Being a technopreneur founder is very exciting; decision-making is your own – live or die. Time taken to make decisions – instant. Power to open bank accounts – why not? However, as soon as you are a shareholder in community, and not only a founder by yourself, there are rules that come into play, some by law and others which are not law but do matter.

I have found that some founders are sometimes more focused on shareholding than they are on value, and I think that there are various reasons:

• There is a sense that ownership infers decision-making power and without ownership (preferably majority), one is less able to make decisions;
• There is also a sense that ownership percentage translates into economic return;
• Aggressive controlling shareholders that are also executives, that would like to abuse the power given by that large shareholding, beyond what shareholding normally infers.

Who is “the boss”?

What does shareholding mean? Shareholding in a company can be issued for various reasons; being a founder, being a key employee even, but perhaps the main reason is money, whether “sweat equity” or hard cash. It means that the holder is entitled to take part in the returns generated by the company. It does not directly relate to being a “boss”.

Shareholders together appoint a board, which in turn “directs” the company, appointing management to execute (“executive”) on the strategy. There is typically no legal difference between an executive and a non-executive director, both are meant to “apply their minds and be “diligent” in ensuring that the company behaves according to a mandate. To be a director is important – you are responsible, but more typically the board of directors delegate authority to a “Managing Director” or a Chief Executive Officer (who is not necessarily a director), but certainly the “boss”! But regardless of that authority delegated, the directors’ responsibility does not disappear.

Layers of Authority

In writing this article I wanted to encourage our clients and others to look at the layers involved when exercising authority. And the reason is to ensure that the fun that is in business, along with the stress, is balanced with appropriate use of authority, bearing in mind that this authority is given in order to deliver the returns that are expected by shareholders (not necessarily purely financial returns in this age).

A simple example is to honour the authority that you as a director may have delegated, not to override decisions of juniors lightly. The style of one’s leadership is critically important here – every director is a leader, put there to lead the business. But leadership may be exercised through gaining board consensus rather than ordering actions that are more appropriate for a manager. Certainly, one’s shareholding does not play a role here. It only plays a role if decisions are required by the board that need shareholder approval.

As a manager of the business it is your job to deliver the strategy agreed – it is not to rethink that strategy. In particular a shareholder in theory always has the opportunity to sell their shares in a company if they don’t want to continue to participate, either because the return is insufficient for the investment or perhaps the company has changed what it does to the point where the shareholding does not sit well with the shareholder.

Shareholding Value or Percentage Holding?

The really practical outcome of this story is to ensure that founders concentrate on their absolute share value and not only on the proportion of shares they hold. Steve Jobs was evicted from Apple at a point in time as the (other) shareholders disagreed with what he was doing – but he was a relatively large shareholder. He later lead Apple to its recent form, a visionary who was by some accounts difficult to work with. He left this earth as one of its richest people, yet did not hold a majority stake.

Everyone understands that one should rather have a small slice of a big pie than a large slice of a very small pie; the reason is that the absolute quantum is important, not the percentage once you are a minority shareholder. But as an executive, managing the company on behalf of a board representing shareholders, one needs to put that hat on and focus on delivering results.

Shareholders Rule

If the rules of being a manager are that you need to seek permission to set up a new company or to open a new bank account, then regardless of whether you are also a large shareholder, you need to seek this permission. If the shareholders decide that a company cannot take certain decisions (such as changing line of business, taking on debt or selling the company) without seeking permission from shareholders, then that is the answer. If you would like to control the company at this level, then a large shareholding would be important, but raises the question as to your sincerity and motivation in having other shareholders in your community.