Personal Finance

Safeguarding your role as a company founder

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Suspended cangroup CEO Bharat Thakrar. FILE PHOTO | NMG

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Summary

  • Leaving the WPP Scangroup situation behind, boardroom ousters are common in the corporate world.
  • Founders are often diluted by external investors during growth stage.
  • Ousters occur when the investors use their influence in the company to pass resolutions against the founder or his interests.

WPP Scangroup board suspended its chief executive officer (CEO) two weeks ago. He was also the founder of Scangroup. It is highly unlikely that his shareholdings and directorships have been affected by the suspension. The board clearly stated the reasons for the move as in the capacity of CEO, he was also an employee of the company. I would, therefore, not be quick to term the suspension as a boardroom wrangle.

Leaving the WPP Scangroup situation behind, boardroom ousters are common in the corporate world. Founders are often diluted by external investors during growth stage. Ousters occur when the investors use their influence in the company to pass resolutions against the founder or his interests. The founder is left with nothing but fond memories and tales of how he was the initial owner of the now multinational company.

Today's article is for founders. How do you protect your stake in the event of an expansion?

A founder may have to dilute his stake in a company for strategic reasons such as expansion or during capital injections. In such instances, the founder may have to sell some of his equity shareholding to external investors in exchange for capital injection into the company.

This is the most critical stage in protecting the founder's equity and ought to be done cautiously. The first thing is to choose your investors cautiously. You have to decide if they are short-term investors or long-term investors. This will guide the type of shares to issue them with. You must do a due diligence on your investors and hire experts to assist you in the process.

You will need a lawyer to structure the deal and a finance expert to advice on valuation. When it comes to protecting your stake, think long-term and if possible, think in perpetuity. Think hundreds of years from now. Have a balanced attitude when it comes to on-boarding investors.

Don't be too rigid in the irrational fear of losing control of your company and don't be too lax and take the first deal that comes through.

A shareholders’ agreement is a must have for any founders diluting their shares. It stipulates the rights, obligations and duties of the founder and the investors. Some key provisions include classes of shares and the rights attached to them. It is important as the founder to create a different class of shares with superior rights to common shares. These include extra voting rights. Facebook Inc. for example have safeguarded the founder's equity by creating a special class of shares that carries 10 votes per share while the rest have one share one vote.

You can maintain control of your company through board allocation mechanisms. You ought to have more board representations as boards govern by resolutions. The higher your representation in the board, the more likely you are to control the company. Use of independent directors may minimise loss of control stemming from boardroom politics. This is because they are more likely to make unbiased decisions as they have little to gain from a boardroom coup.

Control is also maintained during share transfer. The right of first refusal allows the founder to have the first right to repurchase the shares of exiting shareholders. In this way, you control the company. The company can also issue redeemable shares to investors, meaning they will be bought back at a later stage.

There are many other ways as a founder you can maintain control of your company despite expansion and growth.

Consult your lawyer for professional advice.