Once in a blue moon, this situation repeats itself. The board of a company along with the stake holders and investors are pushing the entrepreneur towards a direction and he/she is really not liking it, and tries the ownership card. “This is my company, and I do have the best in mind for it”. Nobody usually reacts to those words, but technically one could throw you out for making statements like that. I’ll start with who doesn’t own a company – Its the entrepreneur.
Whoever sold you the romanticism that being an entrepreneur meant being your own boss, was clearly lying. You really never escape the chain of command and reporting structure so easily – not in a civilized society. So Its no wonder that things don’t span out as they say. As an employee you might be accountable to your boss, but as an entrepreneur you are accountable to all of your clients, stakeholders and employees. And every one of them holds you responsible to have the answers and do your best – that’s no different from being an employee times ten. Think about it.
So here’s two things you must know. It is crucial to understand this because this sets the context to understand a whole lot of things that happen through the course of the company.
1. The day you incorporate your company, you no longer own it. You want to own something, keep it a proprietory firm or under a partnership (wouldn’t recommend it, as the stats are as high as 99% of partnerships ending in breakups). It might not be a bad idea to keep it as a family business, but there as well its joint ownership.
2. The Day you agreed on a termsheet and took money from your investors, you made up your mind that you were going to sell your company for a good price someday. Investors invest looking for returns and that returns are never going to happen without an exit; And an exit means a sale. Read that line a few times, it helps to get it into your head. You have in all means sold your company when you take investment. Period.
So the obvious question arises. Why on earth would anyone want to be an entrepreneur despite all these gory truths. Well, a couple of reasons. a) You still do have the capacity and capability to build something from scratch, scale it and make money in the process – You are still one of the major stakeholders in the firm. and b) What you want to do to create this value (be it money or impact or fame) is all left to you – atleast in the beginning.
The intent for writing this article is for one thing. I see and come across enough entrepreneurs who want to own more than 50% of the company. Thats almost the sure way to kill the company and strangle some relationships, because it shows that you haven’t gotten the first thing about a corporation right – you cant own it. And the only way to scale it is to give up control, bring in the right people, and yet have enough of a leeway to make a decent exit – note how the stake you hold is towards a better return, rather than control.
And in all this does the obvious question remain. Who does own a corporate? They say it becomes an entity of its own, can own assets, can incur liabilities, can attract investments and is a being of its own shielding its board and management from most liabilities. Who then owns it? The answer to that is probably the most shocking. The Government. The Government is what owns a corporate – actually every corporate. The rules of the land, enable and provide the space for passionate, enthusiastic and enterprising individuals to spot an opportunity, exploit it, create jobs, add value, attract investment, grow the company, expand, create a board to make their own decisions and directions for the entity, make an exit, or even take it public. But at the end of the day, when and if it does shut down and incurs a loss, the losses go away with the fading memory of the company. And thats the shield that a government provides towards the entrepreneur – probably the best of freedom for an individual to create wealth and value the fast track way.
As far as the govt is concerned, creating jobs is one of its prime mandates. And corporations are instruments towards that cause.
In the light of that, look at the bailouts. You might see a slightly different picture.
Note: Repost from the Blog – The Startup Guy
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Ari,
I am being quite realistic here. The point is that, if you want to go backtrack and see who legally owns an entity, it will eventually lead to the government. But as you rightly pointed out, if its depending on who owns it – via its value and control, then yep its its stakeholders.
The point that was being made here is actually quite simple as saying that entrepreneurs need to know that majority stake is not equal to control and long term benefits and like all great things in life, one needs to balance this out right.
Thanks for the note. Appreciate it.
I do not agree with this post (got your attention now?). Some entrepreneurs do own their company, and some wield a decisive dictum even without a controlling stake. Yah, of course, the “stakeholders” own the company too, but that too, just as in politics, boils down to voting power etc etc. And, government? Common…. OK, maybe in a la-di-da type of academic perspective. You might as well say that god own the company. Or, in a more zen like way: “What is a company?”.
Get real, bottom line is that like many things in life it boils down to power and some time the entrepreneur has it, either by the books or not, and some times he does not.
Some first thoughts –
Coveting ownership and control is human instinct. If the entrepreneur is capable of raising necessary resources himself, he can retain control and retain his ownership as well. It’s when he gets ambitious, thinks scale beyond his available means, does not have enough collateral to raise debt all the while feeling the need for momentum capital he chooses to let outside capital in. It doesn’t necessarily mean he is no longer in control, but his ownership is diluted to the extent someone else has risked his money. Now isn’t that a fair trade off?
Corporations are formed not just because of the inherent infirmities in the other forms of business organizations you outlined (sole propreitorship / partnerships). Bankers prefer a corporation over other forms before they consider extending working capital assistance / Export Credit / Bill Discounting / Bank Guarantee facilities etc. Large customers also are happier with companies because the casual vacancy of a proprietor/partner (death, insolvency, lunacy) should not render his business unserviceable since there is a sudden management vaccum at the vendors’ end.
Regarding your concluding statement, “corporations are owned by Government” – not unless the corporation owes so much in taxes/statutory dues to it, no government can usurp the ownership of a private company from its shareholders. Rest assured, entrepreneur can still retain ownership and control shall always lie with the motley crew in corner office so long as they are smart enough to keep the majority investors loose and disorganized, pampering them with occasional crumbs of dividend and bonus 😉
I think without ownership nothing is really possible and perhaps this article is only valid for the really novice starter since any entrepreneur worth his/her CEOship will know that they own only a part of the corporation! Unless a Founder owns and continues to direct the company against perhaps all odds and into what might seem to be inappropriate decisions, this tendency to decide by committee results in the most mediocre enterprises where the risk averse hyenas have eaten up the authority of the true value creator
So go on guys, take them all on! Ignore everybody, only you know what you want and how to get there, and for that if you need to throw your weight a bit, go for it! its likely you won’t win every day but what the he**
An entrepreneur is a schizophrenic person and lives many lives at once: You don’t want him to think he owns the company but you want him to dedicate himself to the management and growth like it’s his own baby. And if he loses this sense of ownership, he may very well lose motivation as well. Also, he’s often a technician and he has to run the company as such so he keeps a communication line with his colleagues and employees; but you also need him to build another communication line with shareholders, mostly on a financial wavelength… That’s the charm of being an entrepreneur!