little on their traditional terms, including their former obsession with gaining board control right out the gate.
3. Founders themselves are far more savvy today, on average, than was the case a decade ago. In the bygone days, only a relatively few serial entrepreneurs had the sophistication to sit on a reputable board and still add value to it as founders. Today, the average founder is far better versed on what it takes to drive a company than was the case before. Thus, it is easier for VCs (and other investors) to accept the idea of a "founder-driven company" than it used to be. (Over the years, I have seen all too many "control-freak" founders and other variations that could only be labeled an embarrassment to sound management; based on this, I can understand the historic VC attitude, though of course this all must be counter-balanced by the many ills that the VCs themselves brought to the process when they would sometimes abuse the founders in whose startups they invested.)
4. Founders today have far more control over timing on when to do their Series A rounds. The cost of launching is far reduced today and the options for deferring larger rounds are greater, as for example by taking bridge funding from angels or F&F to allow the company to build value and minimize dilution before it goes for larger forms of funding.
When all these factors are combined, it seems clear from the trenches that a profound change is occurring by which founders have more control than ever before over their ventures. Of course, having this validated by someone such as PG, who is at the heart of this activity in Silicon Valley, goes a long way to letting the VCs themselves see it as respectable to accept as a fait accompli as they move forward.
> "3. Founders themselves are far more savvy today, on average, than was the case a decade ago."
I've heard this a bunch of times. Why is this the case? Is it the information available to founders, the quality of people choosing to do startups, or something else?
Another observation - this is a good example of the value of YCombinator and other similar networks. In this case, some YC guy is negotiating with VCs and needs some information, so he talks to pg, who talks to some other founders, and bam there's your answer (plus the rest of us are a little more enlightened, too).
grellas - could you say whether these days founders can open a company quickly with these open sourced documents by YC or TechStars by filling in the blanks, or do they still need a lawyer to do it for thousands of $$? Sorry if this puts you on the spot, but I just wanted to know how much more needs to be done that is not covered by the standard docs.
I am assuming here that the investors are your friends & family and they aren't out to do a high powered negotiation -- just want to set things up correctly and keep going. Are there any specific pitfalls that could happen if one just used standard documents and a convertible note?
On the flip side, I've seen founders cling too tightly to control. Sometimes the guy that is really good at getting a version 1 out of the garage is not the same guy that is good at calling the shots once it's a 60 person company. Taking the stance that "I want to retain control," is obstinate and egotistical. The proper stance is, "I want to retain control until someone better comes along." That may be never. But it's the right attitude to have. In the end, it's not about who controls what, it's about who's more likely to make all the time and money that's gone into the company worth more.
Non-founders having board control means that you don't get to make the choice to replace/augment yourself as manager.
You're absolutely right, but what you're talking about has very little to do with board control. Taking the stance that "I want to retain BOARD control" isn't obstinate and egotistical-- it's basically just saying, "As the guy who works on this company for 60 hours a week, I trust myself to know when it's time to bring in professional management".
Is it really possible to get VC funding when all you have is a version 1 out of the garage? I was under the impression that investors wanted to see traction before putting in serious money.
10 years ago, we had a "2 VC, 2 founders, tiebreaker CEO" board structure that I think was probably more common than simply "conceding the board to the VC". (I'm aware of the pitfalls in that structure, too).
My sense of it --- and someone with more recent experience please correct me if I'm wrong --- is that the shareholders agreements matter as much as the board structure does. Point being, you wouldn't want to see "founder control" becoming cosmetic, a fig leaf around the real power the VCs wield.
I wish PG would go into the details of structuring a board control. Perhaps that's an essay for a another day.
Some context:
Founder of Magna International, Frank Stronach, who started his business some 30 years ago made a lot headlines this past summer due to the sale of his "special" founder-class shares. I found it remarkable that even though the company is public, he still had majority interest over the board due to his share structure. EDIT: Every 1 of his B shares converted to 100 Common Stock (and he had over 700 Class B shares, before he decided to give up control and convert)
Wikipidia explains:
Stronach, who is currently the non-executive chairman of
Magna International, holds multiple-voting shares of the
company, which gives him majority voting power over
issues brought to shareholder vote. Although he controls
the voting power among Magna's shareholders, Stronach
owns only 4% of Magna's equity.
