Ask HN: Why do tech startup owners do not own the majority of their stock? | Hacker News Reader

Ask HN: Why do tech startup owners do not own the majority of their stock?

39 pointscodesternews23 comments

Why tech startup owner do not own majority(51%) stocks?

What's then their motivation? It means they are just employee and can not take major decisions.

If there aren't any constraints like VC funding, co-founders, employees (that want equity) then yeah, it would be pretty logical to keep more than 50%.

In reality, you need to make compromises, it's better to have < 50% of something rather than having > 50% of nothing.

BTW: They probably still have "decision power", because they have a board seat, which means they have influence over the company and are not just an "employee" as you stated.

Don't get hung up on 51%, or 50%+1 share. Not all shares are equal. A company can issue a single voting share and 99 non-voting shares, and that gives the owner of the 1 voting share complete control despite only owning 1%. It's much more complicated than any simple example can illustrate.

To answer the question though, founders sell equity to raise money. When you've sold 50% the next time you raise (or give stock to a new employee, or reward a mentor, etc..) means you're going to own less than half the company you started.

I still don't exactly understand what the value of a non-voting share is. What rights does it confer, exactly. Why do I want to own it?

Non-voting shares are as much of an investment in the value of the company as the voting shares are -- you would hope they increase in value, and they may also pay dividends.

When you invest in ETFs or mutual funds you don't normally get voting rights either -- the fund manager does. Despite that, ETFs and mutual funds are the best type of investment for average people who want to save for retirement.

You still own a share of the company. If they pay dividends, you get one.

But if you can't vote about whether they pay the dividends... what is preventing the owner of the voting share to simply never pay dividends, and transfer the profit to their own pocket using some other method, for example giving themselves a really high salary, or starting a new company and transferring the profits there?

When you are making decisions on behalf of a corporation, you legally have to make the best decision for the shareholders. There's a lot of wiggle-room in that, but the courts will see through the most egregious stuff.

So if you own non-voting shares and the voting shares decide not to give dividends and instead buy a useless corporate yacht for themselves to use, you can sue.

Non-voting stock in a private company is rare, but if the company exits for a value where the liquidation preference of preferred stock doesn't matter, all shareholders share in the distributions pro rata. So if you own 10% of a company via non-voting stock, you generally own 10% of the economics, you just can't vote on decisions that require a stockholder vote. Of course, the value of 1 non-voting share should have a discount to 1 voting share, but if you own a small stake, there's not much of a difference since your vote doesn't count for much regardless.

It’s like a bitcoin, you buy it because you expect the price to rise, and someone else to buy it at that price.

They can be of anything, usually (almost always) dividends, but can be rights to something, like profits directly, too.

I suspect there are two main reasons: 1) Dilution comes with the game when going the VC route (which founders may or may not have realized ahead of time) and once you've started down that path, it's hard to reverse course since you often don't have the cash to buy out investors. So their ownership gets diluted away to obtain funding to keep the lights on and/or with the hopes of cashing out down the line. 2) The plan was always to cash out ASAP. Many startups aren't being built for the long run and more than a few are just attempts at a quick cash grab before investors figure it out so they don't care that they get diluted as long as they get a payday (a.k.a. a 'liquidity event') since that was the plan all along.

You are right that once you lose control, you are just an employee and there are many cautionary tales about what can happen from losing control to getting booted out of the company you founded. As a result, there are some companies (notably Google and Facebook) where the founders made sure to retain control. So it's just a matter of priorities and deciding what one is willing to put up with to achieve their objectives.

> Many startups aren't being built for the long run and more than a few are just attempts at a quick cash grab...

From a VC's perspective they would rather take a loss on a short term investment than waiting 15 years for your investment to pay off.

If there are two shareholders, one of whom has 51% and the other of whom has 49%, then there are meaningful ways in which the minority shareholder is not really a decision-maker.

It's pretty different if there are 10 shareholders and you hold let's say 40% of the shares, in which case you might only need one or two people of nine to agree with you.

Because they sold shares to investors for money they dearly needed to build the company.

When you found a startup and take VC/angel/investor money, the point (from a financial perspective) is the exit. If you're planning to make $10 million USD during some liquidity event, does it matter if your share was $10 million stake was 1% or 100%?

Of course it matters. In a bad/mediocre exit scenario, most of the money goes to pay back preferred investors. Common winds up with scraps.

They do, when they put in 51% of the capital needed to grow the business (i.e., they bootstrapped the company). In each funding round you can generally expect 15-25% dilution, and then employees will receive options as well. By series B-C most founding teams will own less than 50% of the business.

Also, remember that different shares come with different voting rights. You can not own 51% of the economic value of a company but still have 51% of voting shares.

The ownership of a corporation is apportioned by stock; control is apportioned the same way modulo any side-agreements and restrictions. A tech startup founder frequently does not own a majority of the issued stock because stock has been traded to investors to provide working funds and capital and allocated to key employees to ensure they have some skin in the game.

Founders typically start out with majority >50% ownership, but over subsequent funding rounds and employee stock options have to slowly give up ownership %. How much they give up depends on their strength at the negotiating table every fundraising round. The better the company is doing the less they have to give up to close investment, and vice versa.

There is this old joke, where a businessman is asked why he's not mad about his wife cheating on him, and he answers "It's better to own 50% of a valuable asset than 100% of a worthless asset."

You are correct that it is indeed preferable to own 51% of the shares. Being able to do that and raise the amount of capital you need, however, is the tricky part!

49% of a growing company is better than 51% of a failed company.

49% voting shares plus 51 other investors is still de facto control.

because most founders are in the business of raising money not building companies/making products

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