
Ask HN: Should investors get a board seat and preference in liquidation? - rahulchhabra07
I have a few doubts and need clarification.<p>- I think investors getting board seat - control over the direction of co and preference at liquidation is a lopsided deal.<p>- 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.<p>- 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.<p>- 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.<p>- Given this equation, it makes sense for founders &amp; 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.
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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.

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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.

