[HN Gopher] Boards are dangerous to founder/CEOs
___________________________________________________________________
Boards are dangerous to founder/CEOs
Author : tosh
Score : 423 points
Date : 2021-11-23 16:50 UTC (6 hours ago)
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| thrower123 wrote:
| After all these years I still don't understand the rules about
| replacing the real titles of articles with an editorialized
| version
| 4monthsaway wrote:
| I like this article, nice to see this type of advice without all
| the usual fluff
| w0mbat wrote:
| Surely the author meant, "Your Board of Directors Will Probably
| Fire You', or some other statement that makes sense in English.
|
| I know the horrible grammar comes from the original article.
| staunch wrote:
| Selling equity is one thing. Selling control is another.
|
| When the founders have control, they're the leaders and directors
| have to follow. When the directors have control, they lead and
| the founders have to follow.
|
| Generally, founders are more successful leaders of their own
| companies.
| bluGill wrote:
| > Generally, founders are more successful leaders of their own
| companies.
|
| Is that just because bad companies remove their founders in a
| last ditch effort to survive? Is that because bad founders can
| screw the company before they are removed?
| staunch wrote:
| Founders are the ones with the experience, skills, and
| knowledge to lead the companies they create.
|
| Generally, VCs are equity portfolio managers and not
| qualified to lead a company. Even when they are successful
| founders themselves, they're almost never the right people to
| lead another founder's startup.
| flenserboy wrote:
| 1. Avoid going public if at all possible. 2. Avoid outside
| investors if at all possible. 3. Avoid having a board if at all
| possible. 4. Control the shares or the shares will control you.
| szundi wrote:
| Step one on this road: and you suddenly found a pendrive with
| 100kpcs of BTC.
| nowherebeen wrote:
| > 1. Avoid going public if at all possible.
|
| This is basically what Bloomberg has done. Despite selling
| financial terminals to bank traders, the company still hasn't
| gone public after all these years.
| novok wrote:
| 5. Manipulate your employee's equity awards so that %99 of them
| return them to you, eventually, because you're never going
| public and thus your company equity is functionally worth $0.
| bluGill wrote:
| That isn't always good advice. Often the money from going
| public is required to make it. You either go public, or someone
| else will take your idea, go public and use the money from it
| to eat your lunch and then you get nothing.
|
| Good ideas are easy. Unique good ideas are so rare as to be
| non-existent. Nearly all good ideas are obvious to anyone who
| knows the field and what can be done.
| streetcat1 wrote:
| The market today is so big that many competitors can live
| side by side . At least in B2B. I mean there are hundreds of
| CRM companies.
|
| You can have other companies eat your lunch. All you need is
| to get into a default alive state. I.e. have 5-10K MRR. The
| rest is nice to have. It should be possible in any billion
| dollar market.
| ChuckMcM wrote:
| This is something you should really understand if you're starting
| a company. The board isn't your "friend" while individual board
| members may be, as an entity it probably isn't. The understanding
| that individuals can be "good" and the composite can be "bad" is
| usually encountered by most people when some government is doing
| something "bad" but the people who live where that government is
| in power are known to be "good." We see a lot of companies that
| have "good" employees but act in a "bad" way as a company.
|
| So with that in mind, you have to understand that none of your
| "friends" would fire you, but the "board of directors" (even if
| composed of people you consider friends) could easily decide to
| do that.
|
| Tom Lyon used to joke that it was only on your third startup that
| you funded yourself that you are really in control. The wisdom of
| that took a while to sink in for me.
| anthropodie wrote:
| "A group experience takes place on a lower level of
| consciousness than the experience of an individual. This is due
| to the fact that, when many people gather together to share one
| common emotion, the total psyche emerging from the group is
| below the level of the individual psyche. If it is a very large
| group, the collective psyche will be more like the psyche of an
| animal, which is the reason why the ethical attitude of large
| organizations is always doubtful. The psychology of a large
| crowd inevitably sinks to the level of mob psychology. If,
| therefore, I have a so-called collective experience as a member
| of a group, it takes place on a lower level of consciousness
| than if I had the experience by myself alone." - Carl Jung
| interroboink wrote:
| While I do think there's something of value in the idea here,
| boy do I find that quote unconvincing (:
|
| The second sentence essentially says "This is due to the fact
| that that's how it is." I'm sure Jung has a larger context
| and basis for these claims, but this quote just struck me as
| super hand-wavy.
| WastingMyTime89 wrote:
| > I'm sure Jung has a larger context and basis for these
| claims, but this quote just struck me as super hand-wavy.
|
| No, no, don't worry. Jung was already dismissed as
| completely unscientific and not to be taken seriously while
| alive. Sadly, psychology as a field mostly remains in a
| dire state and still has to shed part of its let's
| generously say less than rigorous past.
| WastingMyTime89 wrote:
| Of course, I invite readers to treat Carl Jung quotations as
| having a credibility proportional to the amount of efforts he
| made during his life to properly prove and establish the
| facts he was enunciating: not much.
| omginternets wrote:
| Just because it isn't science doesn't mean it isn't true or
| interesting.
| polishdude20 wrote:
| I wonder if this is a consequence of the shared qualities a
| large group has. In a large group, there are lots of people
| with different ideas. The only thing that is the most similar
| between all of the people are their base animal instincts
| because we are human. Thus, the base instincts are
| accentuated in the group.
| munificent wrote:
| I intensely dislike the cynicism of this and other similar
| statements.
|
| It's a truism of American culture that any group of people is
| somehow stupider, meaner, and more hurtful than any of its
| individual members. Yet our lived daily experience is that
| often our most rewarding, beneficial, and joyful experiences
| come when being a member of a group.
|
| I mean, we are a group _right here and right now in this
| thread_ and I assume everyone participating still feels it is
| a net positive for them to do so. The idea that _all_ groups
| become bureaucracies, mobs, or totalitarian regimes is this
| weird extreme perversion of American values. Call it toxic
| individuality.
|
| I think a value-free and more accurate observation is that
| emergent properties exist: a group can have observed
| properties that are counter to the intentions of any of its
| individual members. The aggregation process itself can be
| dynamic, iterative, and complex in ways that break a simple
| coupling between invidual intent and total outcome.
|
| This can be bad, when otherwise sane reasonable people get
| riled up in a mob. Or it can be good, when a choir's tone
| sounds more in key than any of its individual singers. It's
| highly dependent on both the individual members and the
| communication structure of the group.
| mattkevan wrote:
| "The intelligence of the creature known as a crowd, is the
| square root of the number of people in it."
|
| - Terry Pratchett
| lostcolony wrote:
| Also Pratchett, and mathematically probably more accurate
| (decreasing rather than increasing with the more people
| added) - "the IQ of a mob is the IQ of its most stupid
| member divided by the number of mobsters"
| toxik wrote:
| Jung's statement is much stronger, more akin to 1/sqrt(N).
| ricksunny wrote:
| So I think there's a lot to this composite phenomenon and I
| wish it were studied explicitly. (Although I wouldn't
| necessarily know), I'm not aware of social science /
| organizational behavior research that dissects the difference
| between an individual's behavior and a group's behavior that
| they are a member of. Yes we know about peer pressure and
| power dynamics (the Milgram experiment), but what are
| situations when an org will do something that all its
| constituent individuals would not but for fulfilling their
| respective unique responsibilities in the organization?
