Chapter 1: The Misconception of Control

“Brett, I need to have control of the board.”

Who do you think made that statement? Was it a startup CEO, an investor, or perhaps both? As a first-time CEO, it’s only natural to desire control over the board of directors. After all, controlling the board means you steer the company and can’t easily be dismissed.

You might also think that if investors dominate the board, they possess the power to dictate your actions and terminate your position whenever they choose. However, the truth is far more nuanced.

So, which group consistently expresses the need for board control? It’s invariably the CEOs, not the investors. Let me clarify the key insight that investors have that many do not.

Investors don’t actually need control of the board to remove you from your position. They are quite astute and recognize something that many first-time CEOs overlook: they exert control over the company the moment they invest.

This is straightforward. To scale your startup—especially if you are pursuing venture capital—you will require additional funding to continue growing.

Consider this scenario: you launch a company that experiences rapid success. Your revenue and customer base expand dramatically, and your valuation climbs with each funding round. You’ve cleverly structured your stock, retaining 100% of the voting rights.

Despite the success, your startup still needs financing as it hasn’t reached profitability yet. You might feel secure, thinking you can’t be ousted as CEO regardless of your conduct. It may seem like a comfortable position.

However, if you behave poorly—mistreating staff, facing allegations of harassment—the investors might decide they’ve had enough. They could approach you with an ultimatum: resign, or they will withdraw their support.

You may attempt to resist, but if your investors are resolute, your board members will likely insist that you step down. Ultimately, you might find yourself resigning because you realize you lack any viable options.

Just ask Travis Kalanick, the former CEO of Uber, if holding all voting rights can protect you from being ousted. The situation I’ve described mirrors Kalanick’s experience.

Be wary if your key investors are hesitant to join the board. This advice doesn’t pertain to situations involving angel funding or self-funding, where having a single-member board can simplify your journey. In fact, I would recommend avoiding giving a board seat to an investor unless absolutely necessary.

However, when seeking substantial investments from venture capitalists, it’s crucial to have your investors on the board. Each board member bears a fiduciary duty to prioritize the company’s best interests while serving on the board.

Investors who are not part of your board are not obligated to act in your best interest; they focus solely on their own. Over time, the interests of investors and CEOs may diverge, which is far more significant than who technically controls the board.

Chapter 2: The Importance of Investor Board Participation

In this chapter, we’ll delve deeper into the dynamics between startups and their investors, examining how the alignment of interests can make or break a company’s growth trajectory.