Do I lose control of my startup when I hire a CEO?

This question originally appeared on Quora, below is my response

To answer this question we need to look at how most company’s operate. This largely depends on the constitutional documents of your company, and the jurisdiction in which you’re incorporated.

How companies are structured:

Typically the chain of control in company is as follows:

Shareholders > Directors > CEO

Roles of Shareholders

Shareholders meet on a regular basis, typically at the Annual General Meetings (AGM), but also at Extraordinary General Meetings (EGM). This is where the Shareholders vote on how the company is structured, amendments to the constitutional documents, changes in capital structure, and the appointment of Board members.

Usually each ordinary share has an attached vote to it and majority votes win. Most companies require supermajorities (e,g, >70%) for amendments to the constitutional documents to protect minority shareholders.

Shareholders have the right to appoint Directors to the Board. Many constitutional documents will guarantee a board seat to Shareholders with a certain minimum threshold, e.g. 20%.

Roles of Directors

The Board of Directors votes on the major strategic decisions for the company. Led by the Chairman of the Board the will typically approve business plans, budgets and many things regarding how the company is run at the highest level. This often includes the hiring and firing of key personnel, including the CEO.

Boards typically operate on democratic votes, with the Chairman of the Board leading tie-breakers. The Chairman, and by extension the Board are responsible to the Shareholders of the company.

Role of the CEO

The CEO runs the day-to-day operations of the company. Often CEOs have a large degree of autonomy, within the plans approved by the Board of Directors.

The CEO reports to the Board of Directors and will present their results and proposals to the Board on a regular basis.

So where is the control in the business?

This really depends on what you define as control. If you want to control the day-to-day operations of the company like how product development will go, what marketing campaigns you will use, or which individual is going to be hired then yes, hiring a CEO will make you lose control.

If not, then we need to examine how your Board is structured. If there are only 2 Board seats and you hold 1, while also being Chairman of the Board then you effectively have full control of the Board as the Chairman votes on tie-breakers. The moment you lose a majority on the Board, you lose control of the company.

Therefore by extension the right to vote for directors at Shareholders’ meetings is critical. Not only do you need to control the number of Board seats, you also need to control the right to nominate and vote in Directors. Now remember Shareholders are often entitled to Board seats. Therefore when raising future rounds its important to consider what the minimum threshold is, as set forth by your constitutional documents. It’s also worth bearing in mind that many investors will require a Board seat as a condition to the investment, regardless of what rights the existing constitutional documents afford them.

How do I protect myself from losing control of the Board?

One of the most common practices to retain control of the Board is to have two classes of equity in the company. Founder shares that have outsized voting rights and investor shares that fewer, or no voting rights. Notable tech companies like Google and Facebook use such structures to afford their founders outsized control of the company. While it’s accepted that keeping founders in control can be beneficial for the company it’s not a given.

So if you have a seat on the Board and you want to raise capital in the future look at how to protect your existing Board seat, and how to ensure control over other Board seats that may come down the line.