Apr 14, 2017

Founder control controversy isn't easily resolved

Dan Primack, author of Pro Rata

Richard Drew / AP

There has been a lot of tech and trader talk lately about founder control, in light of both the Snap stock structure and Uber's ongoing sadness soirée. At its heart have been two competing theses:

  • Pro: Such arrangements usually only apply to visionary founders who have demonstrated an ability to successfully execute and generate major market traction, either at a past company (e.g., Jack Dorsey at Square) or at their current one (e.g., Travis Kalanick at Uber). The investment is as much about the person as it is about the idea, which is at the heart of venture capital's "founder friendly" movement.
  • Con: The board of directors must be able to fire the CEO, or else it's really just a board of advisors. You may have invested in "the person," but sometimes that person changes or does something unforeseen that is extraordinarily damaging to one or more of the company's many stakeholders (other shareholders, employees, customers, etc.). With great voting rights comes no responsibility.

The latter argument is quite persuasive from a corporate governance standpoint. On the other hand, a young Facebook is probably sold to Yahoo if Zuckerberg didn't have the ability to say no. And Snap likely would be owned by Facebook (which is already owned by Yahoo in this scenario, all of which makes me want to write a wonderfully nerdy Choose Your Own Adventure book).

Again, these cases are outliers. Most entrepreneurs don't get voting rights in excess of their actual equity. But such outliers are where the most money is often at stake, so it seems that there must be some middle ground. Kind of like a limited no trade clause in pro sports, although the exact construction remains elusive.

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