The Three Levels of Control Within an Organization

May 29, 2018  |  By Kevin Vela

A common misconception in any startup is thinking ownership percentage equates directly with control. While it’s true that the majority equity holder(s) usually controls the business, this isn’t necessarily always the case. Let’s break it down.

Day-to-Day Operations

Day-to-day operations are generally managed by the President or CEO (typically the same person in an early-stage startup). The President/CEO oversees the employees, is responsible for P&L, and in a startup, does everything from set the SaaS pricing (or oversee who does) to order office supplies.

In the early days of a startup, the founder is the President. In later stage companies, the President is appointed by the Board.

Strategic Decisions

Strategic decisions are things like hiring C-level executives, setting the annual budget, setting terms for a capital raise, and approving large expenditures. Initially, when the company is small, these decisions are made by the President/CEO, but once a board of directors or managers (the “Board”) is established, these decisions are made by the Board, and rightfully so. You’ll want the group wisdom and deliberate nature of a Board’s decision-making.

Fundamental Decisions

Fundamental decisions are made by the shareholders of the company (or members, if the company is an LLC). Very few decisions fall under this category, but they are critical: selling the business, merging with another business, converting the entity, electing the Board, or filing for bankruptcy. It’s quite the process to set a shareholder meeting and take a vote, or to chase down signatures for an action by written consent, so this doesn’t happen often. But when it does, the time and expense required to get a vote out to shareholders is well warranted.

Now back to that note about control. If you are the founder of a startup, you’re likely going to have majority control for quite some time. So you can appoint (or elect) yourself President and control the Board (by taking the only seat, or voting in people who are favorable to you).

But once you start taking on investors, be ready to give up some of that control. You’re not likely to give up voting control anytime soon, but it’s pretty typical for investors to take a seat, or two, on the Board, and to request “protective provisions,” or a set of decisions that can’t be made without investor approval. Thus, once you get to your Seed or A round, it may be possible that you still own a majority of the stock of your company but you need approval for certain decisions (usually concerning raising capital, changing the corporate structure, changing the option plan, spending large amounts of money, or selling the business).

And as the company grows, the founder may lose control altogether. This is typical in most venture-backed companies – where various layers of investors will all have representation on the Board alongside representatives of the common stockholders. But this sort of group wisdom and collective decision-making, not to mention the intellectual and social capital around the table, are critical components for the success of startups.

About the Author(s)

Kevin Vela

Kevin is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, M&A, fund representation, and gaming law.

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