Do you know about the theory of rational thought? The theory of rational thought has at its core the basic assumption that people will act in a logical manner. Now, if that was true, then a great startup CEO would have much more power than a board of directors because a great startup CEO is running the company, not the board of directors.
A great startup CEO will have much more effect than the best board of directors ever will on the success or failure of a company.
After all, you're there every day, working to build your company. You're intimate with every detail, every nuance of your company. There's no way a board of directors that you meet with every six to twelve weeks can have the same depth of knowledge about your company.
But it only holds that a great CEO will have more power than the board of directors if the board is acting rationally.
What happens if the board is acting irrationally and you, the CEO, are doing a great job?
All bets are off in this scenario. And guess who has more power?
The board of directors has more power than the CEO because the board can fire the CEO.
However, there is one more group that has more power than the CEO or the board of directors. That’s right…
The investors have the most power, more than the CEO, and more than the board of directors, in any company.
Why? Simply put, the board reports to the investors. And the investors can vote with their money to overrule the board and the CEO.
So one of the most important things you want to do as a startup CEO is make sure you are in alignment with your investors.
And everyone has investors. Even bootstrapped companies have their families and friends as investors. So…
- It’s really critical that you make sure that your investors have the same objectives for your company as you do, and…
- You need to continually over-communicate to your investors every step of your journey to make sure you stay in synch, and…
- You will need to make sure your new investors share your vision and goals before you take their money.
All you have to do is observe the public markets and watch the effect that activist investors have when they take a position in a company. An activist investor takes a position in the company, and then tells the board what it wants done.
The true power is always with the investors because they control the money.
The board and the CEO can try and fight the activists, but, more often than not, the activist investors will win their fight.
The same holds true in startups. The investors, not the board, control the money.
And you’re out of luck if the investors…
- Don’t have the money to support the company going forward, or…
- If the partner you’re working with gets fired and you lose your support inside the fund, or…
- If the fund wants you to sell your company and you want to keep going, that's why..
- Your best chance of success as a startup CEO is to execute your plan.
The old adage always holds true: Just follow the money. And the money is with the investors.
But You Have A Secret Weapon Against A Bad Investor
It's one word: Execute.
If you execute and beat your plan, then it's really hard for even the worst investor to fire you. Yeah, they may not like you, but they'll let you stay as CEO because you're increasing the value of the company.
Then, you should do one more thing to negate the power investors have over you. Get to cash flow positive, so you don't have to rely on any more investor funding to grow your startup.
Until your startup is cash flow positive, then, even if you're doing well, there's always the possibility that investors can screw around with you. So, execute, get to cash flow positive, and try and make sure you're in alignment with any potential investor you add. That's the ticket to having a great experience with your investors.