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The "No BS" version of how startups are really built, taught by actual startup Founders who have lived through all of it. Hosts Wil Schroter and Ryan Rutan talk candidly about the intense struggles Founders face both personally and professionally as they try to turn their idea into something that will change the world.
Welcome back to the episode of
the Startup Therapy Podcast.
This is Ryan Rutan,
joined as always by my
friend, the founder,
and CEO of startups.com.
Will, Schroeder will, we talked
to lots and lots of founders and
it's a secret to anybody and uh,
most founders seem to think that
control is a cap table problem.
It isn't.
You can own 90% of the company
and still wake up one day
realizing you need permission
to do anything meaningful.
Well, like.
You have an
experience like this?
Yeah, I like a lot of 'em.
I remember the first
time this, this happened,
well, not the first time.
Remember one of the first times
this happened, I was running
a company and I owned like, I
think like 80% of it, right?
Uh, you know, the, the majority.
And an investor comes to
me, an early stage investor
and says to me, Hey, unless
you do X, Y, and Z, we're
not gonna fund the company.
Ergo, the company's
not gonna make payroll.
And I remember
thinking, what the hell?
Yeah.
Like I own 80% of this company.
Yeah.
How can this guy tell me this?
I'm in
charge around here.
Yeah.
Yeah.
What I realized was control had
very little to do with, with how
much you owned and had a lot to
do with how the company is set
up and what the provisions are.
Yeah.
And when we talked to
founders like, like Ryan,
how many founders do you talk
to that are like, I gotta
worry about the valuation.
'cause if the valuation's
not high enough, I'm gonna
lose control of the company.
A lot of them.
Well, we just had, we had that
question pop up last week, right
when you and I were doing the,
the live workshop on funding
and somebody asked something
along those lines and you
know, I think we answered it
then, but it's pretty constant.
I think a lot of founders really
get this wrong and so like
today, I think good that we talk
about what control actually is
and, and probably why equity is.
Maybe the worst proxy for it.
I mean, there's probably
worst things, right?
Like, which way were the
crows flying this morning?
That's how much the
company I control.
Probably not, but you know,
equity is not a good proxy
for it, but it's the one that
we most often see applied.
Yeah.
And, and so like, so
here's the theory.
This is what most people think.
And if you're in the audience
and you're listening to
this right now, please like
lean in on this one because
I'm telling you we're
gonna change everything.
You think about what control
is in a company, the TLDR
is, we're gonna tell you
have very little of it.
The longer version is we're
gonna try to tell you how
to focus on what matters.
But here, here's the
The short version.
The short version is
the idea of control.
Something along these lines
that if I own the majority of
the business, like the, the old
school version, like I always
picture of the Monopoly man
version is that I own 51% of
the business, and if I own 51%,
then I control the company and
that's, and everybody has to do
what I say and blah, blah, blah.
It's like, dude, it
doesn't work like that.
Nope.
At all.
I'm sure there are some
companies where the literal
51% strikes some sort of
decision making capability.
Sure.
But like at that point,
I'm thinking like public
companies or something, like
something way different.
Not at all how startups work,
not a startup raising money
on, on a problem statement
written on a napkin from
their friends and family.
Yeah,
and and I think what's
also missing when, when
I say to people, okay,
you're afraid of losing
control, what specifically.
Are you afraid of losing?
Yeah.
And they'll have like
kind of amorphous answers.
They're like, well, you
know, I wanna make sure
that, you know, I can control
any decisions, et cetera.
I'm like, which decisions
specifically do you mean?
Right.
Yeah.
And, and when you start to
get specific, the fidelity
and what they want to control
drops off quickly because
they don't really know.
Yeah.
They just know they don't want
someone else making a decision,
whatever that might be.
I talked to a founder about
this specifically about
two, three weeks ago now,
and we went through that
same matrix and I was like,
what is it you're afraid of
actually losing control over?
Yeah.
And they didn't really know.
And so ran through some
examples and I said like, look,
typically when you're saying
control, I, I think you mean
like kind of one of three.
Major things.
Strategy, right?
Like what are we building?
Who are we serving?
Okay, cool right pace, what's
our growth rate, what's our burn
rate, what's our risk tolerance?
And then things
around people, right?
Hiring, firing, comp,
and how we build culture.
Yeah.
And they're all different
levels and as we'll
explore, they have different
protections to make sure that
you maintain some level of
control should you want it,
right, right
around those three things.
But I think it generally falls
into those three buckets for me.
You know when I never hear this,
this is what blows my mind.
I never hear the lose control
when people are having
co-founder discussions.
Now when they do, it looks
like this, I wanna take
on, uh, A CTO, let's say.
Yeah.
And that person's
gonna build my app.
By the way.
Isn't it funny that all
that's gonna go away?
Yes.
Like the lever of the CTO
being able to take half
the company or whatever.
Hang
on, let me check.
Will, it's Tuesday,
March 31st, 7 34 my time.
I'm pretty sure it went away.
I think it's gone to get left.
I just, I, there was, there
was always the genesis of
this conversation anyway,
the idea is, hey, I'm gonna
take on this co-founder.
I wanna make sure they have 30%.
I have 70%.
Yeah.
So I control the company.
That is the, the understanding,
again, when you press that
person to say, how do you
know that that will allow
you to control the company?
Like, well, I own majority.
I was like, well, do
you understand how the
rest of this works?
Yeah.
Like how owning a majority
rarely has anything to do with
controlling decisions, and most
people have no idea whatsoever.
Hence this episode.
No.
And why would you, why
would you understand, like,
like the intrinsic parts?
Well, don't you remember
back in kindergarten when
we all started, uh, taking
on co-founders for our
companies and they, they
taught us how, right?
Like, we have no
proxy for this stuff.
I think, look, I think there's,
there's an easy thing to
remember here in my book.
It's like the moment
you're not the only owner.
Whether that comes in the
form of a co-founder, whether
that comes in the form of
an investor, when you're not
the only owner, your absolute
freedom disappears, right?
You're correct.
Absolute freedom.
Until then, you are
absolutely free.
Right?
Your absolute freedom
disappears and, and look,
that's not evil, right?
