Who Owns Your Company?

// Business, Entrepreneurship, India

Once in a blue moon, this situation repeats itself. The board of a company along with the stake holders and investors are pushing the entrepreneur towards a direction and he/she is really not liking it, and tries the ownership card. “This is my company, and I do have the best in mind for it”. Nobody usually reacts to those words, but technically one could throw you out for making statements like that. I’ll start with who doesnt own a company - Its the entrepreneur.

Whoever sold you the romanticism that being an entrepreneur meant being your own boss, was clearly lying. You really never escape the chain of command and reporting structure so easily - not in a civilized society. So Its no wonder that things don’t span out as they say. As an employee you might be accountable to your boss, but as an entrepreneur you are accountable to all of your clients, stakeholders and employees. And every one of them holds you responsible to have the answers and do your best - that’s no different from being an employee times ten. Think about it.

So here’s two things you must know. It is crucial to understand this because this sets the context to understand a whole lot of things that happen through the course of the company.

1. The day you incorporate your company, you no longer own it. You want to own something, keep it a proprietory firm or under a partnership (wouldn’t recommend it, as the stats are as high as 99% of partnerships ending in breakups). It might not be a bad idea to keep it as a family business, but there as well its joint ownership.

2. The Day you agreed on a termsheet and took money from your investors, you made up your mind that you were going to sell your company for a good price someday. Investors invest looking for returns and that returns are never going to happen without an exit; And an exit means a sale. Read that line a few times, it helps to get it into your head. You have in all means sold your company when you take investment. Period.

So the obvious question arises. Why on earth would anyone want to be an entrepreneur despite all these gory truths. Well, a couple of reasons. a) You still do have the capacity and capability to build something from scratch, scale it and make money in the process - You are still one of the major stakeholders in the firm. and b) What you want to do to create this value (be it money or impact or fame) is all left to you - atleast in the beginning.

The intent for writing this article is for one thing. I see and come across enough entrepreneurs who want to own more than 50% of the company. Thats almost the sure way to kill the company and strangle some relationships, because it shows that you haven’t gotten the first thing about a corporation right - you cant own it. And the only way to scale it is to give up control, bring in the right people, and yet have enough of a leeway to make a decent exit - note how the stake you hold is towards a better return, rather than control.

And in all this does the obvious question remain. Who does own a corporate? They say it becomes an entity of its own, can own assets, can incur liabilities, can attract investments and is a being of its own shielding its board and management from most liabilities. Who then owns it? The answer to that is probably the most shocking. The Government. The Government is what owns a corporate - actually every corporate. The rules of the land, enable and provide the space for passionate, enthusiastic and enterprising individuals to spot an opportunity, exploit it, create jobs, add value, attract investment, grow the company, expand, create a board to make their own decisions and directions for the entity, make an exit, or even take it public. But at the end of the day, when and if it does shut down and incurs a loss, the losses go away with the fading memory of the company. And thats the shield that a government provides towards the entrepreneur - probably the best of freedom for an individual to create wealth and value the fast track way.

As far as the govt is concerned, creating jobs is one of its prime mandates. And corporations are instruments towards that cause.

In the light of that, look at the bailouts. You might see a slightly different picture.

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14 Responses to “Who Owns Your Company?”

  1. sunil r nair Says:

    June 17th, 2009 at 00:29

    I could not agree more. Vijay Anand has got the core of the ownership conundrum bang on. I hope this helps suicidal startup owners to wake up and smell the roses.

    Sunil

  2. Salil Says:

    June 17th, 2009 at 02:45

    Vijay,
    This is a great post.
    I hope everybody who wishes to start a company reads this.
    Cheers,
    Salil

  3. Venkat murthy Says:

    June 17th, 2009 at 02:48

    This part of being an entreprenuer, something many don’t know.
    Thanks for throwing some light on it!!

  4. Abhishek Parolkar Says:

    June 17th, 2009 at 03:26

    Vijay, You said it right.
    Well, many a times I also get disappointed by behavior of entrepreneurs who try to over control the setup for hunger of ownership and authority, which does no good to the company.

    It is extremely important that entrepreneur treats himself as an employee of the company in leadership role and not mimicking ownership role.

    Thanks for writing this post, but more important point that I would like to make is that, entrepreneurs don’t choose to behave as owner. This trait or mindset of ownership is a side effect of the process that entrepreneur goes through while building the firm from scratch and getting it to the level where it become a company. Whats crucial is that, Entrepreneur finds her mechanisms to fight with such side-effects of the process.

    I would love to see you write on these mechanisms too.

    Good stuff :-)

  5. Kshitij Says:

    June 17th, 2009 at 04:04

    Hi Vijay,

    This is a great post. I liked this line particularly “You have in all means sold your company when you take investment. Period.” How true..

