Big Red Car here on a rainy Monday in the ATX. [Whoever has been praying for rain locally – you can stop now.]
So, a founder calls me and says, “I read where you recommend a voting trust for a startup. Do tell?”
A voting trust is a good idea right from the founding of a company. It is something which should be in your founding documents:
1. Articles of Incorporation;
2. Corporate Bylaws;
3. Option Plan;
4. Founding Shareholders Agreement;
5. Voting Trust; and,
6. Employment Agreements.
[You do have the Big Six, right? Haha, half of y’all couldn’t find these docs even if you made them. Sorry, that was mean.]
The Voting Trust
The voting trust came from Delaware law. Most corporations are incorporated in Delaware because of the ease of the regulatory environment – meaning it is figured out, not that it is “easy.” Most other states have now adopted the idea of a voting trust.
Voting trusts were initially used by groups of shareholders to effect such mundane things as being able to appoint board members and to call unscheduled board meetings or meetings of shareholders.
When used by founders, they are a control feature in an environment in which control is going to be assailed by seeking outside funding – as an example, from venture capitalists.
How does a voting trust impact control, Big Red Car?
When you found the company, the founders agree in the voting trust to either delegate all the voting rights to the “big” founder or to vote unanimously.
When you have a dominant founder, the “big” founder theory prevails. She gets to vote all the shares. She is the “trustee.”
When you have a group of founders, then they can agree that all decisions will be made either with majority control or unanimously. Again, the appointed trustee votes all the shares.
In both instances, the creation of the voting trust exerts some control and discipline on all matters which will be decided by a vote of the shareholders.
Like what, Big Red Car?
Like the composition of the board of directors.
Like whether that particular board of directors decides to fire the founder CEO.
Like whether the board of directors decides to sell the company at a given price.
Most of this is a little more complex – shareholders elect boards which then act on behalf of the shareholders. If you have a beef with the board, it may be necessary to remove certain directors and bring on more.
It is also possible to effect some actions by “majority consent of the shareholders in lieu of action by the board or in lieu of a meeting of the shareholders.”
[Pro tip: You will want to coordinate the provisions of the Corporate Bylaws with the provisions of the voting trust which you can do if you do all of this stuff up front BEFORE you take on any venture capital money. It is in the Bylaws wherein you insert the “majority consent” provisions.]
Example, Big Red Car?
OK, dear reader, you raise some venture capital funding in return for twenty percent of the equity of the company. Looks like this:
Founder A – 40% <<< CEO, the visionary
Founder B – 40% <<< CTO, the techie
Venture capitalist – 20%
Founder A and Founder B have different views on something. Founder B teams up with venture capitalist.
Founder A votes her 40% of shares “NO.”
Founder B votes her 40% with Venture Capitalist’s 20% = 60% “YES.”
Pick the subject. Loss of control of the future of the enterprise. A voting trust could cure this problem.
Bottom line it, Big Red Car
A Voting Trust can allow founders to exert control on the future of their beloved startup if correctly written and enacted before things gets complicated.
Remember the Big Red Car is always on the side of the visionary, the CEO. You can get some other opinions on this subject, but this is what is good for the CEO controlling her own destiny.