That's not necessarily
even a problem.
That is just the very nature
of shared ownership of.
Anything.
Companies in particular have
some very specific things
that happen, but that's the
nature of shared ownership.
Let's talk about this
before we get to investors.
I know the investors
part is what everybody's
stressed out about.
Yeah.
We got a lot to talk about
there, but let's talk about
it even before we get there.
When we take on a co-founder.
Because what throws me off is
I rarely see people like have
nearly as much consternation
about control when it comes
to taking on a co-founder or
early employees, et cetera,
as they do with an investor
who's gonna take geometrically
less of the company.
Yes.
In the early stages.
So let's go back
to our, our CTO.
That's gonna build my
mobile app type thing.
Yeah, yeah.
Which you hear all the time.
CTO wants 30% of the company,
which is okay because I still
own 70% of the company, so
I'm still controlling it.
And I'm like, pause right there.
Right?
Like, why is that okay?
And when I say that,
I'm saying, why 30%?
Why do you need, uh, hey, as
long as I'm over 51%, I'm good.
That means nothing,
right?
And let me tell you, having
learned it from the other
side of the, the equation,
early in my career, I wound
up in a situation where
I own 40% of a company.
My business partner owns 60%
of the company, and I assumed,
mind you, I was like 22.
I assumed that that meant
I am totally subservient.
I am his absolute,
uh, vassal.
Vassel.
Yes.
I, I, I'm in this, this Vassel
position and he actually told
me, he is like, that's not
the way any of this works.
He is like, there are
there, first off, we have
an operating agreement that
you clearly did not read.
That's it,
that states exactly how
this supposed to work.
And second, I have a
fiduciary duty, right?
Yes.
Like, even though I own
the majority, there's a
lot of stuff legally I
can't do without getting
in all kinds of hot water.
And Ryan, I had no idea.
I had no, I, I just thought that
he has a hundred percent rights.
I have no rights.
Like he was the monopoly
man.
You weren't gonna question him.
He had a monocle.
Yeah.
What can you say to that?
But think about
that for a second.
Like, our lack of
understanding of this Yeah.
Is so significant.
But the amount of work
we put into protecting
something that we understand
very little of is a lot.
It is.
It blows
my mind.
Lemme draw some boxes
around this stuff.
So let's put some
definition on it.
Equity is how you split money.
Control is how you
split decisions.
Great, great way
to put it, right?
Yep.
Yep.
The cap table, you
brought that up.
The cap table tells
us who gets paid.
You brought up something else
that's even more important.
The operating agreement tells
us who gets to decide, right?
I think if we can keep those
things in mind as we go through,
as you're sitting on the other
side of this podcast listening
to Will and I go through this,
those are a couple of important
things that I think will help.
Keep you aligned with
how this actually works.
Let's play it out.
So let's do a simple scenario.
Ryan, you and I are starting
a company together and we're
gonna go take on investment.
So let's, let's play
through an investment.
We
have to.
Yeah.
Do we have to?
Yes.
And so day one, you and
I decide to, to drop
an operating agreement.
Okay?
Okay.
Now for folks that don't
understand, like they've heard
of an operating agreement,
they got one for free on
legal zoom, like a template
or something like that, right?
Which a lot of people get.
The operating agreement
is like the constitution.
Of the company.
Yeah.
It basically says, and yours
might, yours being folks
listening, yours might be a
total template that doesn't
say much of anything, but it's
designed very specifically to
say, based on certain conditions
of the company, here's how
those decisions air go control.
We'll get made.
Okay.
Now categorically there's
an unlimited number of
decisions that we can put
as these provisions, right?
Yeah.
Here's one that I got early on
when it, when I was getting my
first VC investment, a provision
said in order to make a decision
on a higher, over a hundred
thousand dollars in annual comp.
You have to get board
approval, which makes
total sense, by the way.
Yeah.
But Ryan, I was
blown away by it.
Yeah.
I was like, what are
you talking about?
I have 80% of this company,
and they're like, you don't
have 80% of its money, dude.
Yeah.
That's where we come in.
Right?
And so I don't think people
understand how there's lots
and lots of unique provisions
that actually drive control,
and some of those are really
important and some of those you
probably don't even care about.
Yeah.
When you think about the stuff
that founders care about,
like when they think about
control, what comes to mind?
You know, it's funny, I, I
think it comes down to some
of this just is like, they
don't wanna be told what to do.
It's, and which isn't really
how control works in the sense.
It's not really that people are
gonna tell you what to go do.
It's more they're gonna
tell you how it's gonna
happen or sometimes what
you can't go do there.
There certainly are times
where they, they may actually
tell you what to do, but I
think that most times what the
founders actually care about.
Doesn't really align with
how companies are controlled.
Right.
So I, I think maybe let's
dig into a little bit more
about how control actually
works, where it lives.
Yeah.
What are voting rights,
what's board composition
have to do with this?
Not ownership percentages.
Right.
And so I think because at the
end of the day, I think really
what founders are concerned
with is that they don't want
to be railroaded into doing
something they don't want to do.
And I think you and I
would both take the view
that no one else wants to
railroad you into something
you don't wanna do either.
Unless you're doing something
that's so absolutely insane
that they have to do that to
save their investment, save the
company, save the team, right?
All those things.
So
let's stick with that.
Typically all these control
provisions actually are
the other way around.
Yep.
They're designed so you
don't screw somebody else.
Yes.
As the founder founding
team, you know, executive
team, they're, those control
provisions are put in place,
particularly by investors,
but even in co-founder
agreements, like long
before we get investors.
Again, going back to a
situation, Ryan, where you and
I set up a co-founder agreement.
The co-founder agreement is
designed not to say, I get to
tell you what to do, or you
get to tell me what to do.
It's not that.
It's dude, if stuff goes
sideways, here's what
you cannot do without
both of us consenting.
Right.
There we go.
You can't sell the company
unless we both agree.
Yeah.
Now, when people think
about control, you said it
a moment ago, they think
about being told what to do.
Yes.
Right.
