One Additional Step

October 6, 2003
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Paul Guerre said people seeking venture capital need to get comfortable with the idea that investment by a venture capital firm means surrendering control of one’s company.

The notion comes to some founders as a cold bath, he said. “But a minority stake in a successful venture is worth more than 100 percent of a worthless company,” he said.

“They want control,” he said of venture capitalists. “They want a majority, and they pretty much figure they’ve got more skin in the game than anybody else, so they figure they should be the ones calling the shots.”

The venture capitalist, he noted, is someone working with yet other investors’ money, and it’s his job to obtain a return on those funds by successfully commercializing the founders’ idea.

“The founder will get diluted out,” he added. “But without venture capital, the company never will be much more than an idea. We’re talking millions of dollars here,” he said, “and 2 percent of a successful firm is worth a lot more than 100 percent of a company that never gets off the ground.”

He said the VC may or may not have a role in the firm for the founder. “Maybe the founder’s contribution is to have come up with the idea in the first place.”

Guerre said that if the venture is successful — and the odds of that, he said, probably are less than 1 in 2 — and the founder’s idea is successfully commercialized, the founder certainly will reap financial rewards.

Jack Ahrens of TGAP Ventures, who was in the audience during Guerre’s remarks, echoed what the attorney said.

“Anytime an owner has a problem with less than 50 percent ownership, we have a problem with that.”  

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