Very few things in a VC-backed startup require a shareholder vote. Firing the CEO is not one of them (this is a board vote.) Electing directors to the board is not one of them (this is usually the subject of a voting agreement that ensures board representation by the VCs.)
Let's say the company raises money from VC1, who buys 20%, leaving you with 80%. The contracts add VC1 and an independent to the board, alongside you. Later the company raises money from VC2, who buys 20%, leaving VC1 with 16% and you with 64%. The contracts add VC2 to the board.
Now the board is VC1, VC2, an independent, and you. If the VCs can convince the independent director to vote with them, the board can fire you, even though you own 64% of the company.
It works by having you sign a shareholder's agreement (at the point of investment) where you commit to voting in a certain way for certain key issues, including the structure of the board. Investment is usually not only a contract between the investor and the company, but also a contract between the (new) shareholders. You would be required to support "their representative" to be on the board, no matter how many percent of shares and votes you and they had; and then the board has the rights to govern the corporation according to the corporate bylaws.
Ask Rogers, the board just tried to fire the CEO, the CEO just tried to fire the board, but those elections happen at a different time, and the CEO need the trustee of the family shares to agree.
How is that possible? Shouldn't it be the number of voting shares you hold? I thought that was the entire reason for share classes. It can't be based on the number of bored members alone, can it?
That is how it works. The board has the power to fire the CEO in all companies that I know of. (I suppose you might be able to write the bylaws so this isn't true but I'm not sure; a corporate lawyer would know.) The best you can do is to have an employment contract that regulates how the firing happens (ie. do you get severance, accelerated options, longer option exercise times, COBRA, etc. if you are fired without "cause", with cause carefully defined.)
Removing you from the board itself is a different matter. But that's usually also explicitly covered: they don't put the founder in the "Common seat" they put the founder in the "CEO seat." That way, when you're fired as CEO you automatically lose your board seat.
"The shareholders elect the Board which has the responsibility to hire and fire the CEO. The Board has the right and the responsibility to fire the CEO if they believe it is in the best interests of the company. If the shareholders don’t like the decision, they can call a special meeting of the shareholders to fire the Board and appoint new Directors. The new Board may re-hire the recently fired CEO. So the majority shareholder CEO will ultimately prevail."
That may be true in many companies, but venture capital funded companies almost always have something called a "Voting Agreement". I pulled a random one from my folder of docs, it is below. The upshot, if you are not used to reading these, is that all of the shareholders signed an agreement that says they will vote their shares to elect certain directors. In the absence of an agreement like this you are right, the board could fire the CEO but the majority shareholder could fire the board. But, again, every equity round from a VC that I have seen in the last 25 years (and, I assume, longer, but that's as far back as my personal knowledge goes) has a Voting Agreement in some shape or form.
Actual text from a Voting Agreement:
"NOW, THEREFORE, the parties agree as follows:
1. Voting Provisions Regarding Board of Directors.
1.1 Board Composition. Each Stockholder agrees to vote, or cause to be voted, all securities of the Company the holders of which are entitled to vote for members of the Board, including without limitation, all shares of Common Stock, Series A Preferred Stock, by whatever name called, now owned or subsequently acquired by a Stockholder, however acquired, whether through stock splits, stock dividends, reclassifications, recapitalizations, similar events or otherwise (“Shares”) owned by such Stockholder, or over which such Stockholder has voting control, from time to time and at all times, in whatever manner as shall be necessary to ensure that at each annual or special meeting of stockholders at which an election of directors is held or pursuant to any written consent of the stockholders, the following persons shall be elected to the Board:
(a) For so long as there remain outstanding not less than 200,000 shares of Series A Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred Stock), one (1) individual designated by the holders of a majority of the shares of Series A Preferred Stock then outstanding, which individual shall initially be Jerry Neumann (such director being the director defined as the Series A Directors in the Restated Certificate); and
(b) Two (2) individuals designated by the Key Holders who are at such time providing services to the Company as an officer, director, employee, consultant or advisor holding a majority of the Shares then held by such Key Holders (each such director being one of the directors defined as a Common Director in the Restated Certificate);"
If, as a condition of taking money from a VC, you sign a piece of paper that says one board seat belongs to that VC, then you can't fire your board, regardless of your percent ownership of the company.
Percent ownership matters, certainly: it's what allowed you to make that deal in the first place. At that point your ownership becomes a little bit less about control, and perhaps a little more about economic interest.
Not all shares have the same voting rights. The VC might buy 20% of the company, but 50% of the voting rights. VC2 might buy another 20%, but get a different share of the rights.
51% isn't quite right. For a start, it's really "more than 50%", which is often 50% + 1 share, but in some structures there are different classes of shares with different voting rights. It's common to have a pool of voting shares that are issued to founders and preferred investors, and then non-voting shares that are issued to everyone else. There can also be shares that confer more than 1 vote to the owner. You really need > 50% of the votes rather than any particular amount of shares.
> 51% isn't quite right. For a start, it's really "more than 50%", which is often 50% + 1 share
Most people describe "50% + 1" as 51% even though its not quite right, but everyone understands 51% as a shorthand for "greater than half, not inclusive of half". Eg. a 51% attack on a crypto network is the same way.
>It's common to have a pool of voting shares that are issued to founders and preferred investors, and then non-voting shares that are issued to everyone else.
To your point about differences in classes, there may be a class with 10 votes per share, another class with 1 vote per share, and another class with 0 vote per share.
Weighted shares let a minority shareholder have more than controlling vote in a company.
It is always important to understand the fabric of your company by reading, understanding, and following the terms of your Operating Agreement or Corporate ByLaws.
Manager Managed LLC vs Member Managed LLC vs C or S Corporation are most common entity types. Use the right structure to best protect your interests.