But the control provisions,
and this is, this is how you
need to frame it, is what
do I wanna be able to do
that could potentially harm
someone else that I wanna
be able to do, regardless
of how they feel about it.
Yeah.
Now most people will
look at that and say.
Well, nothing.
I don't wanna 'em wanna
do anything to harm
people that, okay.
Yeah.
But what's harmed to, you
know, to them may be the
right decision for you.
It's a really slippery slope.
Stick on this for a second.
Let's go back to the
example around the a hundred
thousand dollars hire, right?
Yeah.
Because I think this is one
that actually it's, this
is a thing you may see.
It does come up.
This isn't them saying, we're
gonna look at every hire you
have, we're gonna scrutinize it.
We're probably going to say no.
That's actually not.
One of the things I think
is really important with
these provisions is we look
at where they came from.
Provisions like that came
from people doing shit that
was really wrong, like.
We got investment and then I
hired my mom and my dad and
my cousin and my brother and
my dog Steve, and they all
got really big salaries and
they don't do anything here.
We're just sucking money
outta the accounts.
Right?
And so because that
happened once, yep.
Now we have to have
these provisions, right?
I think that we have
to look at it that way.
A lot of the stuff that
happens on a, in a legal
sense is there to protect
these weird edge cases and
they just have to be correct.
There's not a problem.
And
they're there
for
a reason.
They're there for a reason, and
the reason isn't to stop you
from doing what you want to do.
Right.
It's, it's not, again,
it's not somebody trying
to tell you what to do.
They're just as a little bit
of a control, and I can't
tell you the last time I heard
somebody say, yeah, we were
trying to make this higher.
We love them, and then
the board blocked it.
Right.
I've heard a lot of
people complain about
having that provision in.
Yeah, but I've never heard
anybody complain about having
it exercised against them.
Correct.
This is where it starts
to get really interesting.
It's this specter of
control versus the reality.
Okay.
Yeah.
And again, I, I wanna go back
to the control provisions
we're generally concerned
about, are there to actually
protect the other party,
usually a minority party.
Yep.
Going back to, you know, when
I learned what fiduciary duty
was for the first time and I
was the minority party and you
know, my business partner was
a great guy at the time, not he
still is, but I'm saying he was
business partner at the time.
Your business partner at the
time, who is a great guy.
Yes.
Yeah.
I should phrase that
differently, but was
very cool about it.
You know, he was, and again,
he had way more tutelage
than I did on this, this
topic, and he said, look man.
My goal in this deal and
the operating agreement
and everything isn't to
do things to harm you, if
anything, as the minority.
This is mostly set
up to protect you.
Protect you.
Yep.
And so my first learning
about the control rights, et
cetera, was based on being the
minority and seeing it for why
these things were being done.
Okay.
Yeah.
And so going back to what I
think you, you had a great
setup, which was, you know,
what are these categories of
things that we want to control?
More specifically, why are other
people putting these provisions,
investors, et cetera.
Yeah.
Putting these provisions
in this document.
Well, number one, it's so that
we can't go and do crazy shit.
Yes.
I mean if really like, like if
it comes down to it, there's
gotta be some protections where
we can't just do crazy shit.
Ryan, lemme throw one
at you that I think
is really interesting.
One of the, the most contentious
control provisions that gets put
into, like, particularly around
when we take on investors,
but it can't even be in an
operating group, is that you are
not legally entitled to a job.
Mm-hmm.
Right?
Most people have no idea.
I own 60% of the company,
no one can fire me.
Mm-hmm.
No false.
No one can take away your 60%.
They can sure as hell fire you.
Yeah.
That's the kind of
stuff that people don't
even realize it exists.
Yeah.
Yeah.
That's, it's funny, they're out
fighting about whether they can
spend a hundred thousand dollars
to hire somebody else and they,
they've completely missed the
provision that says, we might
not continue to employ you.
Founder.
Like, wait, what?
Right.
And so just to pause on that,
'cause I think if anybody
hears it goes, wait, what,
what, what did you just say?
Like, I get fired and,
and own the majority.
Yep.
Yes.
Just so you understand
how much you own inequity.
And your employment status as an
employee of the company, which
are two totally separate things.
Yep.
Are not linked one for one.
Now, you might have, you might
wind up with voting control in
the form of the board, the, the
operating agreement, et cetera.
That allows you to
mostly prevent that.
But generally speaking,
this is the kind of stuff
we're talking about.
So for example, if you
were to say, look man,
I'm not doing anything.
Would jeopardize my opportunity
to have a job at my own company.
That's what I'm talking about.
That's what we have to
understand and say, okay,
well if that's a primary
concern, then we have to be
able to address that in the
operating agreement with
the investors, et cetera.
Yeah.
Which they're not gonna love.
However,
they might not even accept.
Then you might have to
decide, I want to continue.
I want to be able to permanently
employ myself, but I'm
not gonna be able to do it
with somebody else's money.
Okay.
Now think about this if you're
the 30% CTO for a second, right?
Yeah.
So let's put a new scenario.
Ryan, you're the 30% CTO
and I'm 70% founder, right?
And I'm, I'm presenting you
this operating agreement.
You're looking at this going,
dude, I don't wanna put all
this work and find that just guy
decides one day just to fire me.
Yeah.
Like you're concerned about
being able to protect, now
you're in the minority and
you still have that concern.
Yep.
So everyone has that concern,
but let me, let me flip it.
If you decide to just stop
showing up for work, and
that sounds egregious, so,
you know, I'm, I'm trying to
deliberately make it egregious,
but there's a lot of versions
of not showing up for work.
Yeah.
Yeah.
There's a version where
you actually go somewhere
else and you don't pay for
work.
Yeah.
Go somewhere else.
Yeah.
Company's not making money.
I have to make bills.
Right.
I gotta, I go get a job.
Yeah, man.
And there's another version
where you do show up.
You just suck at your job.
Yeah.
Like you show up, you
have no contribution.
Oh man.
We've done that in a couple
other episodes where like
that person who you brought
on is co-founder and see
whatever it gets eclipsed
by some junior people later
just because they happen to
be the first ones to say yes.
It happens a lot.
Yeah, man.
Happens all the time.
So now think about that.
