Who's The Boss: VCs or Founders?
A shiver goes down my spine when I hear a VC refer to a portfolio company as “my company” or a CEO as “my CEO.” The implicit suggestion is that VCs are kings and the lowly founder is the grunt that exists only to humbly serve their capital-holding master. Ugh.
And, it goes both ways. It’s not uncommon for a founder to poo-poo the importance of investors since they’re not operating day-to-day.
As both an entrepreneur and a VC – I deeply believe that these perspectives are not only wrong, they’re foolish.
As a VC, I do understand why VC’s might claim seniority. After all, VCs typically join the boards of their companies and boards have the ability to fire CEOs. So, don’t CEOs work for them?
Furthering the confusion are the rights granted specifically to holders of preferred equity. VCs might be able to veto a sale or the issuance of any new security, so doesn’t the buck stop with them? Well…sometimes it does.
But hang on, entrepreneurs can easily point to another set of facts that suggest they are the heirs to the throne:
- Founders typically own far more of the company’s stock than any single investor.
- They often represent half or more of the board, meaning that they’re the real bosses of their CEO-selves and equals to investors in the board capacity.
- And, founders usually have the loyalty of the team – meaning that they hold much of the fate of the company in their hands.
One could argue that this fact pattern makes founders the rulers of their startupland.
So, here’s the thing…when you zoom in on the complex relationships that founders and investors typically have, it’s really hard to tell who is actually the boss. Each party holds different types of leverage in different situations. It’s a carefully crafted relationship designed to protect both parties from risk factors there are specific to their role in the company.
So if arrangement between VCs and founders makes sense and there are mixed rights assigned to each party…why are we trying to figure out who is more important? Why do we care?
Perceptions of seniority or subordination by either party are just…well…perceptions. They’re useless and they don’t affect how the company is actually managed.
The reality is that investors and operators are PARTNERS in a venture. They’re each contributing different assets, with different rights in order to achieve a common objective: the creation of shareholder value.
All of the hubbub about seniority and subordination from both sides is a weak attempt to selectively looking at fact patterns that support egos. But, business isn’t about egos, it’s about progress.
So why is this an issue?
The main reason is that egos can make for bad work environments and unproductive relationships. Entrepreneurs don’t want to be insulted or talked down to by their investors. And, investors want entrepreneurs to respect their input and support their objectives. Egos can get in the way of true collaboration.
So what can an entrepreneur do?
First, you need to understand that all of your investors want and deserve your respect – they’re your partners after all.
Second, when you’re picking your investors you should seek capital from those that understand this concept. While taking capital from “bosses” can be a big downer, there is nothing better than obtaining the building a bench of highly supportive partners.