You build an enterprise by investing a great amount of time and efforts. You eventually started feeling like a successful entrepreneur as you get to experience that first taste of success. However, seeing yourself losing control over your enterprise can make you panic. There are many reasons or situations where you may feel as if you’re losing control over your brainchild. For instance, many times inviting new capital sources raises concerns related to a board seat. Also, you may face less or no control with regards to ownership, voting, and financial aspect as well.
However, if you are mindful of your decisions, drafting all business documents, and negotiate properly then you can regain or retain control on your business. This article explains the ways in which you can protect and retain control over your business.
1. Ownership of intellectual property
It is inevitable for you as a founder to ensure that the IP belongs to the company and not to the individuals. Intellectual property (IP) is a fundamental aspect of your business and you must protect its ownership to reclaim the agency.
2. Avoid reliance on external capital
There is a common belief that if you are willing to expand and grow your business then you have to raise capital for the purpose. However, raising capital, especially the time past Series A rounds can cause you to lose equity in the transaction or a broad seat that a company holds. So what’s the fix to this? Don’t get yourself into raising venture capital in the first place.
But how can you avoid raising capital and still facilitate the growth of your company? Well, you can do that by managing to retain the profitability of your business. To achieve that, you need to conduct a detailed audit and decide what non-essential functions and operations you can scale down. You need to optimize your priorities.
You can also avail tranche investments that allow investors and other stakeholders to offer money to your business over the course of the specific period rather than giving it all at once.
Thus, by avoiding reliance on external capital, by managing to retain profitability and multi-stage founder investments, you can protect and retain control over your company.
3. Negotiate about board control with investors
There may occur situations, where you need to raise venture capital to grow your business. However, you need not worry about it as there are many demonstrable mechanisms that you as a founder can employ to keep your control over your business intact.
Founders and investors can discuss board provisions in the term sheet before a deal gets finalized. You can negotiate board control, board observer, and board member nominations along with discussing investment terms.
4. Advisors and mentors for the required expertise
Advisors and mentors play a significant role in acquiring success in the early stage of an enterprise. Advisors provide expertise that helps companies with various aspects of business operations.
Let’s take an example of an insurance technology business, Reframe Care. They focused on forming a group of advisors before raising capital. It ensured that they are utilizing the expertise of more experienced advisors and mentors to their advantage.
5. Have a majority stake over a number of seats on the board
When it comes to board members, you need to be extra careful. While some board members can be elected by the founders (common stockholders) and some can be by investors, do not allow investors to elect more board members than you. This way, you can retain control over board decisions.
6. Don’t entertain back-breaking liquidation preferences
Make sure that investors are not gaining an amount from a liquidity event before you, common stockholders/founders gain anything. It should not be the case that investors are gaining 3 to 5 times the amount they invested before you gain anything. Thus, don’t allow back-breaking liquidation preferences.
Being a founder, it’s natural to seek complete control over your enterprise and in every decision-making task. Thus, experiencing loss of control is often scary. However, take care of certain factors to protect and retain control without ground on the basic actions that needs to be taken. So plan out well and ensure that every decision you take is for the best of the company without you being at risk of losing the grip on its functioning.