You come on, you've got a
30% share in the company and
you're like, I wanna base,
basically make sure I have job
security, that in this operating
agreement I cannot be fired.
Think about what
that means for me.
Yeah,
okay.
Yeah.
I'm like, well that sucks.
Like if, if you stop showing
up for work, you're saying you
like you're guaranteed a job.
Yeah.
Like that's fucked up.
And so I, when we're
talking about these control
provisions, I'm specifically
saying, here you are in
the minority position.
You have the same issue, right?
I don't wanna be
able to get fired.
And even as the majority,
I'm like, I wanna be
able to fire people.
If, if they're fucking
off, guess what?
That's what people
wanna do to you.
Yeah.
Yeah.
That's, that's exactly what
people do thing for
the same reason, right?
It's not that, it just like
arbitrarily one day like, oh
guys, guess it's international
fire, A founder day,
we.
Right.
And so again, we think of all
these different conditions.
Now, if some of this sounds
overwhelming to folks
listening, this is, this is
why we still employ attorneys.
These are the types of
things that attorneys
can walk you through.
A fun side note, last night
I was talking to my, uh,
father-in-law who's a contract
attorney, and I was telling him,
you know, we sold a company this
week, and I was saying that we
did it largely without attorney.
And I was like, mostly
because we had a lot of
experience doing this.
Yeah.
But also because of ai and,
and he was like, yeah, but I'm
pretty partial to attorneys.
It's, you don't
say
itt, of course you're,
but it's guys like him.
You know, folks in,
in legal profession.
If, if you're not sure
that can walk you through
what you don't know.
Yeah.
Right.
We're here to tell you that this
is why you should start raising
your hand and asking these
questions, but they can tell
you exactly what those questions
and provisions are, but.
Let's fast forward a little
bit and let's talk about how
these provisions get in vote.
Okay, so let's say we've got,
we've got a provision that
says, you know, we can be
fired for cause, et cetera.
Yeah.
We've got a provision to
get, to get this that says
we cannot sell the company
unless we get board approval.
Board approval.
Yep.
Probably worth talking
about how boards work.
Ryan, when you think of
like a five to seven person
board, can you explain to
the folks that why that's
there, why that board exists?
I mean, it's there
for governance, it's
there for protection.
It's there to act out and,
and basically to interpret the
operating agreement and make
decisions based on, uh, their
understanding of it and the,
the agreements of the company.
Yeah.
Protective provisions that
have been put into place.
Uh, you know, I think a lot
of people think the board
is there to advise them.
There is such a thing as an
advisory board when we're
talking about a, it's,
this is governance, right?
This is, yeah,
this is governance.
How the company
makes hard decisions.
These are the people
that can fire you right
now.
These are the people
that can fire you.
These are the people that can
make, you know, they can, they
can have control over some of
those things we talked about.
And so that's why
like when we get into.
Things like, you know,
the, the, the board seats.
These aren't just receipts
for giving people Right.
It's, it's a steering wheel.
We're handing somebody
to the company.
Right.
And, and as you said
before, they are, you know.
Operating under the operating
agreement, which is the
company's constitution, which
I find most, most founders
to be woefully uneducated in
their own, their own operating.
So what does say in the
operating agreement like?
Well, let me go dig it out.
Right, but so like, there's
a few things I think about
when we're thinking through
like the board itself and
what's gonna happen is one
who appoints board seats.
How does that happen
to begin with?
Yep.
Which decisions
require board approval?
Things like are there any
things like do you have
preferred shareholder approval?
Are there any special provisions
that, you know, bring out
spec special provisions?
The one we brought up before,
can the board replace you?
Right under what condition?
What's the threshold
for selling the company?
If we're saying it, it's
board approval, do we want
it to come to board approval
or do we want to have some
sort of a preset threshold,
which we see a lot too?
Will, I think there's, there's
times where there are like
board approval and then there's
thresholds, which is that
we're agreeing ahead of time.
It's like under this
amount, we're not selling.
Without approval over this
amount, we're free to go
right so that it doesn't
mean that we have to
always come to a decision.
You know, something that's
really funny about everything
we talk about here is
that none of it is new.
Everything you're dealing
with right now has been done a
thousand times before you, which
means the answer already exists.
You may just not know it.
But that's okay.
That's kind of what
we're here to do.
We talk about this stuff on
the show, but we actually
solve these problems all
dayLong@groups.startups.com.
So if any of this sounds
familiar, stop guessing
about what to do, let us just
give you the answers to the
test and be done with it.
Again.
Let's go back to our situation.
Two of us are
starting a company.
In this case, let's just, for
easy mass, say it's 50 50.
Right.
You and I, you know, had our
own probably really shallow,
and I just mean like we
didn't go too deep into it.
Yeah.
Uh, discussion over what should
be in the operating agreement.
Yeah.
Neither of us were
that experienced.
You know, we did some chat
GPT prompts to find out.
We did some, some
sleuthing online.
We asked a couple other founders
and it's, it is usually a
fairly loose document, but
then we get to, to take on
investors and we're both
stressed out because we're
like, Hey, um, these investors
want 20% of the company.
Which means you and I are gonna
dilute down to, to 40% each.
We're like, ah.
But collectively, we
still have control.
Not really.
Okay.
Here's what happens the moment
you get a meaningful investment
on, and meaningful sounds like
a, a pretty broad term, but it's
usually after your pre-seed run.
I, I'm just going to spitball
it and say it's usually
over a million dollars.
Yeah.
You know, once you start taking
over a million dollars that's
right, under a million dollars,
people can kind of let it ride.
Once you get over a million
dollars in investment, this,
this stuff's tends to start to
come up and, and even higher.
Here's what happens though.
First thing that happens is
the investors, and there's
typically more than one.
In this round, we'll
say, look, as part of
the operating agreement.
We're gonna need to create a
board of five to seven people.
Typically, the board is
always an odd number so
that you obviously can't
have a tie on votes.
And the, the composition
of the board almost
always looks like this.
There's two members from the
company, two members from the
investors, and one independent
that both of us kind of vie for.
'cause we want to have
it to be our person.
Yeah.
