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I've seen cases where one absolutely non-technical partner takes 75% of the initial equity, tells the other not-so technical partner to find technical people and that her 25% has to be diluted if necessary to bring them in. That's a recipe for ending up with almost nothing if the firm ever becomes profitable after a round or three of investment.
Earlier quoted context omitted.
Can you elaborate on why not? The board exists to run the company on behalf of the owners. If you are the clear majority owner (51% - heck, let's say 75%) - in what way can the board possibly be stacked against you unless you willfully let it?
Because board seats are often given to new investors as part of term sheet "package". Shareholders can decide to grant a board seat to an incoming VC because they think the combo of the VC's money and guidance will increase the value of the company. That can lead to situations where a majority of the ownership is not represented on the board.
Earlier quoted context omitted.
His point is that owning a majority of the shares does not necessarily imply controlling a majority of the board seats.
Can you elaborate on why not? The board exists to run the company on behalf of the owners. If you are the clear majority owner (51% - heck, let's say 75%) - in what way can the board possibly be stacked against you unless you willfully let it?
Liquidation preference is the number one way that founders end up with nothing. Works like this: VC invests $1m with a, say, 5x liquidation preference then if they company sells for, say $6m the VC gets the first $5m and the remaining $1m is split according to equity. http://www.gabrielweinberg.com/ has some really, really good articles on this kind of thing.
Founders are first in.
Liquidation preference is the number one way that founders end up with nothing. Works like this: VC invests $1m with a, say, 5x liquidation preference then if they company sells for, say $6m the VC gets the first $5m and the remaining $1m is split according to equity. http://www.gabrielweinberg.com/ has some really, really good articles on this kind of thing.
Probably ignorance here, but if the company sold for less, say $4m are the founders now in debt for the remainder of the 5x agreement?
1. If you're in debt because of your startup, then when you get acquired you use that money to pay off your debts, and keep what's left over (after taxes, and all). If you're deeply in debt, then it may occupy a large sum of your money. 2. When your VCs and board own most of the company, they have the right to fire the CEO regardless of his founder status. This can be avoided as long as you keep the majority of share…
"This can be avoided as long as you keep the majority of shares." This is wrong. A board can hire or fire as it chooses. Holding a majority of common shares can mean very little, as many founders have learned the hard way. Protective provisions and board seat election procedures can, for all intents and purposes, define who controls the company.
http://thefunded.com is a great community of founders and CEOs, and includes many bitter people who were burned by investors. I've seen a handful of horror stories on there. See this post for example, even though it doesn't speak directly to your question of being broke after an exit, because it talks about investor control: http://thefunded.com/funds/item/5822 "From a purely technical standpoint, venture capitalists…
I still don't fully understand what a VC has to gain by eliminating the founders?
So as long as the board is owned by non-founders, a sale can be forced even though the founders disagree and want to continue operating ... even if the sale will leave the founders with nothing? ... that seems so diabolical!
>> I've recently read stories of startups that became successful and were bought out for large sums, but the founders received little from the transaction. It depends on what startups you're talking about, there are many reasons as to why this could happen. >> Also, how do cases like Steve Jobs and Harry Osborn occur where they are removed from their own company? Do VC's and Investors really take that much of the com…
How did Mark Zuckerberg maintain control of the board, whilst still receiving huge VC investments? So I imagine it something like, he owns majority of the board but not majority of the shares?
http://www.danshapiro.com/blog/2010/08/vc-insanity-economics...