Is this happening because start-ups are getting series A financing later in the life of the company? It used to be that you needed VC just to build and launch a business, but these days the business can be much more real and the founders more proven by the time they're ready for VC.
Startups are getting further and further on seed and angel funding due to advancing technology.
I wish PG would write more about painting and hacking and education and lisp and history and psychology and philosophy and literature and politics and a bit less about investments. Seriously, quite a dry topic..
Great video -- but how exactly did the Marks (Pincus and Zuckerberg) manage to retain control of their boards? What are the specific things that need to be done in the negotiation phase that will lead to that outcome?
Perhaps the ycfounders list is a selected sample: it produces or selects above-average quality founders that are more likely to get a good Series A price (in terms of both control and pre$). I suspect that YCombinator's focus on founders for investment decisions also results in start-ups with assets closely tied to the individuals who run things (rather than say a patent). This leaves future VCs with less bargaining power when forming boards.
While I would like to believe it's because YC-funded startups are better, the fact is that for any startup to raise Series A, the VCs have to believe they're so good they could one day go public. So my guess is that the reason so many YC alumni have been able to retain control is that they are so well connected. They have the other alumni (many of whom are very sophisticated about fundraising) to give them advice, they get hooked up with the best lawyers, etc.
It's an excellent point that YC founders' experience may not be typical ... a different way of looking at this, though, is that YC and other tech incubators have changed the dynamic to give founders in general a much better shot at keeping control.
Which, as a serial entrepreneur, I see as a very good thing.
Considering that not all YC companies who want VC funding get it, it would be surprising for all of the YC companies that do get it to be above average in whatever metric drives board control. I think this has to be a trend that goes beyond YC.
Some anecdotal evidence that its not just YC startups. My company, NewsCred, raised a seed round of approx 1M this summer. We raised it from "top tier" super angel funds. We are not YC, and were not even based in the US. We also were not serial entrepreneurs, although I'd like to think that we're "above average founders!"
Long story short: we did not give up any board control but did not worry too much about price. We got a fair valuation, but nothing crazy.
Can someone explain the power dynamics of a board, vs that of the shareholders? I always assumed that retaining a majority of shares between the founders would keep them in control of the company, but is it the case that the board has more actual power.
For instance; 2 founders hold 60% of the shares of their company collectively after a Series A. The investors hold 40% (lets ignore option pools etc). Now if each side had 2 board seats (plus a 5th seat held by a brought in CEO), does that mean the founders can in fact be outvoted?
Yup. Shareholdership only matters in so much as your shareholders agreement dictates that it does. I could have 1 share of your company and control a hundred board seats, it doesn't matter. There are some things in law that make ownership of a certain % of shares important, but really its all about the shareholders agreement.
As I'm reading this article and nodding my head, I realized that I don't understand what controlling a board actually means.
It sounds like its written in the term sheet somewhere--what does that look like? Joe Startup will maintain control of the board...? Would it be correct for a founder to say "I have control of the board so..." or is it more of a perceived power as a result of other negotiated terms?
Usually, important decisions in a company require a majority vote of the board of directors to approve them.
Control of the board is then defined as a majority voting ability for an individual or aligned group of individuals. For example, 2 founders with equal equity stake will usually have the same incentives. Therefore, a board that has 2 founders and 1 investor is "founder controlled".
Between being completely founder controlled and completely investor controlled, there is a "split board". That means equal number of founders to investors, and one mutually agreed upon independent party that could technically vote either way -- often times a person previously very successful in business with insight into the startup's market.
In practice, a split board usually means investor-controlled, for a couple reasons:
- The independent board member is usually suggested by the investor
- The independent board member usually has a stronger incentive to side with a powerful investor
This essay makes VC's seem like a necessary evil that founders have to tolerate through gritted teeth, as opposed to something more benevolent like, say, YC.
A lot of VCs are good guys. The difference between us is largely that we're in different situations. VCs invest 100x as much as us. Larger amounts of money will inevitably have more constraints attached.