At a small enough number.
No one really cares.
You can pick your buddy and
think you, you've got control
of everything at a big enough
number that doesn't fly anymore.
People see through it.
That's where all of these
decisions, this is where
the control happens,
like hard stop here.
It has nothing to do with what
you and I now have in equity.
Yeah.
If in the operating agreement
it states that under this
provision, this provision,
this provision that it requires
a board majority, which
most of this will, it's just
kind of the simplest way to
say it, then a whole bunch
of stuff starts to happen.
For example, I come in one day
and all of a sudden it's like
an intervention and it's you,
it's our independent and our,
our two, uh, our two investors.
You never want to be
surprised by seeing your
board sitting into a room
you walk into like that.
It's never happy
birthday, right?
Yeah,
exactly.
You don't never
that.
We just feel like you, you're
not getting paid enough.
Right?
Yeah.
So we just figured
we'd get all together.
Right.
And at that point, you
know, they're saying, Hey,
performance isn't what it is.
The company needs
to raise money.
We don't think you're capable.
You know, whatever,
name your excuse.
We think you're gonna
need to step down.
And I'm using this as a,
like a pretty egregious case.
And I'm like, I'm not
going to step down.
Mm-hmm.
Me and Ryan are, are voting
that I'm staying here.
Right, Ryan.
Exactly.
And all of a sudden
Ryan gets real quiet.
Right.
I can't find my vote.
I don't remember where to put
it.
Yeah, right, right.
Yeah.
Oh, just vote like
everybody else.
Votes, guys.
What do you think?
Right.
Yeah.
And now you realize
how Inconsequentially
hopeless you are?
Yeah.
Okay.
Because like I own 40% of
the company, but I only
own one fifth of the votes.
I only own 20% of the votes.
Right.
Yeah.
And let's say it's a simple
majority, just means like
three outta the five people,
you know, voted that way.
And even if you backed me up
on this, Ryan, and you're like,
you know what I, I have no idea.
This is bullshit.
If the independent votes against
us and the two investors,
yeah, man,
they win.
Done board math beats
founder egos every time.
Right.
It's the way it goes.
Once the board exists,
you're no longer supreme
leader or supreme leaders.
Yeah.
You're kind of employees
with influence that point.
Correct.
And I don't think, I don't think
the founders understand it.
Let me flip it the
other way 'cause I think
this also interesting.
If, if for some reason we
still had a five member board
and you and I were both,
uh, on the board and you
know, again, e equal votes,
we're not getting into like.
Way, way, way later we
start to get into weights.
You mentioned preferred,
et cetera, like, like some
votes are worth more than
others, but let's just
keep it simple, right?
It's just five people.
Majority rules.
It goes the other direction too.
You and I might be
down to 4% ownership in
the company, not 40%.
Yeah.
If we've somehow been able
to maintain our voting right.
We have a
disproportionate control.
Oh yeah.
In the company, you
see this with public
companies all the time.
You know, you see people
who have a lower amount,
but a lot of cases they have
a different class of, of
voting shares, et cetera.
Yeah.
That gets way more complex than
most people will ever deal with.
But the point is, since a lot
of these board decisions are,
uh, happen at the majority
level, and there's five votes
to be had, sometimes seven
as the, the numbers, you
know, the dollars get bigger.
That's really what drives
most of the big decisions.
The big decisions being
like, does the company
sell things like that?
Right.
Or, you know, are we
gonna take on more, more
funding, things like that.
One thing I think we might
wanna touch on here Will,
which is the, the operating
agreement itself, right?
I, I don't want founders the
way we've told it so far.
It kind of sounds like there's
this thing that we draft
in the beginning that then
controls things forever.
Right.
And that's not
quite how this for,
it's just full provisions that
say we can never get fired.
Yeah.
We, we wrote it into the
original operating room.
It's right here.
See, they're like uhha.
You mean the one that's
been amended 90 times, uh,
since you started taking
on investment dollars?
So you wanna talk about
that just for a minute, just
so that people understand.
Yeah.
Good call win.
Where and how those
things get beat up,
changed and, and amended.
The operating agreement to
some degree kind of can get,
you know, restated re uh,
amended, uh, rebuilt every
time there's a funding round.
That's, that's
what's most typical.
Now, the reason for that
is because the most recent
investor is going to have
certain provisions that
are important to them.
That they won't jump in
if that isn't dialed into
the operating agreement.
And there's all kinds of stuff
in there that's important
to them because they're the
last money in that may not
necessarily be to the best
interest of other people that
are currently in there in
almost every case, not to the
best interest of the founders.
And so even if you and I write
the perfect operating like,
aha, we've got this figured out.
Yeah.
Brian, before we raise money,
let's write an ironclad
operating agreement that says
no one can ever fire us and no
one can ever make decisions.
Yeah.
We figured out, and only people
named Ryan and Will are allowed
to make decisions that matter.
Right.
You know, you name it.
Right.
Better make sure that we write
that in some kind of ink that is
impervious to redlining, right?
Yeah.
Right, right.
Might as well
can never be changed.
It'll be fine.
Doesn't make a
lick of difference.
Every investor, when they
come on board is gonna say,
yeah, but the operating
agreement looks like this.
Right.
And that's a huge part of
the closing process when
everybody's agreed to invest.
And then you turn it over to
the attorneys and they fight
back and forth while they go
through the closing process.
They're going through that
to say, Hey, my client, most
recent investors have these
terms, uh, that are very
important and we need to make
sure they're properly amended
into the operating agreement.
Now, look, there's a lot of
people that are, that are in
the room as well, like previous
investors, et cetera, that
are like, Hey, screw you, like
that's gonna work against me now
and I'm gonna fight with you.
Good luck with all that
problem for another day.
But I think what's interesting
here is that, again, our
illusion of control is that, but
I thought, you know, if I just
own the majority, I don't have
to deal with any of this stuff.
It's like, dude, as this is not
where any this is coming from.
Yeah.
And there's, there's one other
point I wanna make and I'm
curious your thoughts here.
I've been in a situation
multiple times as a funded
founder, and you talked
to lots of funded founders
about this stuff, where I
have full control of the
company in whatever capacity.
