Startups must balance investor power, maintain self-control

Eric Weiner, of Lowenstein Sandler, recently suggested that startups might unintentionally cede too much power to their investors, especially late-stage venture capitalists. This control could be used to delay the Initial Public Offering (IPO) and hurt the company’s financial stability. He recommends entrepreneurs balance this reliance with other sources of funding to maintain decision-making control.

Excessive power is often gained through table stakes deal terms, allowing preferred shareholders to deter an IPO. They can use this authority during the IPO process, potentially diluting their shares or converting them to standard equity and influencing the company’s strategic direction. Weiner insists on open communication channels to balance power dynamics and secure the company’s long-term sustainability.

Ryan Hinkle, Managing Director at Insight Partners, concurs with Weiner, stating that initiating the IPO process depends on consensus among investors. It’s a decision taken collaboratively, involving numerous potential investors. Hinkle agrees that a company must understand its market standing, utilize unique selling points, and have a clear corporate structure before an IPO.

Balancing investor influence in startups

He emphasizes that such consensus not only secures the investment but also ensures a smooth transition phase.

Startups may face a discrepancy between current valuation and exit goals, resulting in preferred shareholders endorsing a lower-than-expected exit. Post-IPO, these shareholders become common shareholders, changing their company rights. This situation can lead to conflicts, particularly if the startup’s market performance declines after going public. Thus, it’s crucial for startups to maintain effective communication with shareholders and set realistic exit goals and valuations.

Alan Vaksman, founding partner of Launchbay Capital, points out the tension between investor caution and startups’ desire to go public. He notes an increased focus on profitability and financial factors over growth in the public market. Secondary markets have evolved to allow company-approved private share trades, providing liquidity for VCs and reducing pressure on startups to go public hastily. Despite potential disagreements, Vaksman advises entrepreneurs to practice strategic patience, especially in the current unpredictable global market conditions.