As start-ups grow, entrepreneurs face a dilemma — one that many aren’t aware of, initially. On the one hand, they have to raise resources in order to capitalize on the opportunities before them. If they choose the right investors, their financial gains will soar. My research shows that a founder who gives up more equity to attract cofounders, non-founding hires, and investors builds a more valuable company than one who parts with less equity. The founder ends up with a more valuable slice, too. On the other hand, in order to attract investors and executives, entrepreneurs have to give up control over most decision making.
This fundamental tension yields “rich” versus “king” trade-offs. The “rich” options enable the company to become more valuable but sideline the founder by taking away the CEO position and control over major decisions. The “king” choices allow the founder to retain control of decision making by staying CEO and maintaining control over the board—but often only by building a less valuable company.
Since the publication of the artcile, a number of successful technology companies, including Google, Facebook, Twitter, and Uber, managed to break, rather than make the trade-off. That is, the founders have retained a large degree of control while building highly valuable companies.
Question 1: What's common between these companies with regard to the relationship between control and funding? Describe the existing or propose a new breakthrough solution to the founder's trade-off.
Question 2: Provide at least one example where the investors' decision to fire the founder(s)
a) destroyed value of the company;
b) greatly increased value of the company.
tags: innovation, entrepreneurship, vc, trade-off, dilemma, bus74