| [deleted]
| WalterBright wrote:
| Now, think about the wisdom of a democracy :-)
| lifeisstillgood wrote:
| we don't ask the mob as the mob. we get the mob to go into
| a room one at a time and then ask
| dcow wrote:
| This is also why it's very very important for early employees
| to have _their own_ lawyer review employment agreements. The
| CEO may be your best buddy and may promise to never fuck your
| over, but at a certain point they will report to the board and
| no longer be in full control. You should be weary of promises
| that simply cannot be kept. Your only option is to make the
| employment agreement 100% explicit even if it costs the company
| an extra round trip with legal. (Similar if a company offers to
| have _their_ lawyers go over the employment agreement with you
| to save you some $$... there 's an intense conflict of interest
| here that I'm surprised is even allowed.)
| szundi wrote:
| As a CEO of a company, I think this is one of the most
| important thoughts here. I was the owner too, hired a lady as
| CEO, later I fired her. It was very tiresome for me to keep
| wtf kind of promises she made just to maintain the
| credibility of the company and not to alienate people. Of
| course it payed out and I loved all the people, but boy... it
| would have been much easier to just tell the people that
| these are new times and those promises were against the
| company or whatever - pretty sure lots of people would choose
| the easier and cheaper way in "hard times".
|
| I told to directors in multinationals several times that we
| have to sign this because it is not evident for their
| eventual successors that it is in their best interest etc.
|
| Trust, but always be careful and assertive.
| nabla9 wrote:
| Good board needs to be able to act independently from the CEO.
| One reason for bad corporate governance in America is boards
| made from the friends of the CEO.
| boringg wrote:
| That's a high minded goal not really connected to the
| minutiae of the situation. Also relates to larger companies
| as opposed to early stage VC companies.
|
| Think about it from a founder perspective with a bit of
| reality: who in their right minds would you hire an
| antagonistic board for the high-minded goal of making
| corporate governance in America better when you don't even
| know if your company is going to make another year?
|
| People work for companies for three reasons: mission, people
| or money. If you enjoy working with the people at your
| company at least you have that covered. Most corporate
| companies don't have a real mission people can get behind and
| money is in the long run for founders.
| lmeyerov wrote:
| I'm mixed: Hard to have it both ways
|
| Tech grows big & fast, and a lot of today's problems can be
| traced to VC-backed boards noping out of ethical
| responsibilities.
|
| Startup board members are generally (rightfully) worried
| about growth or survival, until that's on rails and by then
| it's too late to fix the monster they've grown.
|
| Today's trends of founder friendliness, wide participation,
| and big checks makes these trade-offs even more extreme.
| Startups are so messy that the industry hasn't figured out
| how to juggle it all yet, or even if the relevant
| stakeholders even want it to.
| rsweeney21 wrote:
| I always thought stuff like this happened to OTHER founders, but
| would never happen to me. But my board fired me six months after
| closing our series A.
|
| The advice in this article is 100% spot on. I didn't know any of
| this. I was totally focused on building my company. But if you
| raise money you can't do that anymore. 50% of your time will
| always be occupied with working on your next round of funding or
| managing your board of directors.
|
| I noticed super early that VCs were not "helpful" at all like
| they had claimed during the fundraising process.
|
| So I got fired, and I thought, "well, at least I still have my
| founders stock!"
|
| Then a year after I got fired the series A investor led the next
| round of funding and decided to value the company at $0, so I got
| diluted by 99.99%. Sounds illegal, right? Well, it probably was,
| but what am I going to do about it? They have billions of dollars
| and I had no money.
|
| I just let it go and started something new - bootstrapping of
| course. On the bright side, the new CEO ran the company into the
| ground. Meanwhile my new company is doing well and I love my job.
|
| Anyway, do what this guy says to manage your board and just plan
| on being fired at some point if you raise VC money.
| mritchie712 wrote:
| I've been doing a lot of research on debt as an alternative to
| VC. A ton of options out there. Keeping notes here for anyone
| interested https://www.trypaper.io/
| bluGill wrote:
| It isn't unheard of for banks to get someone on your board as
| part of the debt agreement. Though probably only in deals far
| larger than anything in the VC range.
| mritchie712 wrote:
| Many of the debt players are realizing their advantage over
| VC is lack of control over your company. For example, check
| out https://timiacapital.com/. A lot of their marketing is
| around "Retaining control" and "No warrants and no harsh
| covenants".
| martinald wrote:
| It seems quite crazy that this hasn't happened earlier.
| It seems to me most VC rounds are usually used to mostly
| finance sales and marketing growth, which if they have a
| positive RoI should really be debt, as that's the whole
| point of it!
|
| Equity funding to me should be used less for that and
| more for R&D and product development where the RoI is
| harder to calculate, or may not exist at all.
| engineeringwoke wrote:
| What kind of competent investor does a debt deal that
| doesn't place them higher in the cap structure?
| cambel wrote:
| Just be aware with debt there are other forcing functions at
| play
| mritchie712 wrote:
| Absolutely. Just another option that's not talked about as
| much, so I've been trying to shed some light on it. If want
| capital without the "help" from VCs, there are options
| there, but as you said, with different downsides (mainly
| being on the hook for repayment).
| option_greek wrote:
| That's so sad but also super impressive. I'm not sure if you
| are ready to but may we know your current and previous
| startups.
| soperj wrote:
| Current start up is in their profile.
| cambel wrote:
| https://www.linkedin.com/in/rsweeney21/
| mindvirus wrote:
| Super curious about this - aren't there laws about fiduciary
| duty in most countries?
| somerando7 wrote:
| Question from someone uneducated on this topic: is it
| impossible to get VC levels of investment without giving away
| board seats?
|
| Is a board even required for private companies?
| PragmaticPulp wrote:
| The board seat is a part of the negotiation in larger rounds.
| Depending on how much leverage the company has in the
| negotiation, they can argue for a mutually agreeable 3rd
| party board seat. In many cases this ends up being someone
| favorable to the CEO, or at least less directly aligned with
| the investors.
|
| Some companies have grown quite large with small boards. The
| company will need a certain number of people to make up the
| board, though, so it helps to start identifying such people
| early.
| kelnos wrote:
| > _is it impossible to get VC levels of investment without
| giving away board seats?_
|
| Not impossible, but extremely difficult. You need to already
| be successful to a degree that investors are fighting each
| other to give you money, to the point where they will still
| give you that money without asking for any amount of control
| of or oversight over the company. Google[0] and Facebook
| founders managed to do this (though not through board
| composition, but through stock classification and voting
| rights), but 99.9% of other founders will not have that kind
| of clout.
|
| > _Is a board even required for private companies?_
|
| I believe some state laws around incorporation require them,
| but otherwise it's just a standard way of doing things that a
| company will lay out in its charter/by-laws. You're going to
| have a really hard time convincing a VC to give you money if
| you tell them that you're not going to have a board of
| directors. Even if you present an alternative structure that
| gives the VC some form of oversight, they will be (rightly)
| skeptical, since this is unproven ground and they will be
| (rightly) afraid that their lack of understanding of your
| unique structure will come back to bite them later.
|
| [9] I do think Page and Brin retaining control of Google was
| especially impressive, considering that their early funding
| rounds happened during, and in the aftermath of, the original
| dot-com bust, when investors were probably pretty leery of
| funding tech companies.
| deckard1 wrote:
| > is it impossible to get VC levels of investment without
| giving away board seats?
|
| Microsoft, interestingly, was after the opposite. They took a
| rather nominal $1M VC funding to _get_ someone knowledgeable
| on their board. Probably helped when it came time to IPO.
| They definitely didn 't need the funding. VCs would love for
| the world to believe that their funding is necessary. But
| often that sort of rocket fuel is detrimental to the growth
| of a company. It puts immense sudden pressure on a company,
| relationships are strained, and really weird things start to
| happen as your headcount shoots past 20-30 people.
| GDC7 wrote:
| > Microsoft, interestingly, was after the opposite
|
| Microsoft is like Marylin Monroe, or Michael Jackson or
| that person who lived to 123 years old.