    Cheers,
    Kshitij

  6. Kalpesh Khivasara Says:

    June 17th, 2009 at 04:06

    I would disagree with the following statement of yours : “I see and come across enough entrepreneurs who want to own more than 50% of the company. Thats almost the sure way to kill the company and strangle some relationships, because it shows that you haven’t gotten the first thing about a corporation right - you cant own it.”
    Why can’t an entrepreneur retain majority control in his company by raising funds after selling a minority stake?

  7. vijay Says:

    June 17th, 2009 at 05:29

    @Everyone: Thanks guys. I am glad this was useful. Will try to keep my posts - in the future - to the same measure.

    @Kalpesh: I was expecting someone to pull out that line, and I’m glad you did.

    a) You will easily give up 20 - 30% of the company when you raise your first round. Another 20% for ESOP and whats left is 50%. You will end up diluting that in your second round which is inevitable.

    b) There are also scenarios like the google founders where they carry 10x votes. So even if they have 10% of the company, they almost have veto rights. But they had built a powerful company before the investors came onboard so they had the power to negotiate.

    Hope that helps. In short, I dont think you can raise funds easily with a minority stake.

    V.

  8. Kalpesh Khivasara Says:

    June 17th, 2009 at 05:45

    Thanks for the clarification, Vijay. I didn’t know ESOPs could account for 20 % of the total equity. Is this number high only for IT/web startups or is it a benchmark across industries?

    And about the Google founders’10x voting rights stocks, do you think Indian laws would permit a similar stock here? Which founder wouldn’t kill to have a 10x voting right stock!

  9. vijay Says:

    June 17th, 2009 at 05:55

    Kalpesh: I think 20% is a reasonable size, though it doesnt have to be, and in some cases could even be more.

    Regarding voting rights: It has nothing to do with the laws of the land. A company is governed by its Bylaws and you can draft whatever you want within it following the guidelines set by the Corporate law. Its possible to do 10x voting rights in India too, but you see any company as explosive as google around? I doubt any investor would agree.

  10. SG Says:

    June 18th, 2009 at 02:55

    Noticed your post on venturewoods and a quick google led me your homepage.

    If someone comes up to investors with just an idea on paper, then maybe yes, but to assume that that is the only way forward when taking an investment is stretching it too far.

    There are a ton of ways for business owners to get what they want without giving what they don’t want to give. Like bank debt is much cheaper in the long run and when someone is anyway betting the farm when starting up, why not risk bankruptcy too along the way ;-) There are other ways too if one is creative.

    If only there was more energy spent on building solid foundations of businesses instead of focus on just ideas and investments. Maybe then more businesses will reach their goals without diluting again and again (your 2nd round comment above) to cover up for their failures.

    Or do you think that investors really are that important and its an exception to be able to build businesses without them?

  11. Sridhar Turaga Says:

    June 23rd, 2009 at 01:38

    @sturaga

    Great post. Cool new design for the site.

    Agree with everything except … “the only way to scale it is to give up control” or “entrepreneurs who want to own more than 50% of the company. Thats almost the sure way to kill the company”

    IKEA, WIPRO, WALMART, LINKEDIN, RIGHTNOW, CRAIGSLIST etc. (as far as I know) are examples of how the founders tried hard to retain control and majority ownership successfully … to ensure they always retain the risk taking ability and freedom to only focus on the long term.

    To the contrary I would argue … raising VC captial some times creates artificial time frames to increase the valuation … even when the market for the company may take longer. It’s easy to draw up a spread sheet with expected 25% return p.a. then life moves at it’s own pace !!

    Equity investments are also like loans … and the expected payback keeps growing … even if it’s on paper.

    Not that I totally disagree with what u said … but it’s the ambiguity of AND that rules start ups …

    One needs to accept that the business belongs to the investors “AND” try and own it as your own as much as possible

  12. Vijay Anand Says:

    June 27th, 2009 at 09:22

    SG: I’d agree with you, if one can build a business without raising money from VCs, they should. Afterall less than 10% of companies manage to raise money from structured financial entities the rest do survive somehow - the stats were that only 16% of the fortune 500 companies have raised Venture Capital - so yep, one seriously must explore the other options out there.

    Sridhar: You are talking about balance. I’d agree. Most of the companies you mention of a) Did not raise funding b) Had established themselves that they had bargaining power. So My points still hold.

  13. The Case for Startups - The Prelude. | Vijay Anand | The Startup Guy. Says:

    August 13th, 2009 at 14:28

    [...] Employment is a key value proposition of any government and referring to my previous article on who really owns a company, You can rest assured that the government will get involved and play its part to help. But the [...]

  14. Rashmi V Says:

    August 14th, 2009 at 02:43

    Well Said.

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