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One of the most difficult decisions an entrepreneur may go through is how much control they are willing to give up to grow their business. The idea of “maintaining control versus maximizing wealth” creates a conflict between being the decision-maker and maximizing the company’s financial value. While maintaining control can make you feel good about being a founder, entrepreneurs should be willing to give up some control when doing so creates significantly greater opportunities for the business.

Research supports the idea that maintaining complete control is not always the best financial decision. Wasserman (2017) studied more than 6,000 American startups and found that companies in which founders maintained control of the CEO position or board of directors were generally valued less than companies in which founders had given up some control. In his research, each additional level of founder control was associated with a 17.1% to 22.0% reduction in pre-money valuation. This suggests that sometimes a founder’s desire to remain “king” can limit the growth of the “kingdom.”

On the other hand, this does not mean founders should automatically give up control. There are situations where founder leadership can contribute positively to a company’s performance. Adams, Almeida, and Ferreira (2009) found evidence of a positive causal relationship between founder-CEO status and firm performance. A founder often understands the company’s original vision, customers, and culture better than anyone else. This evidence suggests that giving up control too early could remove an important source of value.

The real issue is understanding what the business needs at different stages of growth. Research by Ewens and Marx (2018) even found causal evidence that venture capitalists can improve startup performance by replacing founders with outside executives. This collaboration is extremely helpful in making decisions about a company and is considered an important strategy.

In conclusion, maximizing wealth does not necessarily mean that you are losing as a business owner. Giving up a percentage of ownership or some decision-making authority can result in a much larger and more valuable company. For entrepreneurs, an important question they may ask themselves is not simply, “How much control can I keep?” but rather, “What combination of ownership, leadership, and outside resources will create the greatest long-term value?” Knowing when to maintain control and when to share it may be one of the most important decisions an entrepreneur will make.

References

Adams, R. B., Almeida, H., & Ferreira, D. (2009). Understanding the relationship between founder-CEOs and firm performance. Journal of Empirical Finance, 16(1), 136–150. https://doi.org/10.1016/j.jempfin.2008.05.002

Ewens, M., & Marx, M. (2018). Founder replacement and startup performance. The Review of Financial Studies, 31(4), 1532–1565. https://doi.org/10.1093/rfs/hhx130

Wasserman, N. (2017). The throne vs. the kingdom: Founder control and value creation in startups. Strategic Management Journal, 38(2), 255–277. https://doi.org/10.1002/smj.2478