|
| You'll never see a company like that ever again in your
| lifetime.
|
| They did what Standard Oil did, in perhaps an even cleaner
| and uncontroversial manner.
|
| Tons of talent and luck aligned in the exact right way for
| it to be the phenomenon it became.
| tptacek wrote:
| I'm not the most informed person on HN who can respond to
| this but as a general rule it's within the bounds of
| normality to raise single-digit millions in unpriced rounds
| ("seeds") that don't generally have board seats attached, but
| your first significant priced round (your "A" round) will
| essentially always give up board seats.
|
| Formal boards are not required for private companies.
| somerando7 wrote:
| There's nothing legally requiring me to give any seats for
| investment though right?
|
| Reading through this and my gutt feeling is that if I had a
| company doing really well I would do my absolute best to
| not give up any control over it - but idk how many
| investors would be willing to invest in that case (if we
| were doing really well though, I assume at least _some_
| would?)
| tptacek wrote:
| In practical, ordinary terms, there's nothing legally
| requiring you to give board seats to any investor.
| lmeyerov wrote:
| Yeah somewhere around Series A and esp Series B chances
| are, unless the founders really lucked out (eg, equity
| funding that could have been a debt round due to insane
| profits), they'll have lost control
| tptacek wrote:
| I don't think losing control after an A round is totally
| normal.
| hobbyjogger wrote:
| Delaware (and all or at least most other states) requires
| at least one member on the board of directors for any
| corporation, whether it's private or public.
| nostrademons wrote:
| The incorporator, board member, investor, CEO
| (President), Treasurer, Secretary, and sole employee can
| all be the same person.
| tptacek wrote:
| For bootstrapped (for lack of a better term) companies
| these "boards" are pure formalities; it's a running joke
| among bootstrappers that they flip a coin to figure out
| who the listed corporate officers are going to be.
| breischl wrote:
| Had this happen on a much smaller scale as an employee. I
| (foolishly) bought out some of my options when I left the
| company. Years later they sold it, but structured the deal such
| that the major investors got paid out all the proceeds, leaving
| zero for the common shares. Yes, I realize preferred shares and
| payout preferences and so forth. The really galling part is
| that the exec team (who had themselves acquired, not built, the
| company) paid themselves massive bonuses. The employees mostly
| got a token amount and a kick out the door. Common shares got
| zero. Thanks guys.
|
| tl;dr, shares in a non-public company are a lottery ticket at
| best. Just like options, but more expensive.
| jiveturkey wrote:
| What you're describing, though, is normal. The vast majority
| of deals happen this way. (We only hear about the tiny
| fraction where rank and file do make a dime or two, like we
| hear about the 10 heart conditions / COVID complication and
| suddenly the sky is falling.)
|
| Whereas, while the situation described by the GP is not
| unheard of, it's uncommon.
|
| Anyway, your situation is why the common mantra, value your
| stock options at $0.
|
| I think that's a wrong statement though. Stock options should
| have a binary value. $0 or IPO/exit value. If the company
| doesn't go all the way to IPO, you won't get a partial
| payout. So then guesstimate the IPO valuation of your options
| and factor the risk.
| javajosh wrote:
| All the horror stories around VC money and shennanigans like
| this make bootstrapping look not just appealing, but
| required. It's an iterated game that they play a lot, and you
| play once, and they have no incentive to play fair. I'm glad
| some of them were named and shamed in this thread, though.
| Like, why would anyone take money from someone who has acted
| in bad faith many times in the past?
|
| It reeks of unaccountable power and information asymmetry,
| two of my least favorite things.
| achillesheels wrote:
| This is what my father informed me of after seeing the
| reality of a founder CEO being diluted to nothing in the
| 90's. All that risk-taking and life which can't be
| recovered just to pay for someone else's Tahoe ski-trips :(
| repomies69 wrote:
| Though in the business world it is always like that,
| whatever you do. Whatever kind of deal you are doing you
| have to be careful and attentive.
|
| Bootstrapping is great, but it also has challenged to
| overcome. Many fail to do it.
| [deleted]
| tomp wrote:
| You probably could make a good point but this makes no
| sense:
|
| _> It 's an iterated game that they play a lot, and you
| play once, and they have no incentive to play fair._
|
| The player who plays multiple times ("iterated game") has
| _more_ of an incentive to play fair. That 's basic game
| theory. If you only play once, noone can "punish" you in
| the next game if you cheat.
| javajosh wrote:
| I didn't mean iterated game in the game theory sense,
| because that implies both counter-parties play against
| each other repeatedly.
|
| It's like when you get a mortgage - it's a once-in-a-
| lifetime for you, and a Tuesday for them. They know
| exactly how to (and have mechanisms in place) enforce
| every part of a contract they've been using and improving
| for decades; you barely understand the contract because
| its the first time you've ever seen anything like it, and
| you have no machinery in place to understand or enforce
| your side of it. They have one contract they enforce
| against 1M counter-parties; meanwhile you have 100
| _different_ contracts you 're supposed to enforce ...at
| the same level of care and capability? That's never going
| to happen, and so all you're left with is heuristics like
| "surely they'll treat me fairly!"
|
| It honestly seems extremely foolish to take VC money
| under these circumstances.
| tomp wrote:
| Yeah, the correct terms for these would probably be
| "diversification" and "information asymmetry".
|
| I think the main reason for these onerous terms _is_ the
| fact that without them, the founders _would_ cheat (not
| people like you or me, but rather, they _would_ attract
| cheaters if they didn 't work so hard to prevent them for
| succeeding)
| buryat wrote:
| what about your cofounder?
| hinkley wrote:
| They don't have to value the company at $0 to fuck you over
| once you're gone. The current board can depreciate all of the
| shares by 50% and then issue themselves twice their original
| shares so they break even. Then do the same thing a couple of
| rounds later.
|
| I haven't seen $0 but I knew a few people who got diluted to a
| joke. It doesn't take but a factor of 2-4 dilution of your
| outlook to drastically change your opinion of how you spent
| that time.
| anandrew wrote:
| Could you explain more? Because this sounds like it should be
| very illegal. My understand is that shares represent partial
| ownership of the company. So what gives one set of
| shareholders the right to reduce others' ownership share?
|
| In fact, why don't the boards of _all_ companies do this?
| Devalue everyone else 's shares so they become the sole
| owners?
| antoniuschan99 wrote:
| How does one go about learning about these things. HN crowd
| definitely leans towards the technical side myself including.
|
| Btw. The blog is very informative and have subscribed.
| low_common wrote:
| How does share dilution work? Does that mean issuing more
| shares? How does depreciating shares happen?
| Cymen wrote:
| I experienced dilution as a former employee of a startup.
| Teespring did a 13:1 down round a year or so after I left
| (2015?). If you weren't an accredited investor that could
| afford to invest in the round, you had 1/13 of your original
| shares after the round finished. I experienced both being
| pushed into AMT when exercising the options (they didn't
| offer early exercise) along with having 1/13 of my shares
| later on. No idea if I'll ever see any money out of the deal
| so I've chalked it up being a lesson learned -- many say to
| value stock options as $0 but they can have negative value.
| jiveturkey wrote:
| well to be fair, you should never exercise if it isn't
| early exercise. the odds are _very_ much against you. I
| mean, by the odds you shouldn 't early exercise either but
| at least you don't get hit by the AMT bullet.
