Deal Structuring

Question & Answer

How can a founder remain in control a company when bringing an investor onboard?

To structure a deal where the founder remains in control of the company, you would need to focus on negotiating the terms rather than solely considering the price. Here’s a broad outline of how you might approach structuring such a deal:

Equity and Voting Rights

  • Dual-Class Share Structure: Introduce dual-class shares where the founder holds shares with higher voting rights compared to other shareholders. For example, the founder could hold Class A shares with 10 votes per share, while other investors receive Class B shares with 1 vote per share.
  • Voting Agreements: Draft a voting agreement where the new investors agree to vote in alignment with the founder on key decisions.

Board Composition

  • Board Seats: Ensure the founder retains a specified number of board seats or the majority of board seats.
  • Board Observer Rights: Allow investors to have an observer role without voting rights, ensuring they can participate in discussions without diluting the founder’s control.

Protective Provisions

  • Protective Covenants: Include protective provisions that still allow the founder to run day-to-day operations. For example, investors might require approval only for major decisions such as mergers, acquisitions, or significant capital expenditures.
  • Founder’s Veto Rights: Grant the founder veto rights on certain significant actions, ensuring they maintain control over crucial company decisions.

Buyback Options

  • Founder Buyback Option: Include a clause that allows the founder to buy back shares from the investors under predetermined conditions or timeframes.
  • Callable Shares: Structure a class of callable shares that can be repurchased by the company or founder at a specified price.

Preferred Shares

  • Non-voting Preferred Stock: Issue non-voting preferred stock to investors, which grants them preferential treatment in liquidation and dividends but no voting power.
  • Performance-Based Vesting: Use performance-based vesting for equity grants, where the vesting conditions align with milestones that benefit both the company and the investors.

Exit Strategy

  • Exit Clauses: Define clear exit clauses for investors that do not necessitate the sale of the whole company. For example, offering the right to sell shares to a third party with the founder’s approval.
  • Drag-Along and Tag-Along Rights: Carefully define drag-along and tag-along rights to ensure the founder retains a strong position during any exit event.
Deal Structuring books

Deal Structuring

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  • Be introduced to the fundamentals of deal structuring
  • Learn 19 proven deal models for structuring deals
  • Discover 39 key elements of deal nuances
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