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Ask HN: Should investors get a board seat and preference in liquidation?

7 points by rahulchhabra07 ↗ HN
I have a few doubts and need clarification.

- I think investors getting board seat - control over the direction of co and preference at liquidation is a lopsided deal.

- Founders and early employees seem to have put in the effort, have context higher by orders of magnitude and real skin in the game - they sacrifice time, effort, take risks and have real opportunity cost - proof of work.

- Both wealth and effort compounds. Investors put in already compounded wealth into to-be compounding efforts founders are making and still own preference over later stage returns of the co.

- This implies even though investors take lesser risks, and put in lesser work, they get more returns than founders who put in more work and take more risk in generating the returns.

- Given this equation, it makes sense for founders & early employees to have control over the direction, more stake, and preference over liquidation. Giving more stake to someone who has higher skin in the game inevitably leads to better results for everyone who owns a stake in co.

5 comments

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greenyoda
> Giving more stake to someone who has higher skin in the game inevitably leads to better results for everyone who owns a stake in co.

You don't think investors have skin in the game? The investors take on the risk of losing 100% of their investment if the company doesn't succeed. And it's a real risk: the vast majority of all startups fail. What comparable risk do the founders and employees take? If the company fails, they've been paid a salary for their work and can go find another job.

Do you expect the investors to just give you millions of dollars without any say in how it's spent? Even if you had a track record of having founded several successful companies in the past (which most startup founders don't), an investor wouldn't give you millions of dollars to play with without having some control over the risk.

If you want absolute control over how the money is spent, finance the company out of your own savings, not with other people's money. Lots of companies are bootstrapped from their founders' assets, and these founders completely own and control their companies. But you can't have it both ways. If you take money from investors, you need to give up some ownership and control.

rahulchhabra07
- One of the core assumptions is that founders and early employees have more context than investors by orders of magnitude. This implies that decisions taken by founders would be more correct than by someone who has seen cos just from the outside. Which means if an investor exercises control over the direction of the company, it would probably lead to incorrect decisions.

- If a co grows and exits, an investor gets a proportional return. Sometimes, the money helps that growth possible and sometimes it makes that faster. Hence, there exists a win-win already for both parties. The board seat just complicates everything.

- I don't deny investors have skin in the game. I just claim founders have a higher sense of it. The stress, effort, and risk that founders take are nowhere close to the low compensation they decide to take for themselves.

ohashi
Or founders are blinded by being too close and need outside help, people with more experience and connections. You seem to be stuck on founders being better in every way for... no real reason. Some founders might be smarter at some things, some investors will be smarter. You should be finding an investor who adds to the founding team and will help guide and grow the company. Thinking they are just stupid money makes you look naive.
ian0
It's not that cut and dry.

- Most professional investors aren't investing their own money and understand a majority of their portfolio will fail. Even if the fund performs poorly it will take years to find out and they are paid relatively well during that time. A founder runs a gauntlet of practical risks (career, depression, monetary, reputational).

- Most professional investors do not have the experience necessary for running a company. Though obviously they can provide helicopter view support and leverage knowledge from their portfolio.

At the end of the day even co-founders diverge in terms of motivations and end-goals. Obviously investors VS founders will too. If you'r taking on investment its obviously critical that you are aligned from the outset. And if its a VC, then you are aware of how the VC business operates, what their goals are and how that will impact your company in different circumstance (liquidation etc)

Finally, if you are really aligned, it's likely you will welcome their view on how the business is run and being transparent as to strategy & finances wont be an issue.

ian0
A single board seat doesn't imply control over direction. As long as you have more than 1 seat or the chairmans extra vote the founders are still in effective control. Granted there may be provisions in the shareholders agreement that limit certain activities, but as thats a negotiated doc the aim is to have something both parties are aligned on.

At the end of the day, you should aim to have an investor you would want on the board. Someone that brings something to the table themselves, something you don't have. They have already brought money, so not that, but it could be strategic, including assisting in future fundraising activities, or assisting with introductions. VCs especially see a lot of companies through their lifecycle and as such typically have better knowledge of optimising for global VS local maximums in strategy. They also obviously are keenly aware of founder pitfalls.

Preference is a different story. Multiples are obviously rightly controversial, and you could definitely argue that single preference as downside protection is unfair. Note however that a VC has their own equation that argues in favor of this (founders aligned to better exits, returns support future funds and founders). At the end of the day you cant always perfectly align founders & investors, so its a negotiation.