| jasode wrote:
| _> They don't have to value the company at $0 to fuck you
| over once you're gone. The current board can depreciate all
| of the shares by 50% and then issue themselves twice their
| original shares so they break even. _
|
| Mark Zuckerberg tried a variation of that game to cut out
| Eduardo Saverin's shares when they changed the company from a
| Florida LLC to a Delaware Inc. Well, Saverin sued and
| Facebook lost that lawsuit; they settled. Saverin got ~4%
| ownership worth $5+ billion at the time.
|
| https://www.businessinsider.com/exclusive-heres-the-email-
| zu...
| Kranar wrote:
| Facebook did not lose any lawsuit. A settlement is a far
| cry from a loss and judging from the outcome, it looks like
| Saverin got screwed over.
|
| So basically, the board will try to screw you over; if
| you're not in a strong enough position to do something
| about it then you're out of luck, if you are strong enough
| to do something about it, then you might be able to recoup
| some of what you're entitled to.
| throwaway894345 wrote:
| Does anyone have a good idea about the laws for valuation
| tricks and the ways companies skirt them? A company for which I
| had stock options recently was sold to a larger company, but
| the deal _seems_ to have been coordinated such that the
| investors with privileged shares (or whatever they 're called)
| got their money, but the peasant shares (again, I forget the
| terms) were worthless--all of the "key employees" got generous
| bonuses and the employees still with the company were to be
| rewarded by the buyer with (presumably) valuable stock.
|
| I wasn't really _banking_ on these options as part of my
| financial plan, but _surely_ this sort of thing is illegal,
| right?
| drno123 wrote:
| Who was your investor? So other startups know who to avoid.
| buryat wrote:
| 2017-10-04 Series A - Numetric $13M
|
| Insight Partners -- lead investor
|
| Hack VC
|
| EPIC Ventures
|
| Draper Associates
|
| Aaron Skonnard
|
| https://www.crunchbase.com/funding_round/numetric-
| series-a--...
| CityOfThrowaway wrote:
| Yeah this checks out, these people have a reputation for
| this behavior.
| javajosh wrote:
| If firing the CEO is a (the?) major degree of freedom for
| investors/boards, why are these events not recorded on
| crunchbase? That would seem to be a natural addition. I'd
| also like to see events related to dilution using valuation
| and any other major DoF that a board might have.
| gp wrote:
| Don't want to dox, but you should be able to find it on
| crunchbase. I'm not surprised about the story given who's in
| that round.
| scrollaway wrote:
| > _I 'm not surprised about the story given who's in that
| round._
|
| Care to elaborate?
| wellthisisgreat wrote:
| I am also very interested
| adtac wrote:
| >Then a year after I got fired the series A investor led the
| next round of funding and decided to value the company at $0,
| so I got diluted by 99.99%
|
| Was it made impossible for you to be an investor in that round?
| Could you have prevented 99.99% dilution that way?
| kelnos wrote:
| It's hard to participate in a funding round when you don't
| have much money, as the parent says.
| hn_throwaway_99 wrote:
| So the existing stock the CEO had, made through his blood
| sweat and tears, was worth nothing, but you'd expect him to
| want to _pay_ for the ability to buy more stock in the
| company he was just kicked out of?
| adtac wrote:
| No, I'm just curious if it was possible technically.
| Obviously it's super unethical to do this to your CEO.
| hobbyjogger wrote:
| At a $0 valuation (assuming that's accurate) you'd be
| paying almost nothing to participate in the round (assuming
| you had a contractual right or were given the opportunity
| to participate).
| fossuser wrote:
| Can't you structure things like Zuckerberg or Palantir and just
| have the founder retain unilateral company control?
| pfarrell wrote:
| Sure... If your company is so attractive that the investors
| will go along with it. IMHO, Facebook's history is an
| outlier. Most startups aren't positioned with the leverage
| they had when raising money. I don't know enough about
| Palantir's history to comment.
| hinkley wrote:
| When the orders of magnitude change, so does the correct
| solution. In other words:
|
| Stop comparing your startup to FAANG.
|
| You are not FAANG. If you were, everyone else would know
| it. Since you aren't, their strategies don't work for you.
| fossuser wrote:
| I think Founder's Fund and Thiel are desirable because of
| how they treat founders.
|
| I wrote that first comment before finishing the article
| (which is a good article people should read it).
|
| His first advice is basically to try to do what I asked if
| you can.
| m12k wrote:
| You can - but then your startup needs to be that much more
| attractive to get investors in the first place.
| doktorhladnjak wrote:
| In theory, yes. But even that is no guarantee. Travis
| Kalanick had control through supervoting shares at Uber, but
| the investors forced him to resign and passed governance
| changes that made all shares equal in voting power. Even with
| founders having voting power, it's possible for the board or
| investors to exert other leverage.
| vimy wrote:
| How did they force him if he had control?
| nostrademons wrote:
| He was forced out days after his mother died and his
| father was in the hospital. There are some life events
| where you just don't have a whole lot of fight left in
| you to deal with a hostile board of directors.
| miohtama wrote:
| Here is the story
|
| > Indeed, Kalanick had some tepid support inside the
| company. But his vote counting rankled even his
| defenders. He was also calling executives daily, asking
| for detailed information about the business. Even worse,
| he ordered the security team to dig through an employee's
| email to see if that person was leaking a potentially
| damaging story. It all proved too much for the 16-person
| executive team, which signed a letter to Uber's board--
| but clearly directed at Kalanick--asking them to refrain
| from reaching out to employees or meddling in the
| company's daily affairs. Kalanick's own handpicked
| executives turned against him.
|
| > Somehow, amid the dysfunction, Uber hired Khosrowshahi,
| who impressed the board with a thoughtful PowerPoint
| presentation that included a slide that read, "There can
| be only one CEO at a time." Khosrowshahi was all that
| Kalanick wasn't or couldn't be: humble, a good listener,
| and a diplomat. In a pointed reversal of Kalanick's
| mantra, he would say: "We don't have a PR problem; we
| have an 'us' problem--we have behaved poorly." And when
| the city of London revoked Uber's operating license in
| September, Khosrowshahi visited, met with taxi
| regulators, and published an open letter. "On behalf of
| everyone at Uber globally, I apologize," he wrote. "We
| will appeal this decision on behalf of millions of
| Londoners, but we do so with the knowledge that we must
| also change."
|
| https://www.bloomberg.com/news/features/2018-01-18/the-
| fall-...
| wpietri wrote:
| If you still need investors to put in more money, you're
| never really in control.
| jasode wrote:
| _> Can't you structure things like Zuckerberg or Palantir and
| just have the founder retain unilateral company control?_
|
| Fyi... Zuckerberg didn't "retain" unilateral control. He lost
| his 65% majority ownership control because it was reduced
| (diluted) to 40% when Peter Thiel invested in 2004.[1]
|
| What eventually happened was that Zuckerberg _later
| consolidated voting power from other shareholders_ like Sean
| Parker and Accel Partners.[2] Why would they give voting
| power to Zuckerberg?!? Because Zuckerberg was doing a good
| job running the company.
|
| Yes, Facebook also later set up class B shares with 10x
| voting power for Zuckerberg. But investors won't accommodate
| founders with that structure unless the company is a big
| success.
|
| So in short, MZ lost 65% control, and then eventually got
| majority voting power back after some business events. Even
| though he now only owns ~14% of Facebook, an article said his
| _voting share_ was still at majority of ~58%.[3]
|
| [1] Facebook ownership was divided between Zuckerberg, with
| 65%, Saverin, with 30%, and Moskovitz, with 5%. After the
| transaction, the new company was divided between Zuckerberg,
| with 40%, Saverin, with 24%, Moskovitz, with 16%, and Thiel
| with 9%. The rest, about 20%, went to an options pool for
| future employees. -- from :
| https://www.businessinsider.com/how-mark-zuckerberg-
| booted-h...
