Keep Control of Your Start-up Forever
It's a familiar story.
An entrepreneur walks into my office ready to form a new corporation, build a great product, and change the world. Recently, however, there's a new follow-up request: "I want the incorporation documents to guarantee ongoing control. Can you make it happen?"
The short answer: No.
The power that Mark Zuckerberg wields over Facebook has become the stuff of legend. Folks will wax nostalgic about the fact that, in the early days, he controlled three seats on Facebook's board of directors. Many entrepreneurs mistakenly think that they can create an untouchable legal structure to wield similar power--and that all that is required is the appropriate documentation. In reality, however, there are no "magical" legal provisions that will guarantee control. That said, there are a couple things that you can do to increase your chances.
Realize that the Legal Documents are Always Negotiable--But Pay Attention to the Details
The early Zuckerberg board setup was a fairly simple contractual arrangement. In connection with a financing round, Facebook's investors and founders entered into what is known as a "Voting Agreement." Among other things, that locks in the composition of the board by setting the number of directors and designating who controls the various board seats.
The Voting Agreement is typically re-negotiated with each new round of funding. More specifically, the new investors need to be able to get comfortable with it. Quite often, new investors will demand changes, such as their own board seat--or a reduction in board seats that the founders control. Facebook's board structure was not permanently set in stone. New investors could have easily forced some less founder-friendly changes under different circumstances.
Even though the documents can't guarantee power, you should not just let the chips fall where they may in negotiating the board composition and other terms affecting power. An experienced venture lawyer can help you understand the nuanced differences between alternative structures and the implications of those structures in future rounds of funding. Small distinctions such as whether the founders have two "pure" common board seats or one "pure common seat" and one "CEO seat," can swing the pendulum of power and affect your ability to control the board now and after new financing rounds.
Be a Genuinely Fearless Negotiator
Virtually every entrepreneur imagines herself a "tough negotiator," but in watching thousands of transactions unfold, I can tell you that most founders have a breaking point and will eventually give in or tucker out in the quest to nab the best deal possible. It's not a bad thing. In fact, looking ahead three steps in the negotiation process, cutting through the BS and reaching a compromise is often the best way to quickly close a deal and move on.
Retaining power, however, often requires a lot more founder fortitude. It's a critical point of negotiation for investors--and one where they will often fight to the death. Those entrepreneurs who are able to lock down super-favorable power structures are generally those that are truly willing to take their company to the edge and back. Are you actually willing to derail the deal and risk going out of business in order to keep two board seats? You might have to go that far.
Make "Hockey Stick Growth" a Reality
This final point is a no-brainer--but it is the most effective way to maintain control: Build a great business with tons and tons of traction. This is how Zuckerberg kept control. Creating an amazing company will do wonders in opening up new financing and partnership alternatives. The ability to walk away from any deal because you don't need it is the only true negotiation leverage. Time and time again, I have seen founders with multiple offers on the table skillfully obtain protections and power benefits that any VC would tell you are "above market."
It is true that across the board, deal terms tend to settle in line with the market--but if you build something special, there is a lot more room to create your own "market terms."