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We are five engineering students, going to start up a company. As there are many competitor companies in the market, we were looking for an investor to start very big.

Fortunately, we found an investor who is very impressed with our business plan. Now, we are incorporating our company with him as a partner. So, there will be 6 directors in the company.

But the problem is, he is demanding 51% shares of the company and rest 49% to us.

He is supporting us -

  1. By giving us a very big space for our office requirements without any rent or lease.

  2. Giving us all financial support, we will need. We, five founders are not investing any money in the company.

  3. He has very good reputation in the society, so our business projects will face greater exposure, resulting in greater return.

  4. As he has many good connections in the country, many problems, we will be facing, would be easily vanished. Because, the country is India. :P (If you know, what I mean.)

So, I am asking -

  • Is it good or is it bad incorporating company with him? If it is bad, then how can we make him agree to decrease his share below 50%?

  • As he is a non-technical partner and we are all technical partners. So, who will have the power of taking decisions of the company? Our investor, because he is having 51% of shares, making him majority share holder! Or it will depend on voting of directors (Majority Rule)!

  • What would happen, if he sold all 51% shares to other company? Will we have to work under the orders/instructions of the new 51% share holder? And will the board of directors be reappointed, As new majority share holder removing us from board of directors?

  • Will the salary to employees be given from company shares? If yes, then can we make us share non-diluted and the investor shares diluted?

  • As he holding the 51% shares of the company, will we be working under his orders as employees or equal partners?

I have many questions and many confusions in my mind. Please help me to resolve all these problems.

Thank you in advance :D

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May be this could turn out to be a great learning experience for you since this would be your first start-up. But also take a look at this: answers.onstartups.com/questions/40321/… – frenchie Aug 6 '12 at 16:03

8 Answers

up vote 11 down vote accepted

I'd like to offer you a different perspective.

So, yes. 51% percent of the company means he's got the controlling vote. But is it such a bad thing? If he's very experienced and well known in the startup arena - it's a good thing. His leadership can take you places you've never dreamed of and open doors otherwise closed to you and your fellow students. He offers to support you, take you in and offer you a godo work environment.

Just think about it: if you're successful, you and your friends own 49% of a successful company - this is not bad for someone with the current rank of "Engineering Student" -- this could be the lesson of a lifetime ! and in a good way... think of the connections and doors a success like that opens.

Starts up are formed, and dissolved every day. This will not be your last startup - going on this adventure is a positive thing for you and your (otherwise poor) friends. Make this happen and the experience and financial rewards will be great. Once you have some money of your own--- your second startup will be > 50% owned by you -- guaranteed ;-)

So go for it. IF he is an experienced professional, give him his 51% and work hard and well for your 49%. You are all in the same boat. If he succeeds so will you. If you fail, so does he. He cannot fire you and take away your 49% just because "he has control". You own what you own. 49% of this venture will be your private property.

Go for it !

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Agreed, most likely the big huge success will not come from the first startup anyway. And if by luck it is, then that would STILL be a very positive outcome. – frenchie Aug 6 '12 at 16:17
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+1 - not the first startup. Make the experience a learning experience first, "make me rich" experience second. Or spend a whole bunch more time finding another investor with a different offer. – jimg Aug 6 '12 at 16:38
Thanks, Ron M. Great answer. So, I am going for it. Thanks. :D – Akshat Nigam Aug 6 '12 at 16:39
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good luck and hope to read about you in Techcrunch ;-) – ron M. Aug 6 '12 at 17:35
Congrats on getting an investor, which is not an easy task in India. – logeeks Aug 8 '12 at 8:59
up vote 2 down vote

Drop the deal. Silicon valley VC told us, entrepreneurs, in a meeting: never give up more than 7-10% of the business (standart discount for investing funds - please notice the difference between funds and individual investors-, though, is 20%). Investors should be interested in giving as much money as needed for the business to succeed, because giving you 'half-way' money means they get nothing in return. What you are talking about is the scenario we decided to exclude as a possibility for our Startup, the investor is employing you, NOT investing in your idea.