With an equal number of founder elected Directors and VC elected Directors, if your outside tiebreaker director is brought in by the VC's you will be in danger of losing control because you cannot control the situation.
Especially if the tie breaker is planning on doing some additional business with the VC in the future, you may not have a truly neutral person casting the vote.
So, how is founder control typically structured?
For instance, do founder Stockholders get 2 votes per share to elect Directors with, and VC's get 1 vote per share with a guaranteed VC director seat on the board? Or are Directors elected by founders getting 2 votes on a particular decision item A and 1 vote on decision item B, and VC Directors get 1 vote on A and B?
Does anyone know what is currently going on with this?
Are there cases where a non-CEO founder controls the board?
What are the mechanics whereby the minority stake founder(s) control the board? Some sort of skewed voting system? If so, what sort of legal entities allow this structure?
I'm not sure if this is universal, but Stronach (a non-executive chairman of Magna Int.) had control over the board because of his Class B share structure. Every 1 of his B share converted to 100 Common Stock (and he had over 700 Class B shares, before he decided to give up control and convert)
That's quite remarkable, considering Magna is a publicly traded company.
I think one of the main factors pushing the trend in the direction of more founders retaining control is the increased availability of angel money.
If it came down to my cofounders and I having to give up control to raise a Series A (or any series for that matter) I'm sure we'd turn to Angel List to raise a similar amount from well connected and useful investors, without having to give up control - if that were a viable option.
Increasingly it seems like raising a large angel round is an option, which is great for entrepreneurs.
"VCs will still be able to convince; they just won't be able to compel. And the startups where they have to resort of compulsion are not the ones that matter anyway. "
I excepted some sort of footnote for this one. It's not immediately obvious to me this is true.
Hypothetically, the founders are the ones that know their business the best, and hence tend to have a longer term vision. Given that the founder executes on the long term vision, those are the companies that matter. Is that the line of thinking?
I definitely would like to control my own company.
That said, my philosophy is simple: Your first company should SUCCEED. You should be prepare to give up control, equity, etc. as long as it succeeds.
That gives you a track record AND money. Think about it. If you had $10 million dollars 2 years from now, and a 5% stake in your first venture, contacts lots of happy people and a reputation for succeeding with your first venture, don't you think you could own the shit out of your next company? Like 100% ownership in pretty much anything you want, with $5 million of your own money in it. You could try 30 different ideas or set up a nice lab.
Wanting to own your first venture is kind of like saying this will be your only idea, ever.
It might sound unproductive, but my advice to fellow entrepreneurs would be: listen to what investors want, and then give it to them. Put together a great team. Find VC firms who like to invest in your kind of thing. Develop just enough to get them interested. Set up appointments. Get funded. Exit with $10m or more in the bank. Do your own thing. Your first business can be all about the $$ exit.
It seems I myself am going a different route, though.
"Founders retaining control after a series A is clearly heard-of. And barring financial catastrophe, I think in the coming year it will become the norm."
Would a financial catastrophe simply stop new series A rounds, or would it rather change their terms? Are there any examples of changes related to the adventures in 2007--2008?
[+] [-] grellas|15 years ago|reply
1. I would say that, even as of 5 years ago, it was rare for a startup to go through a Series A VC round without the VCs taking at least shared control.
2. Founders of reasonably strong startups can usually do angel rounds, also denominated Series A, without giving up board control and have been able to do so for some years now. These rounds used to be for smaller dollar amounts, often capped at $500K or so, but this has changed today in an era where founders can often turn to angels and superangels for larger fundings. VCs want to stay competitive with the angels at this early stage because, if they lose out at that level, they find themselves sitting on the sidelines as their deal-flow shrinks and they lose out on potentially strong investments made at an optimum stage in promising ventures. To stay competitive, therefore, the VCs must perforce bend a little on their traditional terms, including their former obsession with gaining board control right out the gate.
