Entrepreneurs are very concerned with retaining control of their company. And right they should. Being your own boss — being in charge — is one of the few perks of starting something yourself. No one starts a company so that they can report to a board.
At Distil we still lost control of our company despite having tight control on equity, a majority of voting rights, super-majority clauses (needing more than 2/3 of shareholders to pass a resolution), and 2 founders on a board of 5. Here is the story of how it happened.
In Spring of 2006 we had closed our seed round followed by our Series A that Fall. Things were going well — we were growing as expected, and doing what we had told our investors we would do.
The Summer of 2007 things fell apart. Our sales strategy depended on 2 big partners recognizing Distil’s training solution as a alternate training method for ISO 9001 certification. Being able offer or product as an online way to receive training that could be counted towards certification was our big win. But that summer both of these partners pulled out. It was a set back. We shifted our focus to selling directly to companies (rather than through the big ISO certification bodies). We believed we could rally and persevere even without those partners.
Our board, however, didn’t see things that way.
Our board wanted us to explore other verticals, not just the ISO training world. They suggested we look at other business models, such as creating custom training games (instead of just off-the-shelf offerings). Another suggestion was to offer our in house development tools as an off the shelf product for organizations to make training games.
We politely, respectfully, disagreed. Those were some contentious board meetings. On our side we reiterate our confidence and belief in our initial market and the sales numbers we were going to get. The other board members showed outright disbelief at our projections.
At the end of the day we were in charge. We controlled the company and could do what we believed was best. No one, not our investors, not our other board members, could tell us what to do. We just disregarded their advice and did what we wanted anyways. Man did that feel good!
But the good feeling didn’t last long. Soon we were missing our numbers. Each board meeting we made excuses while showing how next month sales would pick up. We hired a telemarketing firm to call businesses directly. We invested in a new website. None of this worked because, in hindsight, our board was right. Without those 2 partners our business plan was doomed.
Now it was the Fall and we were looking at our next round of funding. 2007 was probably the worst Canadian fundraising environment in the last decade. Absolutely no new deals were done. VCs were only reinvesting in their existing portfolio.
Our existing investor stepped up to the plate and offered to reinvest. They still believed in the team, the product, and the space. There was just one condition. Jonathan, our CEO, must be replaced.
This is every entrepreneur’s nightmare. Why we haggle over cap sheets and voting rights. It’s so that we can’t get fired from the company we started. But that kind of control is an illusion. It really boils down to the golden rule: he who has the gold makes the rules. As long as we needed outside money to stay afloat, our investors were the ones calling the shots.
Still, we founders hunkered down. We ran through different scenarios: reducing to a skeleton crew with commissioned sales; taking on consulting to keep the lights on; dissolving the corporation and reforming again as a different company. The only scenario that really made sense, though, was to accept the funding and start a CEO search.
Jonathan graciously agreed to step down. He asked if he could remain on as Chief Operating Office. Our investor graciously accepted.
After all negotiations, our investor sill did not have majority ownership. Important decisions still required a super majority. The founders still had 2 board seats. Nothing had materially changed — except we understood who was really in control. And it wasn’t us.