A founder might be faced with the dilemma of maximizing wealth creation at the expense of relinquishing some control of a business. During the early stages of a startup, the founder holds significant control over the business; however, if the business requires an infusion of cash, or any other resources, it will come at the expense of handing over some control to the newly incorporated agent(s). It is important to consider the reasons driving a founder’s decision to select one over the other to find the best fit to a specific business needs.
Noam Wasserman’s The Founder’s Dilemmas notes how once a founder has identified either wealth or control as a driving motivator, it increases the chances of achieving the “Rich” or “King” outcome, respectively (Wasserman, 2012). Wasserman’s observations take the approach of founders choosing either building wealth or maintaining control based on variety of factors such as equity distribution, funding, growth, among others (Wasserman, 2012). This dilemma can be described as opposite ends within a sliding scale; as a founder moves toward maximizing wealth, he or she pulls away form the original full control over the startup.
Maximization of wealth is closely associated with a more aggressive strategy that brings together the most optimal inputs to foster growth and create financial growth. This approach is driven by the desire to generate the most monetary gains and the founder’s decisions align to whatever steps advance such outcome. It can be argued that maximization of wealth requires a high level of flexibility and adaptability. On the other hand, the idea of maintaining control might seem less flexible and more restrictive to the founders needs. It encompasses resources within the immediate reach of the founder as long as it does not compromise his or her control of the organization. Both can be viewed in terms of having a tolerance threshold. Maximization of wealth having a threshold in which an action is undertaken only if it supports the business’ financial objectives. The tolerance threshold for maintaining control would refer to only implementing those actions not exceeding a release of control limit.
A paper from the Journal of Entrepreneurial Finance by Edgar Norton, “Capital Structure and Small Growth Firms,” suggests that entrepreneurs account for growth (stable vs rapid) as a factor when determining whether to keep control or pursue wealth maximization (Norton, 1991). Norton’s data analysis suggests entrepreneurs use experienced and expected growth as a determining factor. Both Norton and Wasserman agree on stable growth being associated with maintaining control, while rapid growth would align more with maximizing wealth.
While there are benefits and challenges to each side of the control vs wealth dilemma, a founder will likely be forced to cede a degree of control to move a business forward. It would be in the founder’s best interest to examine his or her limits and business goals in order to pursue the most fitting strategy. The founder should be couscous of any shortcomings and the impacts imposed on the business by adopting either a control or wealth maximization approach. Ultimately, the goal should be to align a decision making approach that would be compatible with the founders goals for the business.
References
Norton, E. (1991). Capital structure and small growth firms. Journal of Small Business Finance, 1(2), 161-177. Retrieved from https://digitalcommons.pepperdine.edu/jef/vol1/iss2/6/
Wasserman, N. (2012). The founder’s dilemmas: Anticipating and avoiding the pitfalls that can sink a startup. Princeton, New Jersey. Princeton University Press.
Jose,
I think you have defined this concept in clear and concise manner. If someone needed to find a concise summary of the topic of “Maintaining Control Versus Maximizing Wealth,” they would need to look no further than your post. If you care to elaborate further, do you have any examples of entrepreneurs who have succeeded and failed, you know, a look at both sides of the coin? I really enjoyed your post!
Jennifer
Jennifer,
Thank you for your kind comments. I would point to Evan Williams as an example to both of these cases. When Williams founded his direct-marketing firm, he engaged family and close friends. His desire to hold strict control over the direction and operations of the startup coupled with a conflict avoidance approach form his collaborators, led to numerous issues and finally shutting down some time later. Years later, when Williams founded Odeo his approach was different. He was willing to hand over control of the startup to his co-founder Noah Glass. His work with Glass would go on to bigger and better things than his direct-marketing firm. Basically a complete opposite change and very different outcomes. Thank you!
-Jose
Great blog. I found a few articles that talked about the non-material riches of being an entrepreneur, which seem to benefit both Rich and King motivators. Your explanation of the motivations of entrepreneurs and their impact on business was very helpful.
One aspect of Rich versus King that I find interesting is how it can relate to the differences between Bill Gates and Steve Jobs. When I look at their history and the evolution of Microsoft versus Apple, I believe that Bill Gates represents the ‘Rich’ motivation and Steve Jobs the ‘King’ motivation. Both very successful, but followed different paths. I think Steve Jobs provides a great example of how to much control can restrict the growth of a company financially. However, Steve Jobs also provides an excellent example of how he learned to open up aspects of the company for growth while maintaining the control he desired.
https://www.businessinsider.com/bill-gates-versus-steve-jobs-feud-frenemies-2017-3
Tony,
Thanks for the feedback. I completely agree with you, Gates and Jobs are prime examples of the ‘Rich’ and ‘King’concepts. I think there is plenty to be learned from each of these two great entrepreneurs. Thank you for the link to the article! Definitely an interesting read. Take care!
-Jose
Jose,
Well done. I think your outside research also added value to your blog post. Determining when to relinquish control does go hand in hand with the growth speed of the company. I wonder if stable growth, however, would mean that there needs to be relinquished control to pursue rapid growth? What do you think?
-Hailee
Hailee,
I that’s a really good question. I would say that an entrepreneur might have to relinquish some control in order to take advantage of rapid growth or shift from stable to rapid. I am thinking rapid growth would likely be associated with volatile environments with many things coming your way at once, so having an army larger than one might be most beneficial to be able to handle everything more appropriately.
Best regards,
-Jose