Entrust investments refer to the investments made by investors into start-up companies while entrusting certain rights like voting rights to the founders of those companies. This allows the founders to maintain control over the company while obtaining necessary funds from investors. For many start-ups, maintaining control is crucial in the early stages to carry out their original vision. There are several ways that founders can protect their control when attracting entrust investments, such as issuing differentiated share classes with unequal voting rights, signing agreements on entrusted voting rights or acting in concert with investors, and using virtual stocks, etc. With proper arrangements, start-ups can strike a balance between ceding some benefits to investors and retaining control over the future development of the company.
Differentiated share classes allowing founders to keep control
One common method is to issue Class A and Class B shares. Class A shares with superior voting rights can be held by founders, while investors get Class B shares with more limited voting power but possibly preferred dividends. For example, Class A shares could have 10 times the voting power of Class B shares. This guarantees founders’ control over corporate decisions while rewarding investors.
Entrusted voting rights maintaining founders’ control
Founders and investors can sign agreements where investors entrust their voting rights to founders, allowing founders to vote on behalf of investors. This consolidates voting power with founders. Additionally, founders and investors can sign concert party agreements to bind themselves to vote together, further ensuring founders’ control.
Virtual stocks incentivizing employees without diluting founders’ control
Founders can issue virtual stocks to key employees as incentives. These stocks do not actually dilute founders’ shares, as they lack voting rights and other shareholder rights. But employees can still get economic benefits like dividends. This both motivates employees and allows founders to keep control.
Start-ups can utilize entrust investments to obtain financing while founders maintain control through varied share rights, voting agreements, and virtual stocks. With proper arrangements, founders can balance investor rewards and retain their vision.