reinamelendrez13

Week 2 Blog Post: Maintaining Control Versus Maximizing Wealth

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

Responses

  1. Aamiya Marshall Avatar
    Aamiya Marshall

    Hey Reina!

    I really enjoyed reading your perspective on maintaining control versus maximizing wealth. I especially liked your point that giving up control does not necessarily mean that you are losing as a business owner. I think that is an important distinction because, as entrepreneurs, it can probably be difficult to separate ourselves from something we worked so hard to build and trust other people with that vision.

    I also agree that the needs of the business can change throughout the different stages of growth. There may be a time when maintaining control is beneficial because the founder understands the vision and direction of the company better than anyone else. However, as the business grows, bringing in outside leadership, investors, or other resources may provide knowledge and opportunities that the founder could not achieve alone.

    I think finding that balance is key. Giving up some control does not necessarily mean giving up your vision; sometimes, it may actually be what allows that vision to grow into something much bigger.

    Great post!

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    1. reinamelendrez13 Avatar
      reinamelendrez13

      Hi Aamiya!

      Thank you for reading my post and giving a thoughtful response!

      It can be difficult for entrepreneurs to separate themselves from something they have worked so hard to build. Emotional connection can sometimes make it harder to recognize when bringing in outside investors could actually benefit the business.

      I really like your point that giving up some control does not mean giving up your vision. That is an important part of this dilemma because an entrepreneur can still have a strong influence on a company’s direction and values without having complete control over every decision. Sometimes, having people with different experiences and expertise can help turn the founder’s original vision into something even bigger than they originally imagined.

      Finding the right people to share that responsibility with is just as important as deciding to give up some control. If a founder is going to trust someone else with part of their business, that person should understand and respect the overall vision. The goal should be to find a balance between protecting what makes the business unique and allowing it room to grow.

      Thank you again for your perspective!

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  2. Tierney Cody Avatar
    Tierney Cody

    Hi Reina,

    I enjoyed reading your take on the Wasserman reading this week. You make a lot of good points around the benefits of pursuing wealth and growth over control. The evidence definitely points in the direction of relinquishing power and control if your ultimate goal is to build wealth (which is the goal for many entrepreneurs).

    I also like that you point out that there does often need to be a stage where the founder retains some control, as they usually will operate with the original vision and culture of the company in mind.

    I’m curious if you think there are any times when a founder always maintain control? I agree that larger business business can almost never reach their full potential that way, but what are your thoughts on small businesses that might not have a desire to expand beyond a certain threshold?

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    1. reinamelendrez13 Avatar
      reinamelendrez13

      Hi Tierney!

      Thank you for your response!

      I really like the question you raised about small businesses that may not want to grow beyond a certain point. There are situations where a founder should maintain control, especially when the business’s main goal isn’t necessarily to become a large company or maximize wealth.

      A scenario that supports this is an entrepreneur starting a small business because they value independence and close involvement with their customers. Giving up control may not offer enough benefit to make it worthwhile. In that situation, maintaining control is part of what makes the business successful. It really comes down to how the entrepreneur defines success. It is all up to the entrepreneur and how they lead. There are many ways to lead, and a key difference lies in how leaders work in a group setting. If their goal is to build a large company and maximize its financial value, then giving up some control may make more sense. However, if their goal is to create a sustainable business that supports their lifestyle and allows them to remain involved in decision-making, maintaining control could be the better choice.

      I also think this shows why there isn’t one right answer to the “wealth versus control” dilemma. The best decision depends on the entrepreneur’s personal goals and what they ultimately want their business to become. A founder who is happy running a small, successful business may not see giving up control as a benefit at all.

      I appreciate you bringing up this perspective because it made me think that entrepreneurship doesn’t always have to mean constant growth!

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  3. Robert Roux Avatar
    Robert Roux

    I think the most interesting part of this is that the research you included almost seems contradictory at first. On one hand, founders maintaining too much control can potentially limit the value of the company, but on the other hand, there is evidence that founder-led companies can perform better. To me, that makes this less about whether giving up control is good or bad and more about knowing when the company has reached a point where the founder needs to loosen that control. I imagine that is also incredibly difficult to recognize when you are the person who built the business from the beginning. What worked when there were 10 employees may not work when there are 500, but the founder may still feel like the approach that got them there is the reason the company succeeded. I also think there is a difference between giving up some control and completely removing yourself from leadership. Bringing in experienced executives, investors, or board members could allow a founder to fill some of their own gaps without necessarily giving up the vision that made the company successful in the first place. The hard part is probably recognizing that point before holding onto control actually starts limiting the business.

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