What Control Do I Lose Once I Start Taking Money from Outside Investors?

financing Apr 07, 2022

You generally only lose control when outside investors own over 50% of the voting shares. That said, many deals contain “Covenants”. Even a bank will request certain things never be done without their approval. For practical purposes, because the management team is likely to vote together unless there are serious problems, when the outside investors collectively own 50% of the remaining shares is what matters. Because if the management team owns 33% (of voting shares), and the outside investors own 66% they would need a lot of unity to override the founder’s board and share votes.  In this example, the outside investors would have to have ~75% of those outside shares to be voting 50% of all shares.

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These things start to matter if things are not going well for some reason. Rarely is there an attempted coup, or do board votes make critical (split) decisions, when things are going well. And if things are not going well, then it is logical to think some change may be needed.

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Probably the most common issue is “bringing in adult supervision” which means a more experienced CEO with gray hair to replace a younger founder who is out of their depth when the company reaches a certain size. Entrepreneurship is very different from scaling or running a large company. So, most younger founders are eventually replaced, or entire teams are brought in behind them, with them often being a figurehead who is not in control.

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Bob Norton is a long-time Serial Entrepreneur and CEO with four exits that returned over $1 billion to investors. He has trained, coached and advised over 1,000 CEOs since 2002. And is Founder of The CEO Boot Camp™ and Entrepreneurship University™. Mr. Norton works with companies to triple their chances of success in launching new companies and products. And helps established companies scale faster using the six AirTight Management™ systems. And helps companies successfully raise capital.

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