Dictators and Democracy: A Slicing Pie Primer on Corporate Governance

I often get questions about how Slicing Pie affects control and decision-making rights. This question usually comes from a person who is afraid of losing control of their “baby” and wants to know how to keep control.

The Short Answer

The person who owns 51% gets to be in control.

The Short Slicing Pie Answer

It’s reasonable to assume that the people with the most to lose should have the largest influence on how decisions are made. With that in mind, at any given time the Pie will dictate how many votes a person has. Still, the rules of Slicing Pie prevail. For example, if someone gets enough votes to “vote” to fire someone the Recovery Logic of Slicing Pie would still provide the correct treatment of that person. Having voting rights isn’t a license to stop playing fair.

The Longer Answer

Many startups have a primary owner who makes the majority of the decisions. Once a startup begins to have multiple founders, partners, employees, etc., things change. The topic of corporate governance can get pretty complicated but in this post I’ll attempt to break it down for you in simple terms.

The Dictator

Most startups begin as dictatorships where one person, usually the original founder, makes all the decisions no matter how small. Subsequent co-founders are generally okay with this because they believe in the founder’s vision and accept their leadership. During the bootstrapping days this works because not much is at stake. No real revenue, small amounts of investment. Not much to lose.

Some dictator-led companies become large companies. Their owners make all the rules and reap all the rewards. Employees usually accept this because the boss is the boss and he or she is the owner and controls the purse strings.

The Committee

The next step beyond the dictator is when there are several co-founders who consult one another on decisions. The dictator may still have majority ownership, but a dictatorship doesn’t lend itself to productive partnerships, especially those who intend to use equity, instead of cash, to build their business using the Slicing Pie model. People who are part of the team usually want some kind of influence on how decisions are made. Committees are usually informal from a legal standpoint and consist of the senior managers in the company.

The Manager

In some cases, control can be consolidated to one person or persons contractually. For instance, in a manager-managed LLC a manager can have decision-making rights regardless of their ownership.

Managers are essentially empowered to make decisions by the owners of the business who can remove the manager under certain circumstances, usually by a 2/3 vote AKA a “super majority”.

Decisions that Matter

Most decisions, like what kind of copy paper to use or which hotel you will stay at for a business trip are more or less immaterial to the ultimate success or failure of a business and, therefore, shouldn’t be considered mission critical. Important decisions are those that have a significant impact on the business. Such decisions include things like:

Hiring or firing senior leadershipLeadership compensationSignificant changes in strategySignificant financial decisions such as taking on debt or raising money by selling sharesAnything that would change the control of the businessSetting spending limits for executivesPaying dividends to shareholders vs. retaining earnings for future investmentOther stock matters like splits or issuing new shares

Most of these decisions matter more to companies that are more established than a bootstrapped startup. In other words, when the money gets significant, certain decisions matter.

There are a variety of stakeholders who have a vested interest in which decisions are made and how they are made including investors, employees, and even customers in some cases.

The Appointed Board

A board of directors becomes relevant when the company starts bringing in large investors. When there is money on the table the owners of the money have a vested interest in exerting some control over how that money is used. When raising money, founders make promises about what they will do with the money and the investors will want a board to represent their interests when it comes to decisions that matter.

The first type of board will be an appointed board meaning the dictator and/or committee will relent to oversight on their decisions to a group of people. Typically, there are three to five. The dictator serves as the chairman of the board, the primary investor serves as a board member, and a neutral third party, like a trusted advisor, is the third. Boards are always an odd number to ensure there are no ties when it comes to voting.

Appointed boards do have some vulnerabilities because they are appointed. The person or people who have the power to appoint the board often have the power to remove the appointee and replace him or her with someone else. However, investors still have leverage because they can pull out their investment or sue if they think their interests are being properly represented.

Democracy

As the company grows and takes on investment the dictator may have difficulty maintaining control if he or she doesn’t have controlling interest (51%). Many founders fight tooth and nail to maintain controlling interest even if it means being unfair. Sooner or later the dictator may have to yield power to the shareholders.

In Slicing Pie companies this would mean each slice grants one vote to the owner of the slice so the people with the most to lose have the most influence.

After Slicing Pie terminates if there are other shareholders—usually converted angel investors or venture capitalists—in the mix they, too, will want a vote. Most VC deals still prefer an appointed board but if the base of shareholders is diverse enough they will demand a vote. Enter democracy!

The Elected Board

When shareholders are given the right to vote they will choose the people to represent their interests by electing a board. The elected board serves the same basic function as the appointed board, but without the risk of being replaced at the whim of the person with controlling interest. Elected boards are usually larger than appointed boards. Most startup companies won’t have an elected board because startups usually have a small group of investors who can drive any votes that might take place making voting for a board useless. Public companies, however, usually have elected boards. The average number board members in a public company is around 11…according to ChatGPT.

The Decentralized Autonomous Organization (DAO)

Boards are a form of centralized governance. Centralization makes it nimbler so decisions can be made quickly. Holding a vote for everything can become an administrative nightmare. However, with the rise of Blockchain, voting can be more practical, and some companies opt to skip the board and vote directly on issues as they arise.

Slicing Pie lends itself to evolving into a DAO because the shares are generally held by the employees rather than major outside investors. In a DAO people vote in proportion to the number of shares they own. Those with more shares hold more sway over the direction of the company than those with fewer shares.

The Cooperative (Co-op)

The last type of corporate governance organization I want to mention is a co-op. The main difference between a co-op and a DAO is that each member of the co-op gets one vote regardless of their ownership. They may not have to have ownership at all. Co-ops are intended to reflect the interests of the community rather than the investors.

It would be difficult for a co-op to turn back into a dictatorship because it would be pretty much impossible to consolidate controlling interest. A dictator would probably have to buy the who company outright and pay off members and investors to get them out of the co-op leaving only dictator-friendly members to cast votes.

It’s More Complicated

Actual corporate governance is more complicated than described above but this is the basic idea. There are all sorts of ways of managing control including contracts, special classes of shares, financing rounds. As companies grow, they become more and more complicated.

Getting Control Back

In a democracy the dictator relinquishes his or her control and will not get it back. When a company converts to a democracy the dictator is gone. The only way to get control back is to somehow consolidate outstanding voting rights to one person. In a small company the person who wants control can buy shares from shareholders one-by-one. You may have heard of the term “hostile takeover”, which is someone buying control of a company.

Different structures work at different stages of development. Dictators are fine for startups that only have a few participants where the vision of one person is being followed and there is a need for speed and agility. As a company grows the needs of the stakeholders also grow and shifting to a more democratic system is inevitable.