This is an answer I wrote on OnStartup, here is the link to the original page.
Losing Controlling Interest in a company, can that be bad?
Basically I have been lucky to get spotted by some angel investors and will be signing £60,000 for 60% of my current business come Thursday, which
will really boost my start-up massively and hopefully make it 'big'. So It will be split: 30 - investor / 30 - investor / 40 - me
Is this a problem? - Is there a way that they can 'flush' me out of the business or something so I lose out? - I do understand there are contracts and a
lot more legal stuff in place. But in a nut-shell, is this possible? (if it helps - it is all 'ordinary shares')
In my opinion, these figures seem very very investor-friendly.
Basically, you're valuing your business at only 100K. It's hard to tell if that valuation is in line with your business but a 100K valuation is pretty low. If ordinary
shares in the UK are the equivalent of common stock in the US, then that point is good for you. But I'm pretty sure you'll also have to sign and agree to some terms as well
and those terms, if you're not the one drafting them, might contain some provisions that may or may not be in your favor. Considering the very low valuation you're currently
being offered, I'd read those carefully and make sure that you understand what they really mean. So in terms of the equity split, I don't know how fair it actually is but I think
it's on the very low side of things. Usually savvy investors make sure to take only 20% - 30% of a company because savvy investors know that taking any more will risk discouraging the entrepreneur.
As for losing control of your company, that may very well happen. But it's usually not through share ownership that it happens but rather through control of the board of
directors. Basically, shareholders create a board and it's the board that decides who and how the company is run. So if the board is composed of 3 people or 5 people, it's
whoever controls the majority of the board seats that will eventually decide your fate as well as the fate of your company. And if you only control one seat, it's not going
to be a very friendly board for you.
As for being "flushed-out", it usually works like this. At the beginning, it sounds like "no, of course you're secure, we're investing in your company because we actually
believe in you, otherwise we wouldn't be investing." But as the plot unfolds, you're going to make a mistake; it's just part of entrepreneurship, it's inevitable. If anything,
strive to make small mistakes, ones that are easily recoverable and that have low down-sides. However, on one decision, the investors will call it black, you'll call it white,
and facts will later prove you wrong. And that's when you'll be at risk of being "flushed-out"...In business, there are no friends, just people whose interest can be aligned with
yours. Ask yourself this: if one day these investors were in a position to screw you, what do you think they would do then?
So, if your concerns are your equity position and your control of the company, with just what you've shared so far, I'd be very concerned. In
my opinion, these terms look very much to be in your disfavor.
PS: If you've already found investors willing to invest in your company, I think it's worth more than you think.
And as a CEO, being prepared to walk away from a deal and say no, is a key skill that'll save you and your company when bad deals come along.
answered Jul 3 '12 at 22:34