Founders vs. Owners
As an early stage startup matures and grows, should its Founders continue to act like its Owners?
A typical startup begins life as a small team of individuals hatching an interesting new idea. At this point, these startup founders are also the company owners and of course, its sole “employees”. Formal control of the company and all operational decision making is completely in the hands of this small team. This arrangement may stay constant through the Seed stage of the company, even as it attracts individual angel investors and a cadre of advisors to meet its challenges.
At the Series A inflection point, one or more venture investors may get involved and things start to get interesting. The entrepreneur community has been taught to highly prize retaining control. Founders reluctantly add board seats for their investors but don’t want to give up a majority on the board. But doesn’t this diminish the chance that critical issues will be raised (and resolved) in the boardroom?
When I hear entrepreneurs talk about the control issue, they are quite passionate about not giving up what they have built – the unique culture, the mission behind the product offering, etc. But what if the culture needs to change, or the product offering doesn’t hit the mark? An independent, outside perspective may help detect these issues sooner.
“Company: someone or something you spend time with or enjoy being with.”
“Corporation: a body formed and authorized by law to act as a single person although constituted by one or more persons and legally endowed with various rights and duties including the capacity of succession.”
These dictionary definitions for “Company” and “Corporation” may provide some enlightenment on this issue. Early stage startups resemble the definition of “Company”. These are a collection of people that enjoy working together, have picked a cause they deem worthwhile, and are facing overwhelming odds to bring a product to market. Few activities in life are more fun or fulfilling than working in an early stage startup!
As this company adds customers, investors, and employees, it gradually morphs into a Corporation. By the above definition a corporation can be viewed as a separate, virtual, person with its own interests. How are these interests determined? By everything that makes up the corporation – the shareholders and its employees. The company founders also play a role in a corporation, but decision making is widely distributed – and so is ownership – shareholders “own” a piece of the company and a vote on key corporate decisions, managers “own” departments and specific missions, and individual employees may “own” a decision, for example. With a corporation, everyone can feel like an owner!
Of course, Silicon Valley has a few famous large corporations that are still more or less run as a “Company” by their founders – Google, Facebook, and (until recently) Apple come to mind. Wait a minute, doesn’t this prove that corporations and their diluted ownership structure are to be avoided at all costs? My answer would be that if you are as unique as Steve Jobs, Larry Page, or Mark Zuckerberg, I would agree with you. But for a more typical founding team, a corporation model and the added sources of wisdom it brings to the table may be just the ticket for sustained growth.
Control of something you have built from scratch is very hard to relinquish, but I highly respect those founders that over time cede it to their investors and employees - for the good of the corporation!