The decision to go ahead and found a startup is an important one. And one of the first decisions you’ll have to make right after is who will make up the founding team and what hat each person is going to wear.
There are a variety of different roles. Generally across most legal systems, we find that a founder of a corporation can be a shareholder, director, officer and/or employee of a startup. At a more local level here in Montreal, this tends to be the case under both the CBCA and the QBCA. Other corporate entities like LLC’s from Delaware have “members” – which are similar to shareholders.
The size of the founding team is an important factor in deciding who will play what role. You may have 7 or 8 “founders” in the sense of “shareholder”, but do you necessarily wants 7 or 8 people to sit on the board? Perhaps not. Jeff Bezos said it best:
“If you can’t feed a team with two pizzas, it’s too large.”Jeff Bezos
Let’s take a look at the differences in roles:
Shareholders subscribe and pay for shares. Generally speaking, at the time of incorporation, the share subscription is for a nominal amount. Depending on the number of shares you issue, it could be as low as a few pennies per share.
Attached to shares are certain rights, for example, the right to vote, the right to dividends, and the right to the balance of any remaining assets in a wind-up. Let’s ignore dividends for now – if you’re starting up, you’re going to be reinvesting every spare penny you have. Let’s equally ignore wind-up scenarios – hopefully you’ll never have to worry about those.
Voting is how a shareholder expresses his voice to the other shareholders. The more shares you have with voting rights, the more weight your vote carries. If you own more than 50% of the voting rights, then you can generally say you “control” the corporation. But control is an ephemeral thing – don’t get too hung up on it, because you’re angels and VCs are going to demand veto rights on certain key decisions anyway. Nevertheless, control is still important, particularly before any money comes in, and it is what allows the shareholders to appoint the members of the board of directors.
Directors are long term thinkers who are concerned with the strategic direction of the business. They’ll meeting as often as is necessary (usually quarterly for big corporations, but more frequently in the case of startups). They also get to vote on certain key decisions, but the difference is that it’s one vote per director (unlike in the case of shareholders). Among these key decisions is the appointment of the officers of the corporation.
Officers manage the day-to-day affaires of the corporation. The basic titles are President, Secretary and Treasurer. The President looks after the operations of the business. The Secretary looks after the books and records. And the Treasurer looks after the finances. But startups tend to have cooler titles like CEO, CFO, COO, CTO, etc. Call it what you want – it’s the responsibilities that matter, not the titles.
We all know what employees are, and I won’t go into too much detail here because founders tend to take a special title and become officers of the corporation. But just know that a title is not required, and you can simply be an employee (but CTO does make for a cooler business card…).
What hat should you wear?
This really depends on what role you’ll have in the business. All founders are shareholders. So you can wear that hat.The main shareholders are also generally the directors (another hat!). Although there’s no hard and fast rule on this, practically speaking, if you’re a main shareholder, chances are you’re going to want a seat on the board. And you’ll also want that fancy title as an officer of the corporation (also comes with a new hat… Your head will be warm!). Just know that you don’t have to be a board member (or shareholder for that matter) to be an officer. And then you’ll hire the employees you need to get your project off the ground (in Montreal’s startup market, that means you’re likely hiring programmers – they have cool hats too).