|
| [2] https://venturebeat.com/2012/02/01/zuck-power-play/
|
| [3] https://www.bloomberg.com/news/articles/2021-05-26/facebo
| ok-...
| repomies69 wrote:
| If the company makes bucketlots of money, the board isn't
| going to change the CEO, even if he would be a total arse
| in board meetings. I think it has to be repeated that
| investors want returns for their investments. Also, if the
| company happens to make money despite of lousy CEO, the
| board will highly probably keep the lousy CEO.
|
| All these founder-centric stories makes it looks like board
| will fire the CEO just for fun, or just because they happen
| to get the idea out of the blue. Actually it is a lot of
| pain and work for the board to try to find a new (better)
| CEO and they probably realize that they will fail
| (statistically speaking). So, the board will fire the CEO
| only in a situation where they genuinely believe that
| average replacement from the market will do a better job
| running the company. They don't fire on a whim.
| magicalhippo wrote:
| > On the bright side, the new CEO ran the company into the
| ground.
|
| I've seen this up close several times, and countless times
| afar. Successful company gets bought by bigger company, new
| owners replace the successful management, new management runs
| company into ground in short order. Remains possibly sold for
| scraps to former competitors.
|
| Like... is there something they're getting out of this I don't
| fathom? Or are they just repeating the mistakes of others again
| and again and again?
| GoatOfAplomb wrote:
| The meeting management tactics in this post are highly applicable
| in other situations as well, whenever you are presenting to a
| group of approvers/overseers. For me, that's launch reviews or
| program reviews. It takes a lot of time, but a smooth review pays
| it back many times over.
| gumby wrote:
| > founder often gets to write a press release about how they
| replaced themselves with someone better suited to take the
| company to the next level or something like that.
|
| This is so common that when I have replaced myself I've had
| friends "comfort" me thinking I really was fired.
|
| In my life I've been fired once, though I should not have been. I
| have also _not_ been fired in two cases where I should have been
| (early in my career).
| Digory wrote:
| Never stand between people and a pile of money.
|
| Your Board doesn't fire you when you're the best guide to a pile
| of money. Your Board will fire you if they think you're slowing
| their progress toward a pile of money.
|
| If you think your skills as a guide to piles of money are
| imperfect, don't put your life in the hands of people who need
| you to rapidly increase their pile of money.
| repomies69 wrote:
| Actually, the board has to believe that the replacement CEO
| they find from the market, will generate better returns than
| the current CEO. So, it is not that the CEO has to be "the
| best", it has to be good enough so that if he is fired, the
| likelihood of the new one succeeding should be lower than with
| him.
|
| Note that there should be quite many advantages for the current
| CEO to do the job well compared to some external guy. Typically
| it might take 2 years from a new CEO to learn the business,
| etc.
|
| Boards don't fire on a whim, they genuinely have to believe
| that a replacement will do clearly better job - they don't want
| to go through all the hassle of finding a replacement just for
| fun.
| robocat wrote:
| The VC cares about their portfolio, so if removing the CEO
| gives gains elsewhere in their portfolio, then their
| financial incentive can be against the startup.
|
| Or the "nobody gets fired for buying IBM" theory where it is
| better to put in a known respected CEO (John Sculley),
| because fault can be blamed on the founder and LPs will
| believe the future VC spin.
|
| Usually the startup is one of the failing investments to
| consider changing CEOs, and I suspect that there are a lot of
| other human motivations that come into it.
| repomies69 wrote:
| That is true, but I don't see how firing the CEO typically
| would give gains somewhere else in the portfolio. For
| example VC's very rarely invest in competing companies.
|
| However what affects the situation is that VC's want a lot
| of risk, and the risk preferences of the CEO could be
| considerably lower - eg. the CEO would be fine with
| moderately profitable company, while the VC wants all or
| nothing.
|
| I don't think it is common to change CEO's for truly
| successful companies which actually show good numbers. No
| one wants to change the CEO, they do it because they think
| that it clearly increases their possible returns so they
| basically have to do it because otherwise they would look
| incompetent as board members.
| Waterluvian wrote:
| " They will each feel like your special confidant. They will also
| see the other board members reacting calmly to the news and start
| to think that perhaps you actually have it under control. This
| will calm them down in the future."
|
| This seems like obviously good advice. But also begins bordering
| on what feels like manipulation. And that makes me uncomfortable.
|
| In fact, this whole thing feels like manipulation. If nothing
| happens in a board meeting because it's scripted, why do they
| exist? It seems like the solution to not getting fired as CEO is
| to control the whole thing and manipulate everyone.
| gilbetron wrote:
| From the article:
|
| "All this may sound cynical or manipulative. It probably also
| sounds like a lot of work. It is all of these."
|
| It's literally the point of the article.
| jyscao wrote:
| >If nothing happens in a board meeting because it's scripted,
| why do they exist?
|
| He actually answers that later on.
|
| >Of course, you have already told them all this on the phone,
| one by one, so you know how they will react. They will want to
| talk anyway, because part of the meeting is them performing for
| each other, but, again, no surprises.
|
| Except instead of only "part of the meeting", perhaps it might
| even be more fitting to say "most of the meeting".
|
| Edit: and also this "Board members show up at meetings to
| monitor their investment and decide if they still want you to
| be CEO."
| loudthing wrote:
| Reading this title gave me a headache.
| Kaizeras wrote:
| This brings memories. I also got ,,asked to leave" after raising
| our first round.
|
| I was young (25) and naive, with no experience in business within
| the family. But what was really crucial back then was that I
| lacked a mentor who'd make me aware of the risks before letting
| the sharks in.
|
| It took me three years to bounce back and start something new. On
| the positive side, I learned a lot.
| Davidbrcz wrote:
| It felt like reading a tutorial for handling vassals in crusader
| kings.
| qaq wrote:
| So with crowdfunding cap now at 5 mil. in US sounds like a good
| way to avoid this whole thing?
| ryanSrich wrote:
| If you can crowdfund to $5m then yes. I'm guessing that's
| orders of magnitude harder for something like a B2B SaaS
| business than raising traditional VC though.
| qaq wrote:
| Thats actually a good question given the paper overhead non-
| accredited investors prob. don't get access to any decent
| opportunities.
| itronitron wrote:
| I worked for a startup for several years, as the fifth hired
| software developer and got to see our CEO fired within the first
| eighteen months. They were not the founder, but they had hired
| the VP of Sales and the entire sales team who were also all let
| go on the same day. Luckily the core product wasn't impacted and
| our primary clients probably didn't care.
|
| The company hired two more CEOs over the next three years, each
| of which lasted less than six months. I'm not convinced that the
| new CEOs ever actually did anything, although that is possibly
| due to the board running interference.
|
| My two takeaways from this experience are that if you are a
| founder you don't want to be CEO, and CEOs are basically useless.
| sombremesa wrote:
| Maybe the reason these CEOs were all let go was because they
| were useless?
| kristoff_it wrote:
| Similar advice applies also to Open Source non-profit
| foundations, in my opinion :^)
| goldenkey wrote:
| Relevant: [I refuse to let Amazon define Rust]:
| https://news.ycombinator.com/item?id=28513130
| 0des wrote:
| The article itself is titled "Your Board of Directors is Probably
| Going to Fire You", why has the title of the post just now
| changed?
| 0des wrote:
| It may be gauche to express this opinion on HN of all places and
| I hope it doesn't come off as tonedeaf disrespect, but does
| anybody notice VC is falling out of favor unless absolutely
| necessary?
|
| I am noticing a lot of bootstrappers that are emerging with the
| ethos that VC isn't what it used to be for some markets, and
| often a poor choice of the right VC can be a detriment to a
| project's longevity, with some teams choosing to avoid it at all
| costs.