I think, like I've got
voting rights, I've
got, you know, whatever.
Right?
But I got no money and it
looks something like this, it,
it looks something like this.
Once again, you and I
both have our 40% shares.
We've got 20% investors, but
we're about to run outta money.
Yeah,
right.
We, we raised 2 million bucks.
We ripped through it all.
We set up payroll.
We got a bunch of people
we gotta pay every, every
month and, and we're
about to be outta cash.
And the investors come back
and say, we're willing to
put in X amount of dollars.
Yeah.
However, here are
our conditions.
That invokes the golden rule,
which is be with the gold rules.
That's
it.
And the reason I, I wanna
bring this up is because
this is part and parcel with
running a funded startup.
This isn't like, oh,
this happened one time.
It's like, it kind of
happens every time.
It gets worse when you
take on more money.
You know what I mean?
Pretty much every time.
Right?
Like, 'cause even if you
won governance on paper.
Yeah.
Right.
Investors can still
control outcomes through
financial leverage.
Yep.
Right.
And runway is kind of
the only board seat
that can't be outvoted.
Correct?
Yeah.
It's
at that moment.
Great way to put it.
You could, right?
Technically I suppose you could.
And, and you're like, okay,
so you choose to exercise
your vote into insolvency.
Like that's what are you
gonna, what would the point be?
Right?
So.
Again, best voting right,
is a positive bank balance.
You've got to be able to
absolutely support the
decisions you wanna make
because otherwise, like you
said, the financial leverage
piece is, is always there.
You need money to move
forward then, right?
If it's, that's
where it comes from.
Cash is control.
When you're outta runway, rights
become theoretical, right?
And that's the end of it.
Can you make
payroll right there?
There's your right.
Right.
Right.
And, and, and we are all
as startups perpetually
going out of business.
Yeah.
Like that's the nature of
how this business works.
It's not a one-off.
It's not like, oh, there
was that one startup
that ran outta money.
Right.
Yeah.
It's like every startup that's
going to run outta money.
Yeah.
In a few survive.
Yeah.
So this is an
incidental condition.
This is like the
most common outcome.
For, for, again, for founders
that are, for founders that
have been through this, we
don't have to explain anything.
They're like, yep.
Yeah, that's pretty
much, that's it.
That's exactly how it goes.
And it sucks for founders
that haven't, but they're
getting into fundraising.
I wanna say what I wish
somebody had told me.
When you raise money, it's the
last time you have control.
Yeah.
Until you make money.
Okay.
And so when we raise money, you
and I raised 2 million bucks.
We got money in the bank.
We've got a little bit
of control at that point.
Yeah.
In as much as we have two
voting seats out of five.
Right.
So we have a little bit of
control and we don't have
to ask anybody for anything
because we're doing okay.
We're making payroll,
like everything's fine.
Now, fast forward 18
months and now we've got
six months of runway.
Right.
And now we still want to
be able to say, but this
is our strategic direction,
but this is our valuation,
but this is how much money
we're gonna raise, et cetera.
Mm-hmm.
And the investors, both the
current ones and the future
ones are like, I don't care
about any of what you want.
Right.
Yeah.
Like, you're gonna do
what I want, or You're
not gonna make payroll.
And we're like, yeah.
Huh?
Yeah.
Yeah.
We really don't
have any control.
Yeah.
Like it doesn't
matter what we own.
No, it doesn't.
When you're profitable,
you can negotiate.
When you're broke, you comply.
Right?
Like that's, if you want
to go play with more of
their money, you are going
to play it by their rules.
You are.
It's interesting because you
see this in public companies
now, there's all different
conditions set in public
companies, but when public
companies are doing well, read
Elon Musk on any given day.
Right.
Elon Musk can do whatever
the hell he wants.
Now, in most cases, if you look
at his companies, he owns a
tiny share of those companies.
Right?
Like he's, he's a big
shareholder in Tesla.
Relative to Tesla.
Yeah.
But you know, small
shareholder otherwise.
Um, but when Tesla's stock
is doubling, and Elon Musk
put this theory to the test,
you can do the craziest shit.
Imaginable and
everyone's fine with it.
Okay.
He sure did put
that to the test,
didn't he?
He sure put that to the
test and in case you weren't
sure, but it's when things
go the other direction.
Yeah,
right.
That you see what your control
in your position really is.
If Tesla stock just plummets,
now this is a bad example
'cause SpaceX is where he's
gonna make all his money.
But if Tesla stock plummets
Right, and that was the only
thing he owned his voting
rights and everything else.
No one cares.
Yeah.
Right.
Because at that point
he's lost sentiment.
He's lost trust.
And again, if the board or
the activist shareholders, et
cetera, are actively conspiring
against his performance,
almost no amount control is
gonna say, save you from it
at that level of operation.
I would say the your control
strategy is just stay funded
and stay credible, right?
That's right.
And so
that's all you
need at that point.
Think about other,
like, famous examples.
So back in the day, I was at
late eighties, early nineties,
uh, Steve Jobs got fired
from Apple by John Scully.
Right?
Uh, and that was, you
know, a very famous moment.
Now, he didn't have the voting
control to maintain his, his job
or, or even, you know, a stake,
meaningful stake in the company.
And so he was able
to be pushed out.
Now, a couple things.
This is Steve Jobs, right?
Uhhuh, like arguably
one of the greatest
entrepreneurs of all time.
Yep.
He got pushed outta
the company also.
Not a pushover by the way.
Yeah.
Yeah.
Also one of the biggest NAS of
all time.
Not just, he wasn't just
like, oh, you want me to go?
Okay, cool.
Yeah.
See you.
Okay, here,
send me, have a box.
I can put my stuff in.
I can't think of a
harder person to fire.
But again, even he
lost the leverage.
Yeah.
So he gets pushed out now.
Now flip it around years later,
he gets famously brought back
and you know, brings about
one of the greatest, what
I'd argue to be turnarounds.
Apple is actually already a good
company, but, uh, turnarounds
in corporate history.
Now that man can do no wrong.
Right?
Right.
This is at the time right When
the company's doing well, you
are god damned invincible.
