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Many entrepreneurs start out expecting that they can become wealthy and remain in control of their business at the same time. However, research by Harvard shows that entrepreneurs who became wealthy and were CEO at the same time are the exception.
The founder usually has a strong connection with the business he started, which might be a reason not to give up equity to investors. Not having any investors on board might limit growth, which means the founder will not become wealthy quickly. However, when the founder gives up equity to investors, they might be able to accelerate the growth of the business by replacing the founder for a better CEO. Then the founder will become wealthy much quicker, but will not be able to make important decisions for the business he started.
Citation from ''The founder's dilemma''
Research shows that a founder who gives up more equity to attract co-founders, 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 side line 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.
Example:
At Wily Technology, a Silicon Valley enterprise software company, founder Lew Cirne gave up control of the board and the company in exchange for financial backing from Greylock Partners and other venture capital firms. As a result, CA bought Wily two years later for far more money than it would have if Cirne had tried to do it alone.
What would you do in this position, wealth or control?
The founder usually has a strong connection with the business he started, which might be a reason not to give up equity to investors. Not having any investors on board might limit growth, which means the founder will not become wealthy quickly. However, when the founder gives up equity to investors, they might be able to accelerate the growth of the business by replacing the founder for a better CEO. Then the founder will become wealthy much quicker, but will not be able to make important decisions for the business he started.
Citation from ''The founder's dilemma''
Research shows that a founder who gives up more equity to attract co-founders, 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 side line 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.
Example:
At Wily Technology, a Silicon Valley enterprise software company, founder Lew Cirne gave up control of the board and the company in exchange for financial backing from Greylock Partners and other venture capital firms. As a result, CA bought Wily two years later for far more money than it would have if Cirne had tried to do it alone.
What would you do in this position, wealth or control?
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