A company stops being yours the moment someone else joins

2022-10-20 original Startups

There seem to be as many answers to this question as there are people asked.

① When you step down as CEO ② When your shareholding ratio drops below the veto threshold (one third) ③ When your shareholding ratio drops below a majority ④ When your shareholding ratio drops below two thirds (absolute control)

These are probably the answers you’d hear most. Technically, once you pass ④, you can no longer act entirely on your own terms, since a third party can now exercise a veto on major matters. In that sense things get more complicated: you have to think, at least to some degree, about reaching agreement with shareholders as a whole, and your control is no longer complete in practical terms. That’s the point at which you could reasonably say “I am no longer fully in control.”

That said, as far as I know, few startup founders lose sleep over that two-thirds threshold. It isn’t because they reason through something equally technical, like “with a majority you can still exercise substantive control, including appointing directors.” I don’t think veto rights keep many people up at night either.

Nor is it for that reason. Especially for founders who have grown their businesses mainly through equity funding, raising money properly and growing the business properly matter far more than the fine details of shareholding ratios. As long as they can keep doing that, they believe they can keep being CEO. And that belief is broadly correct.

So I think many people regard ① as the moment the company stops being “their own.”

But this too is only one facet of what it means to be an entrepreneur.

Let me offer other ways of thinking about it, other options.

⑤ When you take on your first equity investment ⑥ When a stakeholder other than yourself joins

My own thinking leans more toward ⑤ or ⑥.

Go back to that employee’s spot-on outburst (laughs) at the beginning. The person making that remark might be a regular employee who doesn’t hold any actual shares. Not a director, not an executive officer — possibly even a junior engineer, depending on the case.

But he is a stakeholder, in the sense of sharing the same fate.

The idea that “he’s just a rank-and-file employee” is a dangerous one. What I said earlier about the contrast between “an angel investor who gets too deeply involved in the business” and the entrepreneur applies here too, in a different form.

The company and its employees are bound by a contractual relationship: an employment contract. Under this contract, the company provides money and benefits in exchange for the employees’ time and effort. Simplified, both sides bring money and time and exchange them.

Now, what are money and time to each side? In truth, for both sides, these must be things given out of only a small portion of what each has.

What is this, if not a shared fate? It’s an extremely fair relationship. Both sides saw possibility in the “business,” came together, grew, and are meant to share in the harvest together.

So then — whose company is it, really?

The content of this post is an excerpt (original text) from the following book. If you’re interested, please pick up a copy.

The Shape of a Happy IoT Startup

Originally published in Japanese at https://clazytech.com/2022/10/1235/. Translated with LLM assistance and reviewed before publication.