3. Founders themselves are far more savvy today, on average, than was the case a decade ago. In the bygone days, only a relatively few serial entrepreneurs had the sophistication to sit on a reputable board and still add value to it as founders. Today, the average founder is far better versed on what it takes to drive a company than was the case before. Thus, it is easier for VCs (and other investors) to accept the idea of a "founder-driven company" than it used to be. (Over the years, I have seen all too many "control-freak" founders and other variations that could only be labeled an embarrassment to sound management; based on this, I can understand the historic VC attitude, though of course this all must be counter-balanced by the many ills that the VCs themselves brought to the process when they would sometimes abuse the founders in whose startups they invested.)
4. Founders today have far more control over timing on when to do their Series A rounds. The cost of launching is far reduced today and the options for deferring larger rounds are greater, as for example by taking bridge funding from angels or F&F to allow the company to build value and minimize dilution before it goes for larger forms of funding.
When all these factors are combined, it seems clear from the trenches that a profound change is occurring by which founders have more control than ever before over their ventures. Of course, having this validated by someone such as PG, who is at the heart of this activity in Silicon Valley, goes a long way to letting the VCs themselves see it as respectable to accept as a fait accompli as they move forward.
[+] [-] dkasper|15 years ago|reply
I've heard this a bunch of times. Why is this the case? Is it the information available to founders, the quality of people choosing to do startups, or something else?
[+] [-] anthonyb|15 years ago|reply
[+] [-] EGreg|15 years ago|reply
I am assuming here that the investors are your friends & family and they aren't out to do a high powered negotiation -- just want to set things up correctly and keep going. Are there any specific pitfalls that could happen if one just used standard documents and a convertible note?
[+] [-] uuilly|15 years ago|reply
[+] [-] webwright|15 years ago|reply
Non-founders having board control means that you don't get to make the choice to replace/augment yourself as manager.
You're absolutely right, but what you're talking about has very little to do with board control. Taking the stance that "I want to retain BOARD control" isn't obstinate and egotistical-- it's basically just saying, "As the guy who works on this company for 60 hours a week, I trust myself to know when it's time to bring in professional management".
[+] [-] brlewis|15 years ago|reply
[+] [-] tptacek|15 years ago|reply
My sense of it --- and someone with more recent experience please correct me if I'm wrong --- is that the shareholders agreements matter as much as the board structure does. Point being, you wouldn't want to see "founder control" becoming cosmetic, a fig leaf around the real power the VCs wield.
[+] [-] faramarz|15 years ago|reply
Some context: Founder of Magna International, Frank Stronach, who started his business some 30 years ago made a lot headlines this past summer due to the sale of his "special" founder-class shares. I found it remarkable that even though the company is public, he still had majority interest over the board due to his share structure. EDIT: Every 1 of his B shares converted to 100 Common Stock (and he had over 700 Class B shares, before he decided to give up control and convert)
Wikipidia explains:
[+] [-] GavinB|15 years ago|reply
Startups are getting further and further on seed and angel funding due to advancing technology.
[+] [-] lkozma|15 years ago|reply
[+] [-] pg|15 years ago|reply
[+] [-] jswinghammer|15 years ago|reply
[+] [-] ShardPhoenix|15 years ago|reply
[+] [-] yurylifshits|15 years ago|reply
(from Startup School 2009)
[+] [-] rexreed|15 years ago|reply
[+] [-] snewe|15 years ago|reply
[+] [-] pg|15 years ago|reply
[+] [-] jdp23|15 years ago|reply
Which, as a serial entrepreneur, I see as a very good thing.
[+] [-] brlewis|15 years ago|reply
[+] [-] shafqat|15 years ago|reply
Long story short: we did not give up any board control but did not worry too much about price. We got a fair valuation, but nothing crazy.
[+] [-] chrisduesing|15 years ago|reply
For instance; 2 founders hold 60% of the shares of their company collectively after a Series A. The investors hold 40% (lets ignore option pools etc). Now if each side had 2 board seats (plus a 5th seat held by a brought in CEO), does that mean the founders can in fact be outvoted?
[+] [-] 3pt14159|15 years ago|reply
[+] [-] matt1|15 years ago|reply
It sounds like its written in the term sheet somewhere--what does that look like? Joe Startup will maintain control of the board...? Would it be correct for a founder to say "I have control of the board so..." or is it more of a perceived power as a result of other negotiated terms?