| wayoutthere wrote:
| If you look at the most valuable tech companies today, most
| made it a significant way along the path without outside
| investment due to the financial position the founders were born
| into. While there are a few notable exceptions, nearly every
| one of them relied on early loans from parents to build their
| fortunes rather than early stage VC.
| robocat wrote:
| Privileged access to powerful people probably matters more
| than the $. I recall Bill Gates got trusted access to IBM
| decision makers. A recent example is Elizabeth Holmes, where
| the $ amounts were probably low hundreds of thousands:
|
| https://arstechnica.com/tech-policy/2021/11/holmes-
| parents-s...
|
| "The family's wealth, power and political connections date to
| the 1890s, when Christian Rasmus Holmes, a Danish immigrant
| and physician, married Bettie Fleischmann, heiress to the
| namesake yeast fortune and a Cincinnati socialite with a
| fondness for Chinese bronzes." - from NYT article:
| https://archive.vn/aMCpe
|
| The interesting thing is that the future fortune depended on
| a "yeast fortune", i.e. while you might not be born into
| wealth and power, perhaps your grandchildren or descendants
| can be.
| dredmorbius wrote:
| As with much other knowledge and fashion (clothing, software,
| management, ...), it's cyclical.
|
| Old-timers will remember Jerry Kaplan's _Start Up_ , about the
| failure/betrayal of Go Corporation.
| https://www.worldcat.org/title/startup-a-silicon-valley-adve...
|
| Or Sandy Lerner and Len Bosack's betrayal having founded Cisco
| Systems.
|
| https://www.npr.org/2021/05/07/994789248/cisco-systems-urban...
| cle wrote:
| The signal-to-noise ratio is getting lower and the risk is
| getting higher of choosing the wrong investors, and having the
| wrong investors pushing your company in undesirable directions
| to meet LP expectations can be really frustrating, at the
| least.
| adventured wrote:
| I agree that is happening more often in the initial stages. And
| with a bit of experience/reputation you can command very
| favorable terms in the early stages of a start-up, at least in
| the present climate where seed type funding is relatively very
| easy to come by.
|
| Or let's say you don't have much money and you want to avoid
| early VC due to loss of control and hefty dilution. In the US
| market, move to a college town (often quite safe), take a part-
| time $15 / hr retail job (CVS and Walgreens are both moving to
| that minimum in 2022; both are better than fast food and easier
| than Walmart type jobs), get a modest cost apartment
| ($650-$750), walk/bus/bike to work (no car expenses), keep your
| bills under $1k-$1.2k per month, build your start-up on Hetzner
| (new Virginia datacenter). Self-fund, build your thing, don't
| take early venture capital, maximize your leverage later on.
| Maybe occasionally do some side contracting work if necessary
| to fill up the personal treasury (10 hr per month or less).
|
| The counter argument to that is primarily the speed angle, get
| bigger faster or get crushed by the VC funded crowd, and
| similar arguments. It likely varies by the case as to whether a
| given approach makes more sense or less (eg depending on what
| you're building, time to market may not be so much of the
| essence, or it may be critical).
| bluGill wrote:
| A lot of small business owners hand out paychecks on Friday
| Afternoon and then go to the all night gas station to earn
| the only paycheck they will get. Once the company is
| successful they can make earn a lot of money, but in the
| early years a company will often have more bills than income
| and the founder loses.
|
| Note that all night is important in the above, not gas
| station. Anyplace that will let you work not normal business
| hours so you can work your business during business hours is
| what you need.
| VRay wrote:
| Man, I hear a lot of horror stories about working at
| Walgreens and the like on Reddit, even among pharmacists
|
| I guess that just going there part time as part of a bigger
| plan will be a lot lower-stress than trying to make a living
| off it, but that still sounds like a bad idea
|
| You might be better off working as an engineer for a year and
| then saving 3-4 years' worth of minimum wage money instead
|
| I had a friend who really regretted using his savings to try
| and bootstrap businesses though, since he was still working
| at Amazon in his 60s
| adventured wrote:
| If a person has enough experience at contracting to lean on
| that reliably, or enough skill to earn ~$80k-$100k per year
| (to build enough savings quickly for a good runway), then
| it's definitely not the ideal route to pull a part-time
| $15/hr type job (it'd be a waste of time).
|
| And it only works well for younger people without a family,
| as it'll involve 70-80 hours of work per week (at least in
| the beginning).
|
| It's a poor(er) person's scenario. It's what I might do if
| I were 19-21 years old again. Back then, circa 1999-2001, I
| did a lot of web development contracting to fund building
| things I wanted to build with the rest of my time. It was a
| quite unreliable path though, as some months were flush and
| others were bleak. Poor people in that scenario usually
| don't have degrees from nice universities, they often can't
| easily get good engineering jobs early on. And if they have
| an aversion to working for other people/companies, as I
| always have, then that complicates the context further (CVS
| & Co are mostly drone jobs; POS, scan bar codes, greet
| customers, bag items, stock shelves, repeat; and it might
| help reduce development burnout, as it gets you away from
| code and out of the house). If you're young'ish, poor'ish
| and without a ton of experience, it provides a highly
| workable avenue to go after building a thing you want to
| build, self-funded, while cutting out the need for early
| outside capital (the need to give up a piece of your soul
| to the sharks).
| claytonjy wrote:
| I've noticed the same though I don't know what the split is;
| still lots of VC companies, and more companies of all flavors
| being started right now.
|
| I've also seen some late stage cos raise a mix of equity and
| debt at favorable terms; is that becoming more common as part
| of the same phenomenon?
| lumost wrote:
| Rates are low, its preferable to raise debt than a dilutive
| round for existing investors. Companies that are locked into
| a prisoners dilemma for spending/market share need to get
| creative with how they finance their spending.
| dangrossman wrote:
| I don't think that's a new sentiment around here. Anything
| published by 37Signals and its founders used to be mandatory
| reading on HN, and they were all about small teams eschewing
| outside investors. Their Getting Real book was published in
| 2006.
| StriverGuy wrote:
| Interesting you avoided calling them basecamp given the
| recent media fallout. Not saying you did it intentionally,
| but just rare anyone refers to them as 37Signals much
| anymore.
| dangrossman wrote:
| I forgot they had changed their name. They were 37Signals
| when they were HN's darling. This is the company everyone
| was in love with: https://37signals.com/manifesto
| ericd wrote:
| Eh it's still how I think of them, fwiw. I haven't seen as
| much from them since their name change.
| 0des wrote:
| It was my impression Basecamp is more associated with the
| product of the same name, rather than the group (37signals)
| associated with it. Correct me if I'm wrong, others may
| have a different opinion and I'm not the foremost expert on
| that.
| atestu wrote:
| They formerly renamed the company to Basecamp a few years
| ago and shut down / spun off other products (campfire and
| highrise).
| kingcharles wrote:
| I gave up on VCs because I hate the entire experience of
| raising money and being beholden to someone. It's exhausting,
| for a start, and takes away so much time from building a
| product.
|
| I just took my idea list and erased everything that needed VC
| money.
|
| All ideas need some money to launch, and sadly some of the best
| ideas need a ton of money to launch.
|
| Ask yourself - do I have a simpler idea I can build first to
| make enough money to launch the thing I really want to do?
| wpietri wrote:
| Ooh, this is spot on.
|
| > The fact that early-stage founders continue to take their money
| has to be some sort of delusional grandiosity, in my humble
| opinion. "Well yes, they fire half the CEOs they back, but surely
| not me."
|
| Having started companies, delusional grandiosity is almost a
| requirement, especially if you're going to take venture capital.
