Whenever I invest in a business, I always insist on owning 51 percent of the voting stock until my principal is repaid. After that, control reverts to the entrepreneur I'm backing. The reason, obviously, is that I want to have the final say as long as my principal is at risk. Once the company is doing well enough to pay me back, I'm happy to turn decision-making authority over to the person who got us there.

I would never agree to a power-sharing arrangement. Only one person should have final say in a business. Assuming there's a good reason to divide up the equity at all--by no means a given--it should be absolutely clear who's in charge. Otherwise, you're guaranteeing constant tension in the company's decision-making process. Everyone's better off when it's clear where the buck stops.

The final decision maker should be the person who can't be replaced. Though several people may help launch the business, there's always one person driving the process--the entrepreneur. You can replace most employees and investors, but entrepreneurs are almost impossible to replace in the early stages of a business.

You'll note I don't follow this rule in the startups I fund. That's because these companies can't get money elsewhere, so I'm the person who is irreplaceable. That said, I won't invest in a startup that doesn't have an entrepreneur who can assume the role of ultimate decision maker once my principal has been repaid, and I give that person a lot of leeway. But when I invest in a company, everyone knows who's boss.

 

From the October 2014 issue of Inc. magazine