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Founding a company and the question: "Rich or King?


Wichtigkeit des Innovationsmanagement

To be rich, or to be king: that is the question


When founding a company, many entrepreneurs face a fundamental question: What is my primary goal? Do I want to become rich or retain control? This decision not only influences the company's strategy but also the dynamics between the founders and the handling of external capital.


The Rich-or-King dichotomy

The Rich-or-King Dichotomy describes the dilemma many founders face. The "Rich" approach focuses on achieving the greatest possible financial success, often by selling shares of the company and raising external capital. The "King" approach, on the other hand, emphasizes maintaining control over the company, even if it means slower growth and financial success.


Rich: The non-binding

Founders who choose the Rich path aim to achieve the greatest financial gain through rapid growth and scaling of their company. This is often achieved by raising external capital, whether through venture capital (VC), business angels, or other investors.


Advantages:

1. Rapid growth: By raising external capital, the company can grow faster and gain market share.

2. Resources: external investors bring not only capital but often valuable networks and expertise.

3. Competitive advantage: With sufficient capital, the company can invest in its own research and development, driving deeper innovation.


Disadvantages:

1. Loss of control: With each financing round, founders give up shares and thus a part of their control over the company.

2. Pressure from investors: External investors have their own interests and expectations, often aimed at quick financial success, including board seats or determining executive members. This can lead to tensions and conflicts.

3. Short-term f: The pressure to deliver quick results can distract from long-term strategies and sustainable development.


King: The control

Founders who choose the King path place great value on retaining control over their company. They are willing to grow more slowly and often forgo external capital to avoid compromising their vision and values.


Advantages:

1. Unrestricted control: Founders can make all key decisions themselves and implement their vision without external influences.

2. Long-term focus: Without investor pressure, founders can pursue long-term strategies and aim for sustainable business development.

3. Cultural cohesion: The company culture can remain more consistent and authentic since no external interests are involved.


Disadvantages:

1. Slower growth: Without external capital, growth may be slower, making it harder to quickly gain market share.

2. Resource limitation: Limited capital can restrict opportunities for research, development, and expansion.

3. High personal commitment: Founders often have to make significant personal financial and time investments to drive the company forward.


The dynamics between founders

The decision between "Rich" and "King" also has significant implications for the dynamics between founders. In the case of multiple founders, the lack of initial discussion or changing life situations can lead to serious disagreements about the direction the company should take.


Potential for conflict:

1. Different goals: If one founder wants to become rich and another wants to retain control, it can lead to significant tensions.

2. Strategic decisions: The choice of financing path influences many strategic decisions, which may not always align with the personal goals of all founders.

3. Role clarity: Initial clarity about the role, rights, and obligations of each founder can help avoid conflicts and strengthen collaboration.


Solutions:

1. Clear communication: Open and honest communication about individual goals and expectations is crucial from the beginning. It's better to delay founding or avoid poor equal-split strategies and establish a common foundation.

2. Setting priorities: By setting common priorities and values, a shared basis can be created. Even in the event of an unfortunate founder exit, it's already clear who takes over the shares and under what conditions.

3. Flexibility and compromise: All parties must be willing to make compromises and remain flexible to find a solution acceptable to all and ensure the venture's survival.


External capital and control

Raising external capital brings not only financial resources but also external influences into the company. Investors often expect a say and control, which can limit the founders' decision-making freedom.


Strategies for maintaining control despite external capital:

1. Negotiating terms (Earn-In): When raising external capital, founders should ensure to negotiate terms that allow them to retain as much control as possible.

2. Phased financing (VC as you go): Through phased financing, founders can raise capital in multiple stages, adjusting their control gradually.

3. Structural measures (Counties or shires): Measures such as establishing non-equity-based voting structures can help maintain control despite external capital and still allow controlled input from capital providers.


Conclusion

The decision between "Rich" and "King" is not simple and depends on many factors, including personal goals, the company's vision, and market conditions. There is no right or wrong answer, only the path that best fits the individual goals and circumstances. Naturally, the supply of venture capital in the market is very one-sided compared to the capital needs of startups. This also means that investors can be very selective and risk-averse, only betting on ventures with a high chance of success and thus return. From an entrepreneur's perspective, it is also important to pay attention to the strategy and portfolio of the venture capital provider, whether the investment is of an M&A nature or purely for return purposes. It is important that founders are aware of this decision from the beginning and negotiate their strategy accordingly to be successful in the long term. It is also important to first create values that are attractive to new investors before dreaming of exits, castles in the air, pony farms, and unicorns.

Yetvart Artinyan

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