| I mean, just look at the odds. So it makes perfect sense to me
| that the VCs happily take advantage of it.
| ryanSrich wrote:
| I think you have to weigh the options though.
|
| On one hand, you have a 50% chance of being fired.
|
| On the other hand, you're raising from Sequoia.
|
| Is raising from Sequoia going to change the direction of your
| company so much (in a positive) direction that it's worth
| taking on the 50% chance you'll be fired?
| Invictus0 wrote:
| Great article, I really enjoyed everything about this piece. Nice
| insight into the realities of the boardroom.
| ksdale wrote:
| Once upon a time, I helped a group of friends start a company,
| and as we were going over the parts of the LLC agreement that
| outlined what would happen if the company dissolved as part of a
| fight, the _entire_ group treated me like I was ridiculous for
| suggesting that they would get in a fight. I told them that if
| they were planning on staying friends forever, they didn 't even
| need the LLC agreement, they could just promise to treat each
| other fairly.
|
| The company imploded amidst a massive falling out something like
| a year later...
| mooreds wrote:
| Plan for the divorce during the honeymoon.
|
| Then put the agreement in the safe. Two outcomes:
| * everything goes swimmingly: you've wasted a bit of time and
| paper * everything does not go well: hard decisions are
| already made
|
| Before I co-founded a startup, I read the Nolo books on
| partnerships, especially the parts about dissolving them
| fairly. The details differ slightly if you have an LLC, C corp
| etc (as long as it is private) but the overarching themes are
| the same and so so important to consider.
| andrewstuart wrote:
| That's one of the most useful, practical, open and realistic
| advice pieces I've read.
| stanislavb wrote:
| Bootstrap or get fired...
| ilamont wrote:
| _Boards are necessary too_
|
| Are they? I've run my own company without a board for 9 years
| (bootstrapped) and several friends who were CEOs of funded
| companies had board-driven horror stories ranging from getting
| the boot to forcing dissolution of the company.
| kelnos wrote:
| They're necessary if you want to take on funding. It's hard to
| imagine VCs agreeing to give you money without you agreeing to
| have a board. I'm sure there are rare exceptions, but they're
| just that: rare exceptions.
| bluGill wrote:
| In many cases the law requires it. Check with your lawyer to
| see if this applies to you.
|
| Even if it doesn't apply, it is useful to get outside advice.
| The hard part is getting good advice. Boards should do this,
| but as the article points out, they rarely do.
| ilamont wrote:
| I've been on nonprofit boards in the past, and we really did
| play important roles on advice and some tactical activities
| related to committees. But the incentives were completely
| different.
| extr wrote:
| What an article. It's rare you find something that has such
| practical and straightforward advice for managing people (even if
| those people are your board members).
| vmception wrote:
| when you get thrown off of the board you still have your shares.
|
| so the trade is still successful by my rubric. I consider all
| things to be trades, whether I invested in a publicly traded
| equity, or whether I created a bunch of $0.00 par value shares to
| sell to a bunch of other people.
|
| the rule is the same: don't get married to a company.
|
| a board removing you doesn't need any fanfare. you still have the
| shares.
| boringg wrote:
| You still have shares but they may dilute you to nothing.
| onion2k wrote:
| _a board removing you doesn 't need any fanfare. you still have
| the shares._
|
| You do, but there isn't always a secondary market to sell them
| on, and if you leave under a _really_ bad cloud the board will
| attempt to take the shares back, or issue a bunch more for
| themselves thus diluting your shares in to oblivion (see
| Eduardo Savauvin vs Facebook for details.) I don 't think you
| should make light of leaving "with your shares" as if that's
| the end of the story. It might not be.
| umanwizard wrote:
| Eduardo Saverin sued Facebook for doing that and is now worth
| $20 billion.
| onion2k wrote:
| That's brilliant, of course, but he owned 30% before being
| kicked out which would be a little over $300bn now.
| PeterCorless wrote:
| This is a very self-centered "I got mine" view. Think more
| broadly: What did you do to the valuation and perception of
| your company? What have you done to the value of everyone's
| shares, including your own?
|
| If you keep a role at the company, how will it be working with
| your team now that they see your position reduced? If you are
| walked out of the company without ceremony, what balls were in
| the air that aren't going to be caught? Who did you just leave
| in the lurch?
|
| So will those shares be worth anything if you were phoning it
| in rather than focusing on your CEO performance, or
| successfully trying to navigate the CEO-to-other-role
| transition? Will your competition smell blood in the water and
| try to cast FUD in the face of your current customers and all
| future prospects?
|
| What will your reputation be going forward? ("He was a
| difficult person to work with. We had to fire him.")
|
| So sure, you may have your short-term gains in your stocks. But
| what will it do to your career? And the careers of everyone who
| had followed you to that point?
|
| This article was very well-meaning. I just have a feeling that
| all-too-many short-term thinking people are going to follow
| your advice and say, "Well, to hell with it. At least I got
| mine."
| notreallyserio wrote:
| If I'm fired I'm not the one leaving anyone in the lurch. I
| don't understand.
| bgroat wrote:
| Headline - I agree with you.
|
| Just retire, or do something else. You own the shares.
|
| Fine Print: There's still some screwy stuff they can do
| diluting your shares in particular.
| withinboredom wrote:
| Can you have a single share that is always * X of the summed
| voting rights of other shares, so no matter how many shares
| they print, you just get more votes?
| adventured wrote:
| > There's still some screwy stuff they can do diluting your
| shares in particular.
|
| And they also may run the company you founded into the ground
| by selecting a mediocre replacement (who will surround
| theirself with mediocre managers), making your shares
| potentially worthless in the end.
| elliekelly wrote:
| And often it's not about a financial bruise so much as the
| ego/emotional bruise. Losing control is not a comfortable
| feeling for the CEO-type.
| vmception wrote:
| which is why my point carries weight: don't get married to
| the company/project/IP anything
|
| go in with a precision strike and leave. don't stay for 20
| years and act surprised when the Taliban takes over the
| board again in 10 days.
|
| leave that to the disillusioned employees and sycophants.
| yourself and the external contractors extracted
| generational wealth for decades. and if you didn't nobody
| to blame but yourself.
| icedchai wrote:
| "Just retire"... that may be difficult without liquidity,
| regardless of value of the shares.
| icedchai wrote:
| Sure, but it might not matter. Your company can be in such a
| bad state that the next round, if it happens, will massively
| dilute everyone, including you. You wind up owning less than
| 10% of a sinking ship. I've seen it happen. (And if you don't
| take that money, your company goes to zero.)
| [deleted]
| ChuckMcM wrote:
| See also "cram-down round" :-)
| throwaway55421 wrote:
| If you give up your 51% share, sure.
| gogopuppygogo wrote:
| If you give up control.
|
| Weighted shares let a minority shareholder have more than
| controlling vote in a company.
|
| It is always important to understand the fabric of your company
| by reading, understanding, and following the terms of your
| Operating Agreement or Corporate ByLaws.
|
| Manager Managed LLC vs Member Managed LLC vs C or S Corporation
| are most common entity types. Use the right structure to best
| protect your interests.
| onion2k wrote:
| 51% isn't quite right. For a start, it's really "more than
| 50%", which is often 50% + 1 share, but in some structures
| there are different classes of shares with different voting
| rights. It's common to have a pool of voting shares that are
| issued to founders and preferred investors, and then non-voting
| shares that are issued to everyone else. There can also be
| shares that confer more than 1 vote to the owner. You really
| need > 50% of the _votes_ rather than any particular amount of
| shares.