[+] [-] drusenko|15 years ago|reply
Control of the board is then defined as a majority voting ability for an individual or aligned group of individuals. For example, 2 founders with equal equity stake will usually have the same incentives. Therefore, a board that has 2 founders and 1 investor is "founder controlled".
Between being completely founder controlled and completely investor controlled, there is a "split board". That means equal number of founders to investors, and one mutually agreed upon independent party that could technically vote either way -- often times a person previously very successful in business with insight into the startup's market.
In practice, a split board usually means investor-controlled, for a couple reasons: - The independent board member is usually suggested by the investor - The independent board member usually has a stronger incentive to side with a powerful investor
[+] [-] gms|15 years ago|reply
Do I have the wrong impression?
[+] [-] pg|15 years ago|reply
[+] [-] fleaflicker|15 years ago|reply
Out of how many series As total?
[+] [-] fleaflicker|15 years ago|reply
http://news.ycombinator.com/item?id=1976417
[+] [-] kapitti|15 years ago|reply
[+] [-] pg|15 years ago|reply
And practically all the pre series A companies still have board control, because most startups do at that stage.
[+] [-] gcheong|15 years ago|reply
[+] [-] pg|15 years ago|reply
[+] [-] Scott_MacGregor|15 years ago|reply
Especially if the tie breaker is planning on doing some additional business with the VC in the future, you may not have a truly neutral person casting the vote.
So, how is founder control typically structured?
For instance, do founder Stockholders get 2 votes per share to elect Directors with, and VC's get 1 vote per share with a guaranteed VC director seat on the board? Or are Directors elected by founders getting 2 votes on a particular decision item A and 1 vote on decision item B, and VC Directors get 1 vote on A and B?
Does anyone know what is currently going on with this?
[+] [-] jaekwon|15 years ago|reply
Are there cases where a non-CEO founder controls the board?
What are the mechanics whereby the minority stake founder(s) control the board? Some sort of skewed voting system? If so, what sort of legal entities allow this structure?
[+] [-] faramarz|15 years ago|reply
I'm not sure if this is universal, but Stronach (a non-executive chairman of Magna Int.) had control over the board because of his Class B share structure. Every 1 of his B share converted to 100 Common Stock (and he had over 700 Class B shares, before he decided to give up control and convert)
That's quite remarkable, considering Magna is a publicly traded company.
[+] [-] nlavezzo|15 years ago|reply
If it came down to my cofounders and I having to give up control to raise a Series A (or any series for that matter) I'm sure we'd turn to Angel List to raise a similar amount from well connected and useful investors, without having to give up control - if that were a viable option.
Increasingly it seems like raising a large angel round is an option, which is great for entrepreneurs.
[+] [-] iamwil|15 years ago|reply
I excepted some sort of footnote for this one. It's not immediately obvious to me this is true.
Hypothetically, the founders are the ones that know their business the best, and hence tend to have a longer term vision. Given that the founder executes on the long term vision, those are the companies that matter. Is that the line of thinking?
[+] [-] EGreg|15 years ago|reply
That said, my philosophy is simple: Your first company should SUCCEED. You should be prepare to give up control, equity, etc. as long as it succeeds.
That gives you a track record AND money. Think about it. If you had $10 million dollars 2 years from now, and a 5% stake in your first venture, contacts lots of happy people and a reputation for succeeding with your first venture, don't you think you could own the shit out of your next company? Like 100% ownership in pretty much anything you want, with $5 million of your own money in it. You could try 30 different ideas or set up a nice lab.
Wanting to own your first venture is kind of like saying this will be your only idea, ever.
It might sound unproductive, but my advice to fellow entrepreneurs would be: listen to what investors want, and then give it to them. Put together a great team. Find VC firms who like to invest in your kind of thing. Develop just enough to get them interested. Set up appointments. Get funded. Exit with $10m or more in the bank. Do your own thing. Your first business can be all about the $$ exit.
It seems I myself am going a different route, though.
[+] [-] pama|15 years ago|reply
Would a financial catastrophe simply stop new series A rounds, or would it rather change their terms? Are there any examples of changes related to the adventures in 2007--2008?