When Do You Lose Control of Your Startup?
These days early-stage funding rounds are happening with greater frequency, so it's important for founders to ask themselves: when do I lose control of your startup?
Startup founders can lose control of their companies in a number of ways, including:
Adding a non-productive co-founder to the founding team is clearly one factor that will result in loss of control.
Hiring the wrong CEO. A CEO who may be a co-founder and/or outsider and not a good fit for the company can lead to a loss of vision, poor execution, and culture problems.
Making numerous pivots to achieve product-market fit. Frequent pivoting can create confusion, waste resources, and dilute the core brand.
Taking too much external funding too early. Large funding rounds before product-market fit can give investors too much control and influence.
Correspondingly, setting too high a valuation in an early (read: seed) round(s) can result in loss of control. Missing your numbers on subsequent rounds results in investor-friendly terms and inevitably board imposed management changes.
Giving up too much equity and board seats. Founders should aim to maintain majority control for as long as possible.
Neglecting company culture. A strong company culture can help founders maintain alignment and influence.
Chasing short-term growth over long-term strategy. Overemphasizing fast growth – especially with large (random) GTM outlays – can cause founders to lose sight of their goals and vision.
Failing to build a proper board. An independent board with experienced directors can help founders maintain control for longer.
As you can see founders lose control of their startups for reasons other than their ownership position that appears on a cap table. Often, these reasons combine to become the circumstances by which they lose control. Ultimately, that confluence shows up on the cap table.
To avoid losing control, founders should:
Hire the right CEO who is aligned with their vision and values. Consider it the most important hiring decision you will make.
Make strategic pivots only after careful consideration and testing with 20 potential customers, or more.
Raise small rounds initially to prove the model, then go for larger rounds to scale up.
Maintain majority control for as long as possible.
Foster a strong company culture that aligns with their vision.
Focus on long-term strategy over short-term growth.
Choose the best investment partners that is possible and one who is aligned with your vision and goals. Consider it the most important finance decision you will make.
Build a proper board with independent directors.
There are many other critical and time-sensitive decisions that startup founders need to make, but hiring and adding key investors, advisors, and board members are among the most important for regaining and shaping control of their companies.