Yeah.
When Tesla's doing well, Elon
Musk is god damned invincible.
Yeah.
And the reason for that is
because so long as you're making
them money control provisions
just don't get invoked.
They don't, they
don't get invoked.
That's kind of like
the hiring thing.
If you're not making a
really stupid hiring decision
over a hundred k, no one's
gonna try to stop you.
Right.
They're not, they don't want to
stick with that.
The whole point of
control provisions are
when things go wrong.
Yes.
Right.
Okay.
Things can be going
right and people can
maybe not agree with you.
Like I can't fathom that
any of the people that are
meaningfully invested in
Tesla watch Elon's actions
on any given day and say to
themselves, there's no other way
we could hope this was going.
Like the outcomes
are incredible.
Like what?
What the guy can do is
incredible, but the behavior
that gets you there yeah,
is just batshit crazy.
And so again, as long
as he's doing well.
Okay.
As soon as that changes, that's
when control provisions come in.
Yep.
But that's also when people
are trying to protect
themselves from crazy shit.
Let's talk about it from
the founder's perspective.
Yeah.
What do we actually
need to protect.
What is it we should
be protecting?
Right?
What actually matters here?
Because I think that control
is way too broad of a,
we can't have control.
We've already talked about that.
So yeah.
What are the specific
things, specific rights,
the non-negotiables that
we really want to have?
At least somewhat locked
down before we're negotiating
under pressure right before
we're at six months of runway
and only enough cash for
the next, uh, five payrolls.
So let's dial that in a bit.
I think it's a great question.
Let's agree that we can't
control the company, per se,
this amorphous thing that says I
have supreme leadership, right?
But we can control
particular provisions,
particular conditions
that are important to us.
Okay?
And what I would also argue
is, while these might be like
things that we'd love to have.
They also might just not
be realistic, for example.
Any entrepreneur that
gives us five seconds of
thought is gonna say, one
provision I want more than
anything, I cannot be fired.
Mm-hmm.
I mean, 'cause you know,
we think about that as as
very personal and secure.
Right.
And I would argue there's
rarely going to be a case where
there's no way to fire you.
I mean, there's a hundred things
that you could do wrong that
would be like straight up.
Of course we fired this person.
Yeah.
You know, what we consider
to be for cause fraud, theft,
you know, things like that.
Yeah.
Like there's no co-founder
or investor in the world
that wants to be joined at
the hip with someone who can
do anything that they want
and still not get fired.
Like
Right.
To me, that's a selfish clause.
So.
If you're willing to
concede that and say,
okay, well, yeah, I get it.
I, I don't, I don't mean it
that way, like, I do awful shit.
Of course I shouldn't be there.
Or people should
have protections.
Then what you're really saying
is, I don't want to take
on, not take on investors,
so I don't wanna be fired.
I only wanna be able to get
fired for these reasons.
Correct.
These are my non-negotiables.
Right.
Like, like if I hold up
a bank, like I get it.
Anything short of that,
you can't touch me.
If I deposited the company
accounts though, like, I mean,
was the company really harmed?
Mm-hmm.
I had a case last Friday
out to dinner with a founder
reached out to me and he said,
my co-founder just cleared
out the bank account, cleared
it out, and was like, yeah,
it's just not working out.
Can you imagine that?
I mean, like, you know
what's crazy, right?
Is we get to see everything.
Yeah.
And this isn't the first time
I've seen this, but to see the
look on his face when he was
describing and that had just
gone down like a few days prior.
Emergency called me to come
in and try to figure it out.
And I'm thinking to myself,
you guys did this deal
together in good conscience.
You both thought you were
gonna grow a great company, and
then one day your co-founder
decided that you were no
longer going to be part of
this company without your say.
Right?
Yeah.
Like.
How could you have
ever predicted that?
Imagine that was coming.
Yep.
You don't,
and so what I said to him, I
was like, have you read the
operating agreement or have
they the other co-founder
read the operating agreement?
'cause I'm, if you have one,
I guarantee this isn't okay.
Right.
And it turns out they had, they
didn't, you know, dig in and I'm
guessing they didn't have a very
like strong operating agreement.
But there's just, there's
some fundamental protections
that say you can't just
steal from the company and
get away from it scot free.
Like, like that.
That's almost 0% chance
you're, you're gonna correct.
Hold that, that provision.
Yeah.
And, and why would you want to,
right?
Well, right, right.
Who would you expect to
accept it if you did?
You're like, there is a,
a non-litigation clause
against me absconding with
funds to the Virgin Islands.
I, you guys are
okay with that, right?
Yeah.
I mean, so again, everyone
says, well, no, if I do bad
things, I don't want to, I
don't wanna protect myself,
so to speak against that.
But remember what you
think are bad things.
Are different than what other
people think are bad things.
Yeah.
Here's a good example.
Your lack of performance to
someone else is a bad thing.
Yeah.
But you're like, I'm in
every day killing it.
Yeah.
Right.
Like I'm, I'm
working non Do what?
I can't
figure it out.
I'm getting there.
Little by little I'm
making the progress.
Right?
Yeah, you
bet.
Like I
still not where we need it to
be from a company standpoint.
Yeah.
I'm running as fast as
I possibly can, but your
co-founder is looking at
you going, yeah, but you're
still losing the race.
It does not matter.
Now think about how.
Giant, those perceptions
are different.
Yep.
Right.
I'm working so hard or I'm
contributing so much, and the
other person's like I, I'm about
to clear out the entire bank
account because this person has
such a liability and I'm willing
to go to quarter over it.
Yeah.
Think of how dramatically
different those
expectations are.
So again, we go into and
we're like, Hey, I wanna
make sure that, you know, I
can't be fired or anything
else like that unless you
do something really bad.
What I'm saying is, hey
man, what you think is
really bad is one thing.
What other people are
gonna think is really
bad is way different.
And so going back to, you
know, protecting what matters,
we have to be able to say, I
wanna be able to protect my,
my employment up until these
provisions that I think any
reasonable person would agree.
And I have to know going in that
those provisions can be invoked
in ways I'm not expecting.
Okay, so that's one.