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this isn't Silicon Valley, though – warren Aug 7 '12 at 15:48
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and let's be honest out of 100 deals presented to VCs it's lucky if 1 or 2 get past screening process let alone get funded. – user60812 Aug 7 '12 at 16:27
up vote 1 down vote

It really depends on where you see your company in the future.

Although the perks of giving the majority vote to this investor are great and would probably be extremely beneficial, if you're really passionate about the company, you should remain the owner. You don't want to give a single entity the power to vote you out of your position.

That said, unless you're confident you could be just as successful without the investor, you should probably take his offer. Maybe you could sell the stock at a lower price for this investor and still give him 49% of the company.

Good luck in your venture, which ever direction you take!

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up vote 1 down vote

As everyone said 51% means ownership and complete control. That said you have a few options:

1. You can issue different shares (applicable to the US, not sure if possible in India). Quite a few companies with founder CEOs have done this when going public. Basically you have CLass A shares, and Class B shares. Class A shares in revenue, class B is used for voting, etc with no rev share. This way you can hold the vote shares, and give the investor 51% of pay shares, if he agrees.

2. You can put in the bylaws that major reappointments, promotions, changes, etc must be approved by 60% majority. This will basically require, say chairman appointment to require at least one of you to vote in line with the majority holder. This would be acceptable agreement to the investor, however this may hold up a lot of progress due to indecision.

Normally however as a startup you have to take what you can get. If you have a guy offering a group of college students office space, money, influence, and experience; take and don't look back, because not many people will do that. Every day there are brilliant ideas being born and dying, so if you have a chance to make it a reality do it.

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up vote 0 down vote

Imho I would drop the deal. 51% means indeed your investor has the biggest say and last word. That is what happened to Sean Parker at plaxo (he got kicked from the board by his investors), and when helping at Facebook, he made sure that could not happen to Mark Zuckerberg.

So how would you make sure the investor drops his percentage? Play it hard. You want to be in charge. So if you are not in charge, drop the deal. If they are really interested they wil negotiate. If they don't, I am pretty sure you will find other and better investors.

Good luck!

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Thanks, for quick reply. – Akshat Nigam Aug 6 '12 at 15:54
So, Now suppose, he agreed on 45% sharing and 55% sharing for us (other five founders). It means 11% to each of us. Now, who is in-charge? Who will take decisions of the company? And how the decision of kicking a founder takes place? Is it decided in the meeting of board of directors and by majority votes? – Akshat Nigam Aug 6 '12 at 16:05
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Is control of a company in India exercised through a majority of stock ownership or through votes on a board of directors? – frenchie Aug 6 '12 at 16:15
No, I don't think so? It should be same as in other countries. Consider me as newbie. So, how is the control of company exercised usually? – Akshat Nigam Aug 6 '12 at 16:25
I wouldn't think that every single decision would be left up to vote - i.e. someone needs to pilot the ship, but who sets the course is up for discussion. 45% would be a big disadvantage, since lots of horse trading would be needed to pass anything (investor + 1 engineer represents a majority) And we all know that technical people always agree with each other, right ;) Try coming to an agreement with 5 others to gain majority. – jimg Aug 6 '12 at 16:35
up vote 0 down vote

I'm not sure about the laws in India, but I am assuming that they're similar to over here, where > 51% gives you the final say.

I personally wouldn't take the offer. We had an Investor once, and she screwed us over. But luckily we had 66%, so we were able to get rid of her before she destroyed our Company, and its reputation.

The choice is yours, and I can't tell you not to go ahead with it, because this Investor might be great at what he/she does, and they might also be genuine. Although I doubt they are; think long and hard before you accept an offer. And at least try to negotiate so you have controlling shares.

Best of luck.

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up vote 0 down vote

From my opinion, a good investor will never try to secure 51% of your company. Reason is simple, it seriously demotivate the founders. Wiser investors take 5 to 20%.

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up vote 0 down vote

First, try to find other investor, a "cheaper one". You will see how much your idea value.

If you don't find other better, I think you should accept it, because you have a high chance of your new business work.

The investor is putting a lot of money in risk, and believing in your work. And as @ron-M said, you have to much to earn in this partnership.

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