| Jugurtha wrote:
| > _It 's common to have a pool of voting shares that are
| issued to founders and preferred investors, and then non-
| voting shares that are issued to everyone else._
|
| To your point about differences in classes, there may be a
| class with 10 votes per share, another class with 1 vote per
| share, and another class with 0 vote per share.
| toomuchtodo wrote:
| Common shares can also have one vote, or more than one but
| less than individual founder shares, with loss or decline in
| votes upon transfer.
| vineyardmike wrote:
| > 51% isn't quite right. For a start, it's really "more than
| 50%", which is often 50% + 1 share
|
| Most people describe "50% + 1" as 51% even though its not
| quite right, but everyone understands 51% as a shorthand for
| "greater than half, not inclusive of half". Eg. a 51% attack
| on a crypto network is the same way.
| ganeumann wrote:
| Very few things in a VC-backed startup require a shareholder
| vote. Firing the CEO is not one of them (this is a board vote.)
| Electing directors to the board is not one of them (this is
| usually the subject of a voting agreement that ensures board
| representation by the VCs.)
|
| Let's say the company raises money from VC1, who buys 20%,
| leaving you with 80%. The contracts add VC1 and an independent
| to the board, alongside you. Later the company raises money
| from VC2, who buys 20%, leaving VC1 with 16% and you with 64%.
| The contracts add VC2 to the board.
|
| Now the board is VC1, VC2, an independent, and you. If the VCs
| can convince the independent director to vote with them, the
| board can fire you, even though you own 64% of the company.
| VRay wrote:
| How does that work? Couldn't you fire the board and reinstate
| yourself if you wanted to at that point?
| PeterisP wrote:
| It works by having you sign a shareholder's agreement (at
| the point of investment) where you commit to voting in a
| certain way for certain key issues, including the structure
| of the board. Investment is usually not only a contract
| between the investor and the company, but also a contract
| between the (new) shareholders. You would be required to
| support "their representative" to be on the board, no
| matter how many percent of shares and votes you and they
| had; and then the board has the rights to govern the
| corporation according to the corporate bylaws.
| Tyr42 wrote:
| Ask Rogers, the board just tried to fire the CEO, the CEO
| just tried to fire the board, but those elections happen at
| a different time, and the CEO need the trustee of the
| family shares to agree.
|
| It can happen
| nowherebeen wrote:
| How is that possible? Shouldn't it be the number of voting
| shares you hold? I thought that was the entire reason for
| share classes. It can't be based on the number of bored
| members alone, can it?
| kelnos wrote:
| If, as a condition of taking money from a VC, you sign a
| piece of paper that says one board seat belongs to that VC,
| then you can't fire your board, regardless of your percent
| ownership of the company.
|
| Percent ownership matters, certainly: it's what allowed you
| to make that deal in the first place. At that point your
| ownership becomes a little bit less about control, and
| perhaps a little more about economic interest.
| ganeumann wrote:
| That is how it works. The board has the power to fire the
| CEO in all companies that I know of. (I suppose you might
| be able to write the bylaws so this isn't true but I'm not
| sure; a corporate lawyer would know.) The best you can do
| is to have an employment contract that regulates how the
| firing happens (ie. do you get severance, accelerated
| options, longer option exercise times, COBRA, etc. if you
| are fired without "cause", with cause carefully defined.)
|
| Removing you from the board itself is a different matter.
| But that's usually also explicitly covered: they don't put
| the founder in the "Common seat" they put the founder in
| the "CEO seat." That way, when you're fired as CEO you
| automatically lose your board seat.
| nowherebeen wrote:
| "The shareholders elect the Board which has the
| responsibility to hire and fire the CEO. The Board has
| the right and the responsibility to fire the CEO if they
| believe it is in the best interests of the company. If
| the shareholders don't like the decision, they can call a
| special meeting of the shareholders to fire the Board and
| appoint new Directors. The new Board may re-hire the
| recently fired CEO. So the majority shareholder CEO will
| ultimately prevail."
|
| https://www.quora.com/Can-a-board-of-directors-fire-a-
| CEO-th...
|
| It seems like a rock, paper, scissors kind of game if the
| CEO owns the majority of voting shares.
| bluGill wrote:
| Not all shares have the same voting rights. The VC might
| buy 20% of the company, but 50% of the voting rights. VC2
| might buy another 20%, but get a different share of the
| rights.
| nowherebeen wrote:
| That was my point.
| system16 wrote:
| Reading things like this and how common it is for investors to
| take over, I just wonder how it is possible that a young - and
| presumably naive - Mark Zuckerberg avoided the typical VC
| pitfalls and board guillotine / "CEO replaces themselves to help
| transition company to the next level" path?
|
| Was it just because Facebook's growth was so unprecedented they
| had no need to replace him? Or did he have a very good mentor or
| early investors that believed in him or helped guide him without
| taking advantage of the situation? Or was he actually just
| extremely shrewd at navigating board politics?
| repomies69 wrote:
| If the company makes money, there is very little reason to fire
| the CEO. In fact pretty much the opposite, there are probably
| CEOs that would deserve to be fired for multiple reasons, but
| because the company makes good money, the board won't care. The
| board is responsible towards the owners, if they actually fire
| a CEO of a performant company, they really have to show why it
| was in the best interest of the owner.
|
| All these stories where the CEOs were fired are from companies
| that weren't profitable, needed constant funding rounds etc. In
| the situation where the company is just sucking money from
| investors the CEO gets changed easily.
| fezzez wrote:
| He had leverage. Facebook's massive growth meant that he could
| command the terms of the investment, and he ensured that he
| would always continue to control the board even as he was being
| diluted with later rounds.
| thethimble wrote:
| See the "dual class" structure he managed to set up early on
| to preserve control.
|
| https://www.vox.com/technology/2018/11/19/18099011/mark-
| zuck...
|
| This was made popular by Larry and Sergey in 2012: https://ww
| w.sec.gov/Archives/edgar/data/1288776/000119312512...
|
| It's really only possible if the company/investment is so
| compelling that investors will invest with virtually no
| control.
| cm2012 wrote:
| What an incredible essay. Top 5 I've ever read in insight.
| daenz wrote:
| I'm happy and appreciative that this advice exists, but as a tech
| person who just wants to build new things, it makes running a
| company sound like a massive drain on the psyche.
| nickff wrote:
| Running a company is a massive drain, and is not the best way
| to 'build new things'. Starting and running a company is one of
| the best ways to 'build a new organization'.
| PeterisP wrote:
| Sure, it is - running a company is a whole full different and
| very intense profession that has little in common with a tech
| person building new things, you would have to focus on one over
| the other.
| dqpb wrote:
| You can always choose not to take on investments that
| relinquish your control.
| bluGill wrote:
| There is a reason I "work for the man" instead of run my own
| company. I could make money, but I wouldn't be a programmer. It
| took me almost 20 years of a CS degree before I was earning
| more money programming than I could have earned if I had
| dropped out of school and stayed at McDonald's (they offered me
| a management job and the career path in the direction was
| obvious - and also why most people even on that track decide to
| self limit before they reach the highest I could see from
| there.)
|
| To make it clear, if you found a company you MUST be a
| management type person. You can maybe program 25% of the time,
| but the rest of your time is sales and management duties. You
| can hire out the sales but that means more management. Soon you
| are best off hiring out the programming as well and being all
| management.
| repomies69 wrote:
| There's tons of different companies, VC-funded high-growth
| startups are just a small subset of all companies. If you
| want to do programming in your own company you can set up
| some boutique working on some niche. Absolutely no need to be
| "a management type person" in my opinion. It certainly is
| possible to run company where you do up to 80% programming
| IMO.
|
| But, if you want the big bucks it typicalle makes sense to
| hire and grow. If you want to stay small and do stuff
| yourself, it means less money.
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