As the brainchild of a start-up, it’s in your best interest to be one step ahead around decision making power and the effect new partnerships or investors could have on yours. If you don’t understand the legal authority given to each role player joining your business, your power can easily be diluted. This is overlooked by most start-ups, in favour of making tangible progress on product and sales.
In this article I will unpack how decisions are made in a company, who decides how to bring the business idea to life and what steps you should take to get there – all whilst maintaining your power as founder.
Company control – making sure you stay part of the process
Essentially, there are three groups with decision making power in a company. Each group has both special rights, and absolute limitations. Being completely clear on the rights and limitations of each group is perhaps a condition of your success, or even survival in your own company.
Group 1: Shareholders
The first shareholders are the founders of the business. They make a contribution to the business, usually in the form of cash or capital, effort, time or other valuable resources. Their reward is that they get a return on capital, as their shares grow in value and they receive dividends from the profits of the business. They have the right to appoint the custodians of the company: the directors.
Shareholders are consulted and have the final decision making rights on major decisions, influencing the value of the company. However, shareholders have no right to take part in the business of the company. They have no role in the operations, finance or other day to day business of the company. If this comes as a surprise to you, it’s probably because you are (like I was eight years ago) both shareholder, director and employee of the company. Read on.
Group 2: Directors
These are the custodians appointed by the shareholders. Carl Bates from Sirdar (a leading consultancy, focusing on company governance) once put it something like this: The shareholders provide the cash and set their expectations for a return on capital. Then they appoint directors and charge those directors with the task of building the road map, or “strategy”, for achieving that return on capital.
After building the strategy, the directors develop the practical steps that will result in its achievement. Then they monitor the company, which involves “fine tuning” monthly, quarterly and annual deliverables.
This is a big picture, conceptual role – directors don’t roll up their sleeves and descend onto the office floor, coding software, manufacturing car parts, or whatever the activity of the company is. They have the mandate of keeping a broader view. To see the wood for the trees, so to speak. Having a group of people who are not subjectively involved in the day to day work of a business is incredibly valuable. This is a reason why mentors or independent directors are so valuable.
Group 3: Employees
These are the sales people, the manufacturing or production people, the finance team, the HR, the digital marketing team – the people that take the practical day-to-day steps of creating a company (the same company that was funded by shareholders, conceived by directors and is now being set up and run by employees?)
Take note – this is where it becomes interesting and highly relevant for the archetypal client of our law firm: when starting up, the start-up client is all three of the above. She has the skills and capital, she develops the idea, she builds the product, leases the premises, hires the accountant and buys the milk and coffee every day. Sound familiar?
Although it would be great to have all three perspectives of the founder’s roles, this is usually not really necessary to kick things off. At the beginning stage of a business, it’s about making progress on the product, validating the business model, and finding the customers.
However, fast forward a few months and things will change radically as the founder brings on partners and investors. When this happens, additional people are involved in the decision making – and when THAT happens, who actually has the decision making power?
Who is really on top?
Looking at these three stakeholders, you will appreciate a bizarre inverse reality. The most “junior” members of the category probably think of themselves as most valuable, yet they have the least power over the bigger picture.
Employees are the face of the company, but they have no say at all when it comes to the biggest decisions of strategy, funding or even the sale of the company.
Directors are charged with building the strategy and making the essential decisions around the implementation (i.e. signing off all contracts, employing new staff etc.), yet they are appointed and can be dismissed by shareholders.
Shareholders have no employment role and have a limited say in the overall strategy – except if it will affect the overall value of their shares. That said, they are the only ones that can authorise major decisions such as taking on more funding, selling the business, merging the business, etc.
The danger then? Finding yourself in a situation where you feel that you are building up the business as an employee, but your power as shareholder and director have been diluted by other partners. This is why your shareholders’ agreement and MOI (memorandum of incorporation) is so critical – it clearly sets out these rights with no room for confusion. In essence, this is where a start-up lawyer plays a key role and can directly contribute to the value of your stake in the business.
Keep an eye out for my next article on funding your business and bringing on new shareholders. Here we’ll take an even deeper dive into how to best navigate your way around organisational growth and restructuring, without losing your power and voice.