The second is anything these,
again, the big ones, anything.
That would drive a change
in control of the company.
Yeah, change in control could,
could mean a litany of things.
It could mean, uh, we get
bought by somebody else.
It could mean someone else
Now has like the majority
control of the company and
there's a lot of ways to, to
get to change in control when
and if those things happen.
There have to be provisions
that we care about that say
we can't get overridden.
Doesn't mean we're gonna
get 'em, by the way.
Right?
Like we'd like them
to be in there.
It doesn't mean everybody's
gonna greet 'em.
Investors are gonna have
a very strong say in that
one, but that's the shit you
should be paying attention to.
Anything else come to mind?
Or like when you think
about building a company,
what are the things you're
most concerned about?
I, I think it does go back
to a few little things,
but it's really just
understanding kind of what
those non-negotiables are.
It's gonna depend on
the type of company that
you're building, right?
If you're building something
you intend to have, you know,
just a, a co-founder and team
of AI agents at this point.
Like, do you really care
about hiring protocols
or anything like that?
Maybe you're not
gonna hire Yeah,
right.
Or not gonna be
something that's.
Really meaningful.
So to me it's fairly nuanced.
What I would say is just
make sure that you are
thinking through those things
and that you are choosing
your trade-offs, right?
Understanding where you're being
flexible, where you're not,
because if you don't choose your
trade-offs, the term sheet's
going to choose them for you.
And I think that's where we see
most founders get into trouble.
It's not that they failed
to do anything, right?
They failed to plan at all.
They just didn't.
Yep.
Put anything into the term
sheet, anything into the
operating agreement around
controls like this, and then
later, uh, re regret it.
I also, Ryan, I think there's
a lot of things that people you
can't maintain control over.
Like, you can't, like
operating your agreement
way into, for example, you
can't maintain control of the
product direction, unilateral.
Again, you could try to,
like, I've never even
seen someone do this.
You could try to force a
provision in your operating
agreement that says, you know,
product direction will always be
made by this person, et cetera.
Or, you know, these co-founders,
first off, no one would agree
to it, and second off, it's such
a. Amorphous term that you'd
never be able to uphold it.
And by the way, if you're doing
well, the company's doing well.
You get that anyway.
If you're doing poorly, no
one's gonna wanna be able to
say, oh, I know we're doing
poorly and losing a bunch
of money, but let's glad
you got that provision that
says we can't change course.
By the way, like again, to
go back and talk about the
reality of these situations.
We've talked to some other
podcast episodes, but no
one wants to come in and
do that either, right?
No.
There is no board
member, no investor who's
like, you know what?
I really want is to have to
take control over product
direction to save this
sinking burning, about to
go down a whirlpool ship.
Right.
That's nobody's idea
of a great time.
They're not coming in and trying
to take away your control.
I, I think that's really
like, for me, control and,
and the losing control, that's
when it actually happens.
Yeah.
Investors don't
generally take control.
You lose control of something
and they're forced to step
in and assert control.
It's very different,
right?
They're trying to
save the asset now.
You never see it that way.
Yeah, right.
You look at it like
they're meddling.
Right?
They're telling me
what to do, right?
Yeah.
Well, you're not doing it
right, so someone has to.
Things going bad and
meddling tend to go in
hand in hand, right.
It's kinda like when people
think about the police, right?
Yeah.
Like, oh, the police are
harassing me, not if you're
not breaking the law.
Yeah.
Yeah.
And not
to those two things is things
tend to go hand in hand.
So when I think about putting a
deal together, right, what I'm
actually most concerned about
isn't the day-to-day operations.
It's how this ends.
In other words, like what are
the requirements if I wanna
sell this thing, get liquidity,
et cetera, because those are
the life changing things that
if and when it comes to that,
I'm screwed if that provision
doesn't, you know, work
in my favor or support me.
Most common example, and I can
name 10 people off the top of my
head right now that are dealing
with this, is we've got an offer
to sell the company or get some
liquidity, et cetera, and the
investors don't want to take it
because it doesn't benefit them.
We see this all the time.
You and I start this company,
we raise 2 million bucks.
X amount of years later,
we get an offer to sell
it for 5 million bucks.
And the investors
were like, well, we'll
make no money on that.
Like, yeah, but Ryan, I'm,
you know, make over a million
dollars a piece like that
is life changing to us.
Yeah.
It's a at best of base hit.
Now, I'm not saying at all
that the investors don't
deserve their return.
That's, that's why
they do what they do.
But I'm saying it's moments
like that where the delta.
Outcome is massive.
If I can't hire my buddy
for 200 grand a year, okay,
it sucks, but I get it.
But if I can't fundamentally
make a decision, that'll
change the trajectory in life.
Of me and my co-founder,
that's a pretty big problem.
You know what I mean?
For sure.
And, and I think that's where
these, these things tend
to go off the rails, right?
And I guess again, like
we have to define these
things from the beginning.
And I think that's where if,
if we don't fight for the right
things at the beginning, and I
think that's a big part of why
you and I get so frustrated.
We're trying to find that,
like we're trying to get them
to agree to this valuation
because we want, and again,
fight for the valuation for
the right reasons, right?
Fight for the valuation.
So you're getting the most
money for the least equity
that you have to give up.
But it's not about control.
Right, and so I think this is
what we so often see founders
spending energy on things that
just don't really matter, right?
Founders don't lose
control because they
diluted too much, right?
They lose control because they
didn't define what mattered.
They didn't negotiate
it clearly, and then
they ran outta cash.
Ergo, they ran outta
leverage, right?
Equity is a scorecard.
Right.
Governance and runway are the
steering wheel, so if you want
control, stop obsessing over
percent ownership and start
obsessing over decision rights
board math, staying funded
long enough to actually have
your choice in this thing.
Overthinking your startup
because you're going it alone.
You don't have to, and honestly,
you shouldn't because instead,
you can learn directly from
peers who've been in your shoes.
Connect with bootstrap
founders and the advisors
helping them win in the
startups.com community.
Check out the startups.com
community@www.startups.com
to see if it's for you.
Could be just the
thing you